Wisconsin Department Revenue Updates Publication 131 - R&D Tax Credits
Thought Leadership by Jonathan Tucker, Principal – Research and Development Tax Credit Services | KBKG
Understanding tax incentives and research credits can often be as intricate as deciphering a complex puzzle. Fortunately, the Wisconsin Department of Revenue has developed the newly updated Publication 131, a comprehensive guide that unravels the nuances of Tax Incentives for Conducting Qualified Research in Wisconsin.
If you’re currently engaged in research activities and find your business pondering over the potential tax implications, this recent update should provide clarity for R&D tax credit considerations.
What Is the R&D Tax Credit?
The Research and Development tax credit is a federal tax liability reduction companies can take for approved domestic expenses. The rate of reduction is dollar for dollar. You also get back approximately 13 cents for every dollar spent on research that meets the eligibility requirements. Qualifying research and development expenses include the development, improvement, or design of a product, technique, process, or software.
This credit can lead to significant savings that free up cash for further R&D, hiring new employees, and more. For companies that meet the criteria of a Qualified Small Business, the R&D credit can be used to offset quarterly payroll taxes. For tax years 2016 through 2022, the maximum R&D tax credit for payroll tax was $250,000. The credit doubled to $500,000 beginning January 1, 2023. Many states have also enacted an R&D credit.
Who Qualifies for the R&D Tax Credit?
This lucrative credit is available for more than established researchers and scientists. Small businesses and business owners can also reduce tax liability for eligible expenses tied to innovation. Any company working within the United States to develop or improve a process or a product can claim the credit, no matter what industry it is in.
How Is R&D Different from R&E?
The Research and Development tax credit is also known as the Research and Experimentation (R&E) tax credit. These two terms refer to the federal benefit outlined in Section 41 of the Internal Revenue Code.
What Are the 4 Pillars of R&D?
Knowing the 4 part test R&D tax credit is a simple way to identify qualified research activities:
- Permitted purpose:Qualified activities work to improve a new or existing product or process’s functionality, reliability, quality, or performance.
- Technological nature:The activities rely on the principles of physical science, computer science, biological science, or engineering.
- Eliminate uncertainty:The activities make improvements that lead to eliminating technical uncertainties regarding a product’s capabilities, design, or method.
- Experimentation:The activities involve experimenting through processes like testing, simulating, and trial and error of hypotheses.
If your proposed activity meets the above criteria, it likely qualifies for the R&D credit.
What is "Qualified Research"
Essentially, it refers to research endeavors that stand at the forefront of innovation and contribute substantially to the pool of knowledge. If your business is actively involved in such groundbreaking research and development within Wisconsin, you might be on the radar for enticing tax benefits. However, don’t assume this is a given for your business to claim R&D tax credits in 2022 or 2023.
Eligibility to qualify to the R&D tax credit for a small business is contingent upon meeting specific criteria outlined in the updated Publication 131. It’s imperative to grasp the following:
- who precisely qualifies for R&D credits
- what research activities fall under the eligible bracket, and
- the step-by-step process to effectively claim the incentives you’re entitled to.
Research Credits and Exemptions for Sales and Use Tax
Valuable information regarding the R&D tax credit is found in the comprehensive guide on research credits and exemptions for sales and use tax. These provisions can lead to substantial reductions in tax liabilities or even exemption from specific taxes. This updated publication acts as a roadmap, simplifying the otherwise complex process of accessing these benefits. It’s crucial to carefully read and comprehend the practicalities and steps involved rather than just skimming through it.
Before you anticipate a lighter tax burden, let’s first address the often-overlooked aspect of record-keeping. Maintaining proper records of qualified research expenses is crucial to substantiate your eligibility for the benefits above. The publication provides explicit guidance on the nature of documents required to support your tax credit work and claims when the occasion arises.
Federal and State Credits
Let’s talk about how federal tax credits affect tax obligations in Wisconsin. While it may seem like taking advantage of federal credits can lower your taxes, it’s important to remember that Wisconsin has its own rules and regulations. So, knowing which credits are required in the state is crucial. Think of it like understanding exchange rates in a foreign country – you need to know what holds value in that area.
Wisconsin Going Its Own Way
The publication’s reference to time adds an intriguing layer to this discussion. Wisconsin chose not to adopt the changes ushered in by the Tax Cuts and Jobs Act of 2017, which means that the regulations preceding 2022 still hold sway. Unlike most states, Wisconsin has deliberately maintained continuity with its existing rules.
The recent update to Publication 131 by the Wisconsin Department of Revenue is an invaluable asset for navigating the often daunting terrain of tax incentives and research credits. Whether you’re a business deeply immersed in qualified research or an individual seeking to make sense of the tax benefits applicable to you, this publication serves as a dependable guide. When confronted with inquiries related to taxes, remember that Publication 131 stands as a reliable source of information, capable of assisting you in maneuvering through the intricate web of taxation in Wisconsin.