The Federal Research and Development Credit, or R&D Tax Credit allows companies engaged in qualified R&D activity to claim a tax credit for their efforts. This is a lucrative credit as it is a dollar-for-dollar offset of a company’s tax liability. Unfortunately, several businesses are not claiming this credit due to their belief that their work does not qualify for the credit. If your company is developing or improving a software, product or process, it could potentially qualify for the R&D credit and thereby benefit from substantial tax savings.
The most common misconceptions businesses have about the R&D Tax Credit
My company isn’t large enough to claim the R&D Tax Credit
People often assume that the R&D credit can only be claimed by large companies. In fact, the R&D tax credit is available to companies of all sizes, including small and medium sized businesses. Companies with less than $25,000 in gross receipts are the 2nd largest group of companies to claim the R&D credit.
My company is in losses so I cannot benefit from the R&D Tax Credit
This is not true for all loss companies. Specifically, the credit can be used to offset the employer portion of Medicare and social security taxes if a company has…
1. Less than $5 million in gross receipts
2. Has only had gross receipts for a maximum of 5 years
The credit can offset up to $500,000 a year beginning in the first quarter after filing the company’s tax return. This legislation 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 against 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.
My company has plenty of Net Operating Loss carryforwards so I cannot benefit from the R&D Tax Credit
For tax years beginning after December 31, 2020, taxpayers are limited to utilizing net operating loss carryforwards for only 80% of taxable income versus the historical 100%. A federal R&D tax credit is a great way to help cover the income tax liability remaining from the 20% of taxable income.
The R&D Tax Credit is only available to companies within specific industries
People often believe that R&D requires someone performing work in a laboratory by people in white lab coats. However, the qualifications for the R&D tax credit are much broader and can apply to a variety of industries, including but not limited to:
The R&D Tax Credit is only available for new inventions
Companies that develop or enhance products or processes could potentially qualify for the R&D tax credit. The project can be an ongoing project from year-to-year and still qualify towards the credit. Therefore, the credit is available to companies that are either enhancing an existing product or inventing a new product.
The R&D project must be successful to qualify
Many believe that the project must be successful to qualify for the R&D credit. The project can ultimately fail or continue into the next year and can still qualify towards the credit. In fact, the policy reason behind the credit is to encourage innovation and to incentivize companies for taking risks which may lead to unsuccessful projects.
R&D Tax Credit Qualified Expenses Must Exceed a Certain Threshold
Some businesses mistakenly believe that they must incur a substantial amount of expenses to qualify for this credit. In reality, there is no specific threshold for expenses that must be met to claim the credit. While it’s true that the credit amount is based on the qualified research expenses (QREs) incurred during the R&D process, both large and small expenditures can contribute to the credit. Your company may still be eligible to claim the credit as long as your expenses meet the criteria for qualified research activities.
State R&D Tax Credits Are Only Available in “Technology” States
Another common misconception is that these tax credits are limited to select states with robust technology industries, such as California or Massachusetts. However, many states across the United States offer their own R&D tax incentives to promote innovation and economic growth. While the availability and generosity of these credits can vary from state to state, it’s essential for businesses to explore potential benefits in their specific geographic region. Some of these tax credits may complement the federal credit, providing additional opportunities to reduce tax liabilities and support research and development activities. Therefore, it’s advisable for businesses operating in any state to investigate the availability of state-level R&D tax incentives and determine how they can maximize their benefits to support their research and development endeavors.
R&D Tax Credits Are Too Complicated to Claim
Some businesses may shy away from claiming these tax credits because they believe the process is overly complex and time-consuming. While navigating the intricacies of tax regulations can be challenging, it’s a misconception that claiming these tax credits is an insurmountable task. Many companies have successfully leveraged these credits with the help of experienced tax professionals who specialize in R&D tax incentives. These experts can assist businesses in identifying qualifying activities, calculating eligible expenses, and preparing the necessary documentation, making the process more manageable and ensuring that businesses don’t miss out on valuable tax savings opportunities.
Still Have Questions?
Bennett Thrasher’s has tax advisors that specialize in R&D tax credits to ensure companies are maximizing the tax credits available to them. To get more information about the R&D tax credit or to see if your company qualifies, contact Betsi Barrett or Nina Desai for a free consultation.