How we identify companies that can qualify for the R&D credit
When computing a high-level estimation for a prospective client the easiest way is to sum all Qualifying Research Expenditures (“QRE’s”) (wages, supplies, and contractors) and multiply the low end by 6 - 7% and the high end by 8-10%. Utilizing the regular credit methodology, you will never yield a benefit greater than 10% of QRE’s. In some instances, the percentage can go up to 14% if the ASC methodology is utilized and the base is favorable. It’s important to note that these ranges are not exact, however they can be helpful in performing a cost benefit analysis on behalf of your client. When summing QRE’s be sure to account for the contractor haircut (35%, discussed in further detail later in this document) and to account for industry standard QRE/payroll ratios.
The credit is a result of the QREs less the base amount, which varies depending on several factors. When providing estimates for potential clients you will not always have all the information aside from the industry and the expenditures in front of you. As such, it is best to remain conservative because a number of things (funded contracts, base limitations, etc.) could reduce the benefit once an analysis is actually performed.
Each industry has a different QRE/payroll ratio which should be factored into the estimation; there is no hard and fast rule regarding QRE/payroll ratios. Even within an industry, no two companies are exactly the same and QRE can vary dramatically depending on the company’s business model. QRE/payroll averages for several technical industries are presented below. Within these averages there will of course be outliers for companies that run a tight ship, are mainly involved in custom work, etc.
- Architecture & Engineering: 35-50% of payroll expenditures will typically qualify as wage QRE’s
- Manufacturing: 25-35% of QRE’s will typically qualify
- Software: 65-85% of QRE’s will typically qualify