R&D Tax Credit Help in Los Angeles | Los Angeles Bookkeeper

Short answer: The R&D tax credit for Los Angeles companies is a federal credit for qualified research expenses, mainly wages, supplies and part of contractor costs, for work that meets a four-part test. California has its own research credit. Books that track research wages, contractors and supplies by project make a claim easier, and the partner team specialises in this work.

What the research credit is

The federal credit for increasing research activities, under section 41 of the tax code, is a credit for qualified research expenses. Those are mainly wages for people doing qualified research, supplies used in it, and part of what you pay contractors to do it.

It is not only for labs. Software companies, product designers, manufacturers, engineering firms and some media technology companies in Los Angeles do work that can qualify. Whether yours does depends on the work itself.

The four-part test, in plain words

Permitted purpose: the work aims to create or improve a product, process, software or formula
Technical uncertainty: at the start, you did not know how to do it, or whether it could be done
Process of experimentation: you tested options, designs or approaches to resolve that uncertainty
Technological in nature: the work relies on engineering, computer science or the physical or biological sciences

This is a summary. The IRS rules and your tax advisor decide what qualifies.

The payroll tax election for young companies

A qualified small business can elect to apply part of its research credit against the employer share of social security tax. Under the IRS rules this means a corporation or partnership with gross receipts under $5 million for the year and no gross receipts before the five-year period ending with that year. The election is capped at $500,000 a year for tax years beginning after 2022.

The election is made on Form 6765 with a timely filed original return, including extensions. It cannot be made on an amended return, so timing and clean books both matter.

California's research credit

California has its own research credit, administered by the Franchise Tax Board, for qualified research done in California. Its rules differ from the federal credit in several ways, so a federal claim does not automatically carry over. A Los Angeles company may be able to claim both.

Records that make a claim stronger

Time records or reasonable estimates of how much of each person's time went to qualified work. Project notes, tickets, design files and test results that show the uncertainty and the experiments. Contractor agreements and invoices that describe the work and show where it was done.

None of this needs to be elaborate. A ticketing system, a shared drive of design reviews and payroll split by person already cover a lot. The aim is that someone reading the claim later can see what you were trying to solve and how you went about it.

Why the books come first

Every claim is built from wages, contractor invoices and supply costs. If payroll is lumped into one account, contractors are mixed with other vendors, and supplies are buried in general expenses, a study has to rebuild those numbers before it can begin.

Books kept with the claim in mind track research wages, contractors and supplies so they can be pulled by project and by year. The partner team specialises in R&D credit work, and the bookkeeping is set up to feed it.

Where we work

We keep books for businesses across the City of Los Angeles, the Westside, the Eastside, the San Fernando Valley, the San Gabriel Valley, the Gateway Cities and the South Bay.

Questions

Does my business qualify?

It depends on the work, not the industry. Ask on the call and the partner team will tell you whether a closer look makes sense.

We are not profitable. Is the credit useless?

Not always. Qualified small businesses may be able to use part of it against payroll tax. Your tax advisor can confirm.

Can past years be claimed?

Sometimes, through amended returns, but the payroll tax election cannot be made on an amended return. Ask your tax advisor about your years.

What records are needed?

Payroll by person, contractor invoices, supply costs and notes on the projects and the uncertainty you worked through.

R&D tax credit support in Los Angeles