Did you know that companies that engage in research and development in Utah are eligible for the Research and Development Tax Credit (R&D Tax Credit)? We’ll discuss how companies in Utah can maximize this tax claim. After reading this quick guide, companies will better understand this tax credit.
What are Utah R&D Tax Credits?
Utah R&D Tax Credit is a non-refundable tax credit available to taxpayers who make qualifying research expenditures and activities within the state. The R&D Tax Credit mirrors the federal Section 41 Credit for Increasing Research activities with a few exceptions.
In Utah, this tax credit is permanent and does not expire. Moreover, the tax credit is the sum of the following:
- 5% of a taxpayer’s qualified spending that exceeds the base amount.
- 5% of payments made to qualified organizations for basic research in Utah that exceed the base amount.
- 7.5% of qualified research expenses for the taxable year.
Does Utah have an R&D credit?
Yes, Utah offers a tax credit for research activities conducted in Utah, detailed within Utah Code Section 59-10-1012. This tax credit is similar to the federal one recognized in other states. Companies of various sizes, including start-ups, can claim this tax credit.
What is the Tax Credit Code 12 in Utah?
According to Code 12 in Utah, the R&D tax credit refers to 5% of a taxpayer’s qualified research expenses that exceed the base amount, 5% of payments made to qualified organizations for basic research in Utah that exceed the base amount, and 7.5% of qualified research expenses for the taxable year.
Eligibility Criteria for Utah Businesses
According to state law, C-corporations, S-Corporations, LLCs, and Partnerships can apply for this tax credit. In general, taxpayers are eligible for the R&D Tax Credit if they have QREs as defined by IRC §41 in Utah during the tax period. Taxpayers can claim the R&D Tax Credit to offset their tax liability.
Four-Part Test for Qualifying Activities
Permitted Purposes
The activity must relate to a new or improved business component’s function, performance, reliability, quality, or composition. It should intend to develop a new or improved product, process, or software. Moreover, it ensures that the research is not conducted for non-commercial purposes, such as social science or arts-related endeavors.
Technological in Nature
To qualify for research credits, the activity should fundamentally rely on principles of physical sciences, biological sciences, computer science, or engineering and scientific methods. This requires the use of technology or engineering in a field of science.
Moreover, it aims to develop or improve a product, process, or software’s functionality, performance, reliability, or quality. Examples include developing new materials, improving manufacturing processes, or enhancing software functionality.
Elimination of Uncertainty
The activity must be intended to discover information to eliminate uncertainty concerning a particular method or capability for developing or improving a product or process. Uncertainty exists if the capability, method, or design of the product, process, or software is uncertain or not readily known.
Process of Experimentation
The activity must constitute the process of experimentation involving simulation, evaluation of alternatives, confirmation of hypotheses through trial and error, testing and modeling, or refining or discarding of hypotheses. It should involve a systematic process designed to evaluate one or more alternatives and include testing hypotheses, modeling, prototyping, and iterative analysis. It also needs to identify uncertainties and test potential solutions to resolve them.
Calculating the Utah R&D Tax Credit
There are two methods to calculate the base amount: Regular Credit (RC) and Alternative Simplified Credit (ASC). The base amount is calculated as provided in IRC §41(c) and IRC §41(h), except that:
- It does not include the alternative incremental credit provided for in IRC §41(c)(4)
- The taxpayer’s gross receipts include only those amounts attributable to Utah sources under the allocation and apportionment provisions
- To calculate the base amount, a taxpayer may make an irrevocable election to be treated as a start-up company regardless of whether the taxpayer meets the requirements of IRC §41(c)(3)(B)(i)(I) or IRC §41(c)(3)(B)(i)(II).
Selling or Transferring the Utah R&D Tax Credit
No, the tax credit in Utah is non-refundable and non-transferable. Thus, companies cannot sell their tax claim.
Qualifying Utah Research Expenditures
Generally, the R&D tax credit covers two categories of qualified research expenses: in-house and contract research expenses. In-house research expenses include wages paid to employees for any qualifying activities performed, supplies purchased to conduct qualified research, and contract research expenses paid to conduct qualified research.
To clarify, only wages that include all taxable wages reported on an employee’s W-2 form can be declared as qualifying research expenditures. In addition, it should be highlighted that only employees involved in qualified research activities or directly supporting these initiatives are qualified.
Any tangible property bought to conduct qualified research can be considered a supply for this tax credit. An engineering firm working to improve the quality of a product may declare the materials used for that project as supply expenses.
Contract research expenses are when a business performs qualified research on behalf of the taxpayer. In this case, 65% of the amount paid to the non-employee can be considered a qualified expense.
How to Claim Utah R&D Tax Credits?
For this tax benefit, companies must file IRS Form 6765, Credit for Increasing Research Activities. This process includes identifying qualifying research activities and providing documentation proving these costs meet the Internal Revenue Code Section 41 requirements. Companies may use business records, financial records, oral testimonies, and technical documents.
Before you complete this form, you should familiarize yourself with the instructions mandated by the IRS. The PDF version of this form can be easily downloaded from the IRS website.
In general, the IRS Form 6765 has four sections:
- Section A is used to claim the regular credit and contains 11 lines of required information.
- Section B applies to the Alternative Simplified Credit or ASC.
- Section C identifies additional forms and schedules that require reporting based on one’s business structure.
- Section D only applies to qualified small businesses or QSBs making a payroll tax election.
The IRS recommends that companies calculate their credit using both regular and simplified credit methods, and then they fill out the section (A or B) that would result in the greatest tax benefit.
Benefits of the Utah R&D Tax Credit
Claiming this tax credit can help qualified companies reap plenty of benefits, including the following:
1. Reduced State Tax Liability
Companies that claim this tax benefit can lower their overall state tax liability. While this may not reduce the money they need to pay for taxes, the benefit can offset the enormous amount they pay.
2. Increased Cash Flow for Reinvestment
The money companies receive from this tax claim can be used to reinvest for various vital activities. The better cash flow a company has, the more freedom they have.
3. Encouragement for Innovation
This tax claim encourages companies to invest in research and development. The more they invest in R&D, the bigger tax claim they can obtain.
Maintaining Documentation for the Utah R&D Tax Credit
Submitting the proper documents is vital for this tax claim. Companies should be able to provide Utah gross receipts, timesheets, invoices, and other documents to avoid scrutiny from auditors. That’s why eligible companies should work with tax experts who understand the Utah research tax credit. They can help ensure companies adhere to all the rules.
Next Steps
Companies should maximize this tax credit and reap its many benefits. That’s why eligible businesses should work with experts who understand R&D tax credits in Utah. With help, companies can escape possible scrutiny and enjoy the state reward for innovation and progress.