R&D Tax Credits are key for companies to grow and be competitive. In start-ups with a strong technological component, it can even be vital. However, obtaining funds is not an easy task. Here, we will learn how to qualify for R&D Tax Credits?
For an SME especially, resorting to this financial support is of great help. Not only can it dramatically increase working capital, but also the cash flow and valuation of your business. So why not maximize them?
How to qualify for R&D tax credits?
A multitude of credits and grants are available depending on the desired goal of the project and the target audience of your Research and Development (R&D). Thus, for the R&D tax incentive to be eligible, your work must consist of:
– Basic research: Work undertaken for the advancement of science, with no practical application insight.
– Applied research: Work is undertaken for the advancement of scientific knowledge with the objective of some practical application in view.
– Experimental development: Work focused on technological progress through the use of the results of basic or applied research. This is to create new materials, devices, products, or processes or to improve existing ones.
– Research in support of certain technical support work: Engineering, design, operations research, mathematical analysis, computer programming, data collection, tests or research in psychology, etc. This work must be proportional to the basic or applied research or the eligible experimental development and must contribute directly to it.
– You may therefore be eligible for R&D tax credits if you design new products, improve existing products, create new manufacturing processes, improve existing manufacturing processes, modify equipment for a different use, combine different technologies, create new services, etc. Lots of opportunities to recoup a portion of your expenses.
Know if you are eligible:
Several areas of activity may be eligible for a tax credit application. For example, the fields of electronics, tools, and materials, pharmaceuticals, food and beverage, furniture, power generation, etc. If you are in doubt as to the eligibility of your project, here are three important criteria to consider.
– Advancement (scientific or technological): The project must generate new knowledge. The work must result in information that advances the understanding of science or technology. Failure in the process is acceptable.
– Uncertainty (scientific or technological): The development project involves a technological hurdle to overcome, along with a scientific risk. From the outset, the success of the project was uncertain. That is, the possibility of obtaining an X result or how to obtain it was unknown or impossible to determine with the knowledge and experience available at present.
– Content (scientific and / or technical):
The project requires and can demonstrate the need to use competent working staff with the required relevant experience in science, technology, or engineering. A systematic approach has been adopted. (Experimental or analytical investigation)
Put simply, if you have changed a process or product, created a product, process, or new technology, developed a specific machine or equipment for your organization, either as a start-up or as for growth purposes, there is a good chance that you will be eligible for credits.
Many companies do not believe they are eligible due to various misconceptions.
Points to consider when accessing R&D Tax Credits:
– Your expenses don’t have to be part of a specific research and development program. As long as you have developed something new (product, process, or technology) in your normal entrepreneurial activities, this is applicable.
– Trade secrets will not be disclosed. You just have to prove, by demonstrating the scientific value of your project activities, that the research activities carried out are essential and have a value for the success of the project and its impact on the company.
– Scientific research and experimental development do not mean you have to have a dedicated lab or doctoral specialists to qualify. A process engineer, for example, whose scientific skills are essential will be recognized.
– Even if the expected results are inconclusive, your expenses are still eligible. We focus mainly on the methodology and the processes used to achieve this. Hours spent on this work by employees may be eligible for the R&D tax credit. Thus, the effort can be partially reimbursed.
You could be a manufacturing company looking to develop a food product with a longer food shelf life to reduce waste. The hours of work carried out leading to this scientific/technological advance (research for new chemical or biological ingredients, new manufacturing processes, integration of new technology, prototyping, or beta tests) would therefore be eligible.
If the result is not conclusive, the hours of food engineers would still be reimbursable.
For the Research and Development (R&D) tax credit, the following current expenses qualify you for the tax incentives. Be careful, however, they must be linked to the four types of research mentioned above.
Thus, R&D tax credit programs will reimburse part of the expenses incurred by the company either through a reduction in taxes payable (non-refundable tax credit) or in cash (refundable tax credits).
Please note, the applicable rules and rates vary from province to province. Consult a specialist or trusted sources to verify what applies to your situation and location.
Companies can therefore take advantage of such credits, provided that they intend to develop or improve business or production processes to obtain a new improved or technologically advanced range of products, procedures, ‘devices, or materials.
However, certain activities are excluded from the definition of R&D:
– Sales stimulation or market research.
– Quality control or routine testing of products, devices, materials, or processes that are part of your day-to-day activities.
– Research in human sciences.
– Prospecting, exploration, or drilling for the discovery or exploitation of natural gas, minerals, or petroleum.
– Commercial production of new or improved material, product, or device or commercial use of a new or improved process.
– Style changes.
– Collection of routine information to determine if an activity is covered by the R&D program.