Research & Development Tax Credits: What You Need to Know

Businesses across industries continue to struggle during the coronavirus pandemic to ensure they can maintain adequate cash flow, meet financial obligations and keep their operations afloat.  Fortunately, the federal research and development tax credit may provide refund opportunities and provide some relief during uncertain times.

What is the R&D credit?

The Federal Research and Development (“R&D”) Tax Credit was enacted in 1981 to incentivize research and innovation within the United States. The credit is granted to companies engaged in qualified activity for their ongoing development efforts. Benefits of the tax credit include reduced tax liability and increased cash flow, all while increasing a company’s value.  Below, we have outlined some common questions we receive about the R&D tax credit.

Does my business qualify for the R&D credit?

People often hear about the R&D tax credit and incorrectly presume that they are ineligible to claim the credits due to their specific industry. You do not need employees with lab coats or sophisticated research labs to qualify for the credit.  If you are expending resources to enhance the quality, reliability, performance and/or functionality of your product or application, you may qualify for the tax credit. Specifically, if your company is engaged in any of the following activities within the United States, you should evaluate whether your company may claim the tax credit:

  • Development or improvement of a product
  • Development or improvement of a software application or technology
  • Enhancement of a manufacturing processes or technology

Which industries qualify for the credit?

Companies across various industries can claim the credit, including but not limited to the following:

  • Architecture and Engineering
  • Aerospace
  • Construction
  • Food and Beverage
  • Manufacturing
  • Pharmaceuticals
  • Software Development

What is the credit value?

Qualified expenses include wages, supplies, contractors and/or cloud cost expenses. The Federal R&D credit is approximately 4% – 7% of your qualified spend but could be up to 10%.  Many states offer similar R&D tax credits, but credit values vary from state to state. For example, Georgia offers a R&D tax credit that can equal up to 10% of your qualified spend within the state of Georgia.

What if I already filed my tax return?

Taxpayers can amend up to three prior years of income tax returns to claim the R&D tax credit. As such, there may be an opportunity to evaluate tax returns for the 2016, 2017, 2018 and 2019 tax years.

Can I still claim the credit if I don’t owe taxes?

For companies in losses, the federal credit can be used to offset the employer portion of FICA taxes if a company has 1) less than $5 million in gross receipts and 2) has only had gross receipts for a maximum of five years. The credit can offset up to $250,000 a year beginning in the first quarter after filing the company’s payroll tax return. This is extremely beneficial for start-ups, as it allows for an immediate cash benefit when cash flow is tight.

Additionally, several state R&D credits are refundable or can be used to offset payroll withholding taxes.  For example, the Georgia R&D credit can be used to offset Georgia payroll withholding taxes. It is important to evaluate both federal and state R&D incentives during a Tax Credit Study.

What is the process for claiming a R&D tax credit?

If you believe you may potentially qualify for a R&D Tax Credit, it is important to speak to a tax advisor about the next steps, as tax credits must be filed with the tax return. While claiming the credit may be complex, Bennett Thrasher has a dedicated team of advisors to assist you in both claiming and documenting the R&D tax credit. If you have any questions, please contact Betsi Barrett or Nina Desai by calling 770.396.2200.