Moving along in our blog series on the eight myths that are costing software and technology government contractors big dollars in annual tax savings, let’s explore our fifth R&D Tax Credit myth (a self-censoring myth that is very common among companies working on a contractual basis for the government):
Myth 5: I can’t claim the R&D Tax Credit since I am already being paid by the government.
This is simply not true as recent court decisions have clarified the application of the credit with respect to work done for the government.
Eligibility for the R&D credit does not hinge upon who is ultimately paying for the work performed. It is based upon the activities or projects that your company undertakes, regardless of whether or not the work is done for a state or federal government entity. Many of the major cases interpreting eligibility for the R&D Tax Credit (Fairchild v. United States, Lockheed Martin v. United States, etc.) actually involve companies benefiting from (and being paid for) the work they performed for the United States government.
Make no mistake, the R&D credit is an activities-based credit—so long as your activities satisfy the requirements set forth by the Internal Revenue Code and interpretive regulations, your company can claim the incentive.