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Looking for a way to reduce their transfers to the tax office, entrepreneurs can benefit from tax reliefs. Tax reliefs are proven ways to safely save money on taxes.
At the same time, seeing the tax relief that goes to research and development activities, taxpayers may wonder if it’s a relief for them or just for companies involved in the search for life on Mars. The wording of the regulations and statutory definitions may only deepen the doubt about the availability of R&D relief for mere mortals.
But the truth is that the R&D tax relief has benefited a bakery, a construction company, a shoe manufacturer, a translator or a welding company. Each of these companies met the R&D condition, as did a startup that is working on a zero-emission fuel recipe. And each of these entrepreneurs has deducted double and, in some cases, even triple their costs from the tax base.
After reading this article, enlightenment may come and the thought, “wait a minute, after all, I’ve been doing R&D for many years.” And the best part is that in such a situation, you can recover the tax you paid, because the relief can be settled up to 5 years back as part of an adjustment to your tax returns.
What is the R&D relief based on?
Taxpayers who engage in research and development activities may deduct from their tax base additional qualified expenses incurred for these activities. Qualified costs are a special category of deductible expenses, i.e. expenses already deducted from income once. Thus, another deduction of the same costs occurs.
Research and development activities are creative activities involving scientific research or development, undertaken in a systematic manner to increase the stock of knowledge and to use the stock of knowledge to create new applications.
It’s worth breaking down the above definition into smaller components that are easier to chew through.
Creativity:
Creativity involves the creation of something new. Creative activity in research and development, according to the MF Explanatory Notes to the IP Box relief, can manifest itself in, among other things: development of new concepts/tools, solutions not previously present in the taxpayer’s business practice, or so innovative that they are significantly different from the taxpayer’s existing solutions. In short, you have to come up with something.
In the explanatory notes, the Ministry of Finance said that creativity is measured on the scale of the taxpayer’s business. This is why R&D relief can be implemented in a conventional business. It is not about innovation on a global, national or even county scale. The creativity of the work refers to the company’s existing experience. This means that creating something that already works in the market, but not in our company’s offerings, is creative. In the same way that improving internal processes that will allow the company to keep up with the competitive market or reduce costs or labor inputs can be considered creative.
Systematicity
The most appropriate definition of systematicity in conducting R&D activities is one that includes conducting activities in an orderly manner, according to a “certain system,” and meeting the criterion of “systematicity” of a given activity is not dependent on the continuity of that activity, including the specific length of time such activity is to be conducted, or the existence of a plan for the taxpayer to conduct similar activities in the future. It is sufficient for the taxpayer to plan and carry out at least one research and development project, adopting specific goals to be achieved, a schedule and resources for it.
Scientific research or development work
Scientific research is an activity involving:
(a) fundamental research, understood as empirical or theoretical work aimed primarily at acquiring new knowledge about the fundamentals of phenomena and observable facts without aiming at direct commercial application;
b) applied research, understood as work aimed at acquiring new knowledge and skills, aimed at developing new products, processes or services or introducing significant improvements to them.
Scientific research is directed at increasing the stock of knowledge and usually refers to scientific work carried out by entities from the world of science. Therefore, I will not elaborate on these definitions.
Development, on the other hand, is an activity involving the acquisition, combination, formation and use of currently available knowledge and skills, including information technology tools or software, for production planning and the design and creation of changed, improved or new products, processes or services, excluding activities involving routine and periodic changes made to them, even if such changes are improvements.
In business practice, R&D projects will be based on development work. From the definition, we can infer that it is about the practical application of one’s knowledge or experience to work on expanding or improving one’s portfolio. Improving one’s portfolio cannot refer to routine and periodic changes (such as bug fixes). Ideally, enhancements should provide new product or service functionality.
What’s more, development work can be directed at processes within the company. Developing a better system for placing or picking orders, reducing costs or time-consuming work, or automating certain activities may also qualify as development work.
Qualified costs
The catalog of qualified costs is strictly defined in the laws. These are related to research and development activities:
1. employee costs (employees, contractors and work contractors) including Social Security contributions and all other components of wages that constitute income of the employee, contractor or work contractor;
2. acquisition of materials and raw materials, specialized equipment that are not fixed assets;
3. depreciation write-offs on fixed assets and intangible assets used in research and development activities, excluding passenger cars and separately owned structures, buildings and premises.
4. paid use of scientific and research apparatus used exclusively in research and development activities, if this use does not result from a contract concluded with a related party of the taxpayer;
5. the purchase of a service for the use of scientific and research apparatus exclusively for research and development activities, if the purchase of the service does not result from a contract concluded with a related party of the taxpayer;
6. costs of obtaining and maintaining a patent, a protection right for a utility model, a right from registration of an industrial design, incurred for activities listed in the PIT and CIT laws,
7. expert opinions, opinions, consulting services and equivalent services, provided or performed under contract by an entity that is a scientific unit, as well as the acquisition from such an entity of the results of its scientific research, for the purposes of research and development activities.
Government plans for 2025 include expanding the catalog of qualified expenses to include specialized transportation. In addition, taxpayers will be able to purchase the services specified in Section 7 from entities other than scientific entities. In practice, this means the possibility of accounting for B2B services under the R&D relief.
Amount of deductions
The basic rate of additional deduction of qualified costs is 100%. Thus, the cost is qualified in full, the second time it is deducted from income. The real bonus, however, is employee costs, as these expenses can be deducted at 200% – so we are dealing with a threefold deduction.
It is worth adding that taxpayers who have the status of a research and development center have broader deduction options. Such entrepreneurs will deduct 200% of almost all costs – costs related to obtaining and maintaining industrial property rights are excluded (item 6 in the statement above). At the same time, if the CBR is a micro, small or medium entrepreneur all costs can be deducted at 200%. What’s more, taxpayers with CBR status can account for depreciation deductions on structures and buildings as qualified costs.
Qualified expenses may be deducted in full if the entire expense was incurred for business purposes. At the same time, if a given expense relates to R&D projects and ordinary activities, then there is no obstacle to accounting for it proportionally. For example, a given employee may spend 50% of his time on innovative projects and the other 50% of his working time on ordinary activities. In such a situation, only 50% of his payment will be a qualified cost. Accounting for other costs that apply to both types of activities is similar.
Documenting relief
Taxpayers engaged in research and development activities who intend to take advantage of the deduction are obliged to separate the costs of research and development activities in their accounting records. The costs so separated are the basis for calculating the amount of R&D relief. The laws are silent on the subject of what such separation should look like, so taxpayers have some discretion here. They can make their records of qualified costs in an excel sheet or other documents.
The records do not have to be kept on an ongoing basis or on a monthly basis. Relief is settled annually, so it is sufficient for the taxpayer to indicate the costs incurred throughout the year.
Particularly important for taking advantage of the relief is the documentation of employee expenses. The idea is that the taxpayer should be able to show that it records the working time spent by a particular subordinate on R&D activities and other activities.
Accounting relief
Relief is accounted for in the annual return on the basis of prepared cost records and a special PIT/BR or CIT/BR form.
In the CIT/BR or PIT/BR appendix, qualified costs should be indicated with the following categories:
1. salaries of employees;
2. salaries incurred under civil law contracts;
3. acquisition of materials and raw materials;
4. acquisition of non-tangible specialized equipment;
5. expertise, opinions, consulting and equivalent services;
6. paid use of scientific and research apparatus;
7. acquisition of a service for the use of scientific and research apparatus;
8. costs of obtaining and maintaining a patent, utility model protection right, industrial design registration right;
9. depreciation deductions.
The amount of deduction in a given year cannot exceed the amount of income. Fortunately, the unsettled amount of relief is not lost – it can be settled over the next 6 years.
In addition, start-up taxpayers can receive a cash refund of the undistributed amount of relief (unless the taxpayer was created as a result of restructuring activities). The same right applies in the second year of operation if the taxpayer is a micro, small or medium entrepreneur. This means that at the end of the year we can receive a transfer from the tax office with the amount of our tax savings (non-deducted qualified expenses x tax rate).
Finally, in the case of settling relief from previous years, the taxpayer will simply receive a refund of the overpaid tax.
Complementing the R&D relief is the Innovative Employee Relief, which relies on the fact that you can account for the undeducted amount of the relief by deducting PIT advances from your subordinates engaged in R&D at least 50% of their working time.
Is the R&D relief an invitation to the tax office to control?
It may seem that sending a PIT/BR or CIT/BR along with the annual tax return is an enticement for the IRS to check our company. Here, it should be clarified that verifying the eligibility for tax relief is usually done as a check. This is a procedure that generally involves the need to send the tax office the documentation that forms the basis for the tax relief. If the implementation of the relief proceeds in an appropriate manner, there are no grounds for the authorities to question our accounts.
The best form of protection against the aggression of the authorities is to obtain an individual interpretation. This is a document issued by the National Tax Information Service (NTIS), in which the taxpayer can ask whether he has a good understanding of the application of the law to his situation. The R&D relief is all about confirming the R&D activity and the proper recognition of costs. The individual interpretation protects the taxpayer in such a way that if one follows the contents of the interpretation, a change in the law or interpretation of the law will not harm the taxpayer.
In other words, confirmation of R&D activities by the NTIS will prevent the benefits of applying R&D relief from being taken away in the event of losing a dispute with the tax authority.
Finally, the application of tax reliefs is not considered tax schemes and tax avoidance activities. The head of KAS once stated that although a taxpayer taking advantage of the R&D tax relief receives a tax benefit and this is his main purpose of action such an entrepreneur does not act artificially with the purpose of tax evasion. Taking advantage of the relief is a reasonable course of action that is economically justified and can be undertaken by an entrepreneur acting in accordance with the law.
Summary
If it turns out that your business is more innovative than you thought you were, you are entitled to tax refunds from years past and sizable deductions in the future. From bakeries to construction companies, many businesses qualify for significant tax savings.
Tax relief guarantees great results in saving money on taxes. Especially in ailing businesses’ employee costs.
In addition, recognizing the manifestations of research and development activities in one’s company can provide the basis for seeking subsidies for such activities.
Finally, the safe nature of applying tax relief cannot be overlooked. Since even the treasury believes that the R&D relief is a mechanism that is used by a reasonable businessman guided by the law, you can’t find a better incentive.
Our experts can help you determine if your company is qualified for R&D tax relief and guide you through the entire process of implementing the relief. Contact us today to learn more.
