Top 5 Things About R&D Tax Credits Businesses Should Know

The R&D tax credit is often overlooked but doesn’t have to be. By working with a knowledgeable R&D service provider, you can reap the rewards of America’s largest tax incentive. R&D credits can offset income tax liability dollar-for-dollar and are available for companies in any industry – software, biotech/pharma, manufacturing, engineering, food, etc. To qualify, research must seek to solve technological uncertainty.

It’s Open To All Businesses.

Many enterprises are wondering what are R&D tax credits and their impact on businesses. According to experts, R&D tax credits are a government incentive that helps businesses offset their research and development costs. The credit offers a dollar-for-dollar reduction in federal income taxes for eligible companies and can even be applied against alternative minimum tax liability. It’s a valuable resource for businesses of all shapes and sizes, and it’s important to know that it’s available to any business that meets the criteria.

To claim the R&D tax credit, a business must demonstrate that it involves scientific research and experimentation. This includes developing new products, software, and processes, testing prototypes, and other work demonstrating significant trial and error. The R&D tax credit covers various expenses, including employee salaries and wages, third-party contracts, overhead costs, and materials and supplies.

Despite this broad eligibility, many businesses must use the R&D tax credit. This is due to misinformation and misunderstandings, such as the false belief that credit only applies to companies with a science-related industry. The credit is open to any company that tests its products, employs engineers, or engages in data science and analytics.

It’s A Tax Break

The refundable R&D tax credit is a major incentive for companies to innovate and spend on research. However, the U.S. lags behind other countries that have significantly increased their permanent R&D tax credits to incentivize innovation and support jobs.

The R&D tax credit is a significant tax break that can be applied against income and payroll taxes. If the credit is worth more than a company’s income tax liability, it can be carried forward for up to 20 years. However, it can’t be used against alternative minimum tax (AMT).

The process of claiming this valuable tax credit requires a substantial amount of documentation. The IRS often disallows credits for activities not properly identified, documented, or supported. This can result in losing millions of dollars in potential R&D tax credits for your business.

The best way to avoid disallowance is by using a specialized software application that automates the documentation and provides a clear picture of actual R&D expenses. This can prevent costly mistakes and minimize the time your accounting team must spend on documentation.

It’s Refundable

The R&D tax credit is valuable for companies investing in innovation and looking to improve products, processes, techniques, formulas, or software. It is available to any business that spends more on research and development activities than in previous years. While amortization has dampened the impact of the TCJA, credit remains a valuable source of cash for qualified businesses. The credit is refundable, meaning it can be used against any federal income tax liability (including payroll taxes) regardless of whether the company owes any tax in a particular year.

The key to claiming credit is to keep detailed records of all eligible activities and costs. This is why many businesses work with an R&D tax credit consultant to identify eligible projects and expenses.

It’s Flexible

Growing a business requires developing new products, technologies, and systems. This growth is critical to the success of companies and the overall economy, but it can be costly. This is why the federal government offers incentives to encourage more research and development by granting tax credits for R&D expenses. These credits can offset income taxes or even payroll tax liabilities, which greatly benefits small and startup businesses.

However, many businesses aren’t claiming all the credit they’re eligible for due to several misconceptions about the R&D tax credit. One big myth about the R&D tax credit is that a company’s research must successfully claim the credits. In reality, the credit applies to research needed to advance a company’s existing or future services and products, and it does not have to be groundbreaking. In addition, the size of a company does not influence the amount of credit it can claim. This means that many industries and sizes of businesses can qualify for significant R&D credits.

It’s A Competitive Advantage

The R&D tax credit gives businesses a competitive advantage by encouraging companies to undertake research and development activities that improve their products, processes, or software. It can also offset payroll taxes, increasing the company’s cash flow and providing a cushion for unexpected expenses. Research and development can be expensive for many businesses, even small ones. It requires highly-trained employees, dedicated time, and lots of resources.

This is a big reason some companies fail to take advantage of the credits. The good news is that calculating and supporting the R&D tax credit isn’t as complicated as it may seem, especially if your company works with a provider who understands your specific industry, goals, values, and the records you need to substantiate credit claims.