Is Your R&D Tax Credit at Risk?
On October 15, 2021, the Internal Revenue Service (IRS) released its Chief Counsel Memorandum, which outlines new requirements for claiming a tax credit refund for the Research & Development (R&D) Tax Credit.
Based on this memo, these business tax credits will face higher scrutiny from the IRS in 2022. Organizations will be required to submit more documentation along with their claim for these business tax credits which will put many small and medium-sized businesses at risk of being rejected for returns.
Don’t lose the critical cash to reinvest in your business! Contact Cunningham and Associates today.
Our tax experts will provide you with a FREE review of your current methodology and documentation to ensure you are in IRS compliance. We will then work together with you to unpack these changes, and provide suggestions for moving forward.
Claim Valuable R&D Tax Credits
R&D Tax Credits are a federal (and in many cases state) business tax credits established to promote domestic innovation and production. The tax incentive provides startups, small businesses, mid-sized, and large businesses with an additional dollar-for-dollar tax reduction for innovation, design, process improvement, adoption of new business components, and many other common day-to-day activities.
There’s a good chance that your business is already engaging in some of the new or improved products, processes, or technology. But without applying for the tax credit, you may be paying far more in federal income tax, or even state taxes, than you’re legally required to.
Another vital thing to remember is that R&D tax credits are expense-driven. So the more you spend on qualifying research expenditures and activities, the more credits you generate and the more money you’ll save on your tax bill.
R&D Tax Credit FAQs
R&D stands for research and development. Chances are, your business qualifies for these tax savings if:
- You’re innovating in the USA
- Your company is inventing, improving, or optimizing current processes
- Your company is creating, revising, and improving products
Essentially, if a US-based business is investing in innovation or improvements, we can document certain expenditures associated with those processes. In turn, those activities can qualify for the credit, thus lowering the company’s tax bill and liabilities.
Many of our clients wonder, just how far back can they go to claim R&D tax credits?
The good news is, R&D tax credits can be applied retroactively. On average, our clients claim the credit back four years. But sometimes, you can go back even further.
The most common question we get is how to account for R&D tax credits.
What you need is:
- An airtight documentation system built with best practices
- A way to track your qualifying activities and qualifying expenses
You can organize via department, through a ledger allocation, or something else entirely.
You technically can’t get a refund via the R&D tax credit program. But the way these credits are monetized is to directly lower the amount of tax you pay.
Overall, the credit reduces corporate tax liabilities, and it also lowers individual tax obligations. Many of our clients find the tax credits much more advantageous than a straight refund.
We’ve recently gotten a lot of questions from new clients wondering if R&D tax credits are part of a state aid program. They are not. R&D tax credits are directly from the revenue agencies, and have been in existence since the 1980s.
Many expenses can qualify for the R&D tax credit. Primarily, these tax credits are labor-driven. In most instances, what you pay employees and contractors to perform qualifying activities will be your biggest expenses you’ll use to qualify for the credit. Supply costs and speciality tools and equipment can also be used to qualify.
In some cases, R&D tax credits can offset payroll taxes. But it depends. For one thing, there are rules in place for startups. If a startup is under five million in revenue, or has been in business for less than five years, you can elect to offset payroll taxes in lieu of corporate or individual taxes.
Calculating R&D tax credits is complex. But essentially, we start the calculation process by looking at what qualifying activities a company has and the allocated expenses directed at those activities. That expense becomes the pool of those applicable costs. Then, depending on state and federal guidelines, the credit is calculated from that total expense pool.
How Much Can Your Company Save with R&D Tax Credits?
Many companies obtain R&D Tax Credits over six figures, providing them with the critical cash needed to reinvest in and grow their businesses.
For most companies, the credit can be worth 7-10% on qualified research expenses at the federal level. But you can save even more if you apply and qualify for state-level R&D tax credits. You don’t want to be leaving such a large sum of cash on the table.
Our experienced team of tax professionals can help you identify and implement the most valuable combination of federal and state R&D tax credits to help maximize your returns.