American companies are spending more on Research and Development each year. The National Science Foundation shows sustained increases in research and development expenses in the US in the years after the 2008 financial crisis, meaning, American companies are trying to innovate and put their money where their mouth is.
Yet small and medium business owners hear the words “research and development” and they probably envision something outside of what they and their teams are doing on a daily basis.
When business owners hear “R&D tax credits” it’s easy to think that you need to have a huge department doing rocket science each day and invent the next huge thing to even be considered as a business that does Research and Development.
Well, R&D tax credits are one of the areas in tax incentives where the little guy can benefit too. Advocates for the R&D tax credit believe the government could do a better job at educating business owners, regardless of the size, on the tax credits they could be taking advantage of and aren’t.
What is an R&D Tax Credit and What is it Trying to Get Companies to Do?
What these tax credits are trying to do is incentivize companies through a tax break for doing Research and Development work in the US. Notice, we’re not even saying Research and Development that works. We’ll get to that in more depth in a bit. The goal is to keep more jobs in the US and reward companies that are trying to innovate.
What kind of activity qualifies as Research and Development?
Any activity in your business that involves design, development, and improvement of a product and/or a service may qualify as R&D. In fact, in 2003, the “Discovery Rule” that was part of this tax credit was removed; instead of having the R&D tax credit only accessible to companies executing research activities “new to the world” the tax credit became accessible to companies executing research activities that were new to them, or an improvement upon what they were doing before.
In 2015, the Research and Development tax credit became permanent, and the profit thresholds necessary to qualify where lowered, meaning that startups that weren’t generating a lot of money, but were possibly generating a lot of innovation could benefit too. You just have to pass what’s known as the four-part test to qualify.
Does my company have to invent something new?
No! You should be able to demonstrate, through documentation your teams are keeping, that the work you’re doing attempts or successfully improves upon a product or service, or develops a new product or service.
What do I need to document to claim it?
You need to document the activities you do as part of your research and development, as well as the expenses those activities require. Some examples of documentation that can help support your claim are project briefings or notes, product descriptions or white papers, payroll records and expense reports.
How small can my business be to qualify for an R&D Tax Credit?
Your business’s revenue has to be less than $5 million in a given year to qualify. You can submit up to five years of evidence as part of your claim and apply it retroactively as far back as 2015.
What about state taxes?
Make sure to check with your state’s Tax Department for applicable credits in your state. Many states have their own tax incentives for Research and Development, but they vary from state to state.
How can I find out more about this and start my claim if I qualify?
Our team of experts at Incentax, LLC knows the tax code in and out and can help you evaluate your individual business situation to find every tax break you can get. Contact us to set up a consultation and learn more about this and other tax credits you may benefit from.