Any business looking to significantly reduce its tax liability needs to take advantage of the research and development tax credit, otherwise known as an R&D tax credit.
Organizations that develop new products/services or focus on enhancing existing products are eligible for the R&D tax credit. Below, we explain why the R&D tax credit is a valuable incentive and how it can free up cash for your next project.
WHAT IS AN R&D TAX CREDIT?
The R&D tax credit was put in place as part of the Economic Recovery Tax Act of 1981. Its purpose was to increase innovation in America and secure its competitive edge on the world stage. In 2015, the PATH Act extended the tax credit permanently.
The R&D tax credit is derived from the wages of employees who perform qualifying work. The R&D tax credit was instituted as a reward for businesses that spearhead technological innovations. This makes the R&D credit one of the most valuable incentives available to business owners and startups today.
WHO QUALIFIES FOR THE TAX CREDIT?
The R&D is available for any business that performs the following activities:
- Designs and develops new products or services
- Enhances and upgrades innovative products or services
- Develops new software
- Automates manual processes
- Experiments with emerging technologies
- Creates prototypes
- Employs scientists, engineers, and other technical professionals
Most importantly, qualifying activities don’t have to “succeed” for your business to claim the credit. The minimum requirements for a business to qualify for the R&D tax credit are as follows:
- Your business should have gross receipts for less than five years. This essentially means that your company should have been founded within the last five years.
- You should also have gross receipts for less than five million dollars for the credit year
- Your business must take part in qualified R&D activities as mentioned above
WAYS THE R&D TAX CREDIT FREES UP MONEY FOR YOUR NEXT PROJECT
- Tax Relief
If your company is profitable and your business is due for a corporation tax payment, the tax credit will reduce the amount you must pay. If your tax credits exceed the amount you owe, you’ll get the rest as a credit.
- Refunds
If your business has already paid corporation taxes for the period you applied for the R&D tax credit, you’ll get your money as a rebate. A rebate is a reimbursement of the tax that you’ve already paid.
- Credit
The IRS credits back about 5% to a maximum of 15% of your company’s total qualifying expenses, including contractor payments, wages, and equipment used to perform R&D work.
If your company is posting losses, you are eligible to receive between 14% and 33% of qualifying R&D expenditures. Your business may also choose to withhold any R&D loss and instead carry it forward against any future profits. The R&D tax credit recurs so you can claim it every year.
- Cash Flow
With the R&D tax credit, you save up to $250,000 every year on R&D expenses for a maximum of five years.
WHY YOU NEED A TAX EXPERT TO LOOK INTO THE TAX CREDIT
As can be seen, the R&D tax credit is a great incentive for innovation-focused businesses. To ensure that your business receives the maximum value of the credit and to protect you from any IRS audits, consider partnering with experienced tax experts.
Such experts should possess expertise in technical innovations and tax law. They can help you gather the relevant documentation to substantiate your claim and mitigate your liabilities in the event of an audit.
At Incentax, we are dedicated to maximizing every available tax credit for your business. We offer expertise in engineering, tech, and R&D practices. In addition, we can handle the entire R&D process for you so that you can focus on running your business.
HOW INCENTAX CAN HELP
Tax laws are increasing in complexity, and there isn’t a one-size-fits-all solution for every business. At Incentax, we can offer customized solutions that fits the needs of your business.
Above all, we can provide an assessment of how much money your business can save for your next project by filing an R&D tax credit claim on your behalf. If you’re looking for a one-stop-shop for federal and state tax savings, get in touch with us today.