The Research and Development (R&D) tax credit can help small businesses save money on tax big time. Unfortunately, not a lot of businesses are able to claim this tax incentive because they are unaware of it or they don’t think it applies to them. But any business can qualify for the R&D tax credit software so long as they meet the requirements for this.
Just because you wear a lab coat and your work involves the use of test tubes and other scientific equipment, doesn’t mean your business automatically qualify for the R&D tax credit.
Here’s everything beginners need to know about this tax incentive.
What is the R&D Tax Credit?
The research and development (R&D) tax credit, also known as the R&D tax credit and R&D credits, is a form of tax incentive for US-based companies. It is meant to encourage more investment on research and development in the USA. In general, a tax credit reduces the amount of taxes owed or increases a tax refund. There are two ways to calculate the R&D tax credit if a company’s activities qualify for it: the traditional method and the alternative simplified credit method.
How a Business Can Use the R&D Tax Credit
If your business or company qualifies for the R&D tax credit software, you’ll have several choices concerning when and how you apply it. For most businesses earning a profit, the credit will be used against the company’s income tax liabilities. For startups that still have to earn a profit, the credit is used mostly to offset the company’s payroll liabilities.
We have provided a breakdown of some of the ways business can use the R&D tax credit to their own benefit:
1. To earn back 5%-15% of funds spent on qualifying expenses.
The amount of refund will be based on the specifics of the business, but in general, the R&D tax credit covers 5% to 15% of any qualified research expenses. This means, that if your company spent $100,000 on qualified research expenses, you’ll be refunded around $5,000 to $15,000.
2. To Offset Payroll Taxes.
One of the most common ways small businesses use the R&D tax credit is to use it to offset payroll taxes. This can benefit small businesses significantly. In order to qualify, their gross receipts for the year in question must be lower than $5 million, and you must not have gross receipts from over 5 years ago.
If a business meets the said requirements, they’ll be able to use the R&D credits to even out up to $250,000 in payroll taxes. The credit will be applied to their payroll taxes when they choose this method as an option when filing their income tax return. Once a business qualifies for the credit multiple years in a row, they can use the surplus-value of the credit to pay for part of their income tax liability.
3. Thinking Back and Moving Forward.
If a business was unable to claim the credit in the previous years, and still qualify for it, they may still be able to access it. It’s possible for them to go back and adjust their income tax return to include the R&D tax credit software, which allows them to receive a refund for that year.
Businesses that still have to achieve profitability but continue to have research and development expenses may feel that they’re missing out on the benefits of the credit—if the R&D credit is bigger than their income tax, then it’s non-refundable. The good news is, businesses are allowed to carry forward any unused parts of the credit up to 20 years.
Who Can Claim the R&D Tax Credit?
The R&D tax credit software can be claimed by any business that spends for the development of new products or for improving products and processes while on U.S. territory.
The four-part test below can help determine whether a business qualifies for the tax incentive.
- Eliminate Uncertainty –the research must be done in an attempt to eliminate uncertainty concerning the development or improvement of a product or operation. This means that any research or changes done for aesthetic purposes only do not qualify.
- Process of Elimination –the activities must involve experiments to uncover technical uncertainty, such as simulation, systematic trial and error, modeling, and other methods.
- Technological in Nature –the research must be founded on hard sciences, such as biology, chemistry, engineering, physics, or computer science.
- Qualified Purpose –the activity must be done for the purpose of creating new or improved products or processes, resulting to better function, reliability, quality, and performance.
Expenses that can be Used to Calculate the R&D Credit
To calculate the R&D credit software, a company has to provide documentation of their “qualified research expenses.” These include:
- Salaries paid directly to people working on, supervising, or supporting the process of development.
- Supplies used or utilized during the development process.
- Contract research expenses given to a third party for conducting qualified research activities for the sake of the company.
- Expenses paid to cloud service providers or leasing computers used in research projects.
It’s not necessary for the research to produce successful results for the expenses to qualify. Even if the research or project ended up in failure, companies can still claim the credit.
Rules for New or Startup Businesses
The R&D tax credit isn’t refundable, but if your available credit is worth more than your tax bill, it’s possible to carry your credit forward for up to 20 years. But new businesses that incur a lot of research costs with little or no income tax liability have other options that can help reduce their tax burden right away.
The Protecting Americans from Tax Hike (PATH) Act of 2015, has made it possible for new and small businesses to apply the R&D tax credit against their payroll tax (FICA) for up to five years. With this, they are able to receive tax benefits from their research projects regardless of whether they end up in success or not.
The company can qualify for the payroll tax offset if they have:
- No less than five years of gross receipts
- Below $5 million in gross receipts for the credit year
Qualified businesses can apply for up to $250,000 of its R&D credit to their payroll tax liabiolity every year. But you have to choose this option on an originally-filed tax return — which means if you missed out applying the R&D credit to payroll taxes a year before, you can’t fix the problem by filing an amended return.