The current tax code gives business owners tons of opportunities for saving money. R&D tax credits are one of the most lucrative of those opportunities and are all too often overlooked. This high-level overview should give you the information needed to explore how much your business can benefit each year.
What is the R&D Tax Credit?
Since the 1980s, the Research & Development Tax Credit was initially adopted as an incentive for businesses to manufacture products and keep operations within the US. The overarching goal of R&D Tax Credits is to promote domestic innovation and production.
In 2016, the R&D Tax Credit was revised to apply to more small businesses and make credit calculation easier. It provides organizations with an additional dollar-for-dollar tax reduction for:
- Process improvement
- Adoption of new business components
- Other common day-to-day activities
Does My Business Qualify for the R&D Tax Credit?
At Cunningham and Associates, we find the most significant hurdle stopping business owners from looking further into this credit is the implied research and development definition.
Many business owners think they need to be running experiments in lab coats or developing a brand new product to qualify for the tax credit. Not true! Most manufacturing, construction, engineering, architecture, software, and technology businesses have qualifying expenses related to their everyday activities.
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In fact, custom design is a crucial indicator of qualifying activities. This could mean product design, process design, systems design, or in some cases, design to spec. We always say to clients that the design doesn’t have to be revolutionary to the industry — just evolutionary to your business.
In general, credits like this help offset the tax dollar-for-dollar for your business or shareholders, depending on your structure. This is the case for all open tax years. So you can offset the tax that you have already paid, which would result in refunds. These lookback studies have significant ROIs and will set you up to take the credit annually. It’s the gift that keeps on giving!
Can Start-Ups Apply for R&D Credit?
New rules have been established for start-ups, allowing you to benefit from the R&D Tax credit, even if you are not yet profitable or aren’t paying taxes yet. If you’re within your first five years and under five million in annual revenue, you can apply these credits to offset payroll tax.
How is the R&D Tax Credit Amount Calculated?
Fortunately, the R&D Tax Credit calculation isn’t too complicated. To calculate the credit for your business, you’ll need to look at three different expenses:
- Wages of employees doing qualified work — Specifically, you should be looking at your design professionals and management at a minimum.
- Subcontracted research and design expenses — This includes subcontractors in the construction industry that design systems that fit into a larger project. (These are limited to 65% of expenditures)
- Supply and Materials — Any costs related to research, prototypes, testing, and validation.
These expenses are added together and make up your qualified research expenses for a tax year. They are then inputted into R&D Tax Credit documentation — Form 6765, filed with your tax return. The Alternative Simplified Method is the easiest for companies newly electing the credit.
In the first three years of the calculation, you essentially would be looking at a credit of six percent of those qualified expenses. After three years, you would take 14 percent of the excess of half of your three-year average. Sounds complicated, but it is pretty straightforward on the forms.
Claim Your R&D Tax Credits Today
Regardless of your situation, if you’re in any of the industries listed and don’t want to overpay in taxes, you should explore this opportunity. Many CPA firms don’t calculate these tax credits, provide R&D studies, or backup credit claims. So, you’ll want to talk to a specialty firm you trust, and that will work together with your CPA.
At Cunningham & Associates, we pride ourselves on making this process easy and seamless for our clients. We complete no-cost assessments, provide hard numbers on credits expected, along with a fixed fee to complete the work. Credits expire each year, so now is the time to reach out and claim your share.
Stop overpaying on your taxes and save money for your business. Contact us online today. Or call us at (508) 687-6329 to learn how we can help you apply for the R&D Tax Credit.