What You Should Know About the R&D Tax Credit

Tax reform, also known as TCJA (Tax Cuts and Jobs Act) put a lot of new changes in place for businesses. One of the major tax benefits is The R&D tax credit which provides reliable opportunities for reducing tax liabilities to save companies hundreds of thousands of dollars.

Due to common misconceptions, however, a lot of companies are not fully benefiting from the R&D credit. Many are not understanding how it applies to their operations. If a business doesn't claim the R&D credit, it is most likely because:

  • They are confused about documentation
  • Expenditures
  • How the credit can be used,
  • Qualifying activities

If you have clarity about the R&D tax credit, it will help you learn how to identify and claim your credit.

How Do You Know if Your Business is Eligible for the R&D Tax Credit?

The eligibility for the R&D credit is a lot broader than most businesses realize. Eligibility applies not just to product development, but operations and activities, such as software development, quality enhancements, and new manufacturing processes. If you have just started your business, you might be eligible to apply for the R&D tax credit against your payroll tax for the next five years.

Ways in which your organization could qualify for the R&D tax credit:

  • If you have devoted resources and time to building innovative or new products
  • If your company has developed software, prototypes, or patents
  • If you have improved any existing products
  • If your company has hired scientists, engineers, or designers

You may be able to claim R&D credits, (this rule depends on when your tax return was filed) for the last three open tax years. If your company is showing a loss, you may be able to go back even further. Check with the tax experts at OnCentive to learn how this credit may impact your taxes this year.

What are the Business Incentives with the R&D Tax Credit?

The R&D tax credits are business incentives that reduce your company's tax liability dollar-for-dollar. There is no limitation placed on the number of your expenses, and these business incentives can be claimed every year. If you cannot use the R&D tax credit completely, or immediately, then you unused credit you qualify for can be carried forward for up to twenty years, or back one year. Check with OnCentive as each state has its own rules regarding carryovers, so you will want to learn what your state's guidelines are.

Common Misunderstandings on Why Companies Think They Do Not Quality for R&D Tax Credits

There are common misunderstandings made by companies in assuming they do not qualify for the R&D tax credit:

1. The Company is not Paying Federal Income Tax

Small businesses and start-up companies can be eligible to apply up to $250,000 a year for five years of the federal R&D credit. This credit will nullify the FICA part of their payroll taxes each year.

2. The Business is not Focused on R&D

The R&D tax credit is not just for life sciences or high-tech companies that have dedicated research departments. A lot of companies do not have R&D laboratories, but instead perform R&D in their distilleries, wineries, fields, kitchens, or production floors. If you perform any type of experimentation, you qualify for R&D.

3. Employees are not Scientists or Engineers

The companies that employ a large number of engineers and scientists stand out as candidates for the R&D tax credit. Because the R&D was created as a way to encourage experimentation and research, however, it applies regardless of who performs the activities. No matter the employee's title or job title, if there is experimentation involved, employees and even third-party contractors who engage in the improvement or projects are considered under the R&D tax credit allowance.

Any company that has resolved a technological challenge can be eligible for the R&D tax credit. If you are unsure if your company qualifies, you should contact one of the tax experts at OnCentive.

Where to Learn More About Business Incentives and Tax Credits

OnCentive has more than 100 years of combined tax experience and a risk-free model to help companies claim the business incentives and tax credits they deserve. Talk to one of our tax experts today and learn if your company qualifies for the R&D tax credit, or any other incentives out there to help your business grow.

Shannon Scott
CEO, OnCentive

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