As the market continues to expand, the call for innovation and improvement has also been louder. The United States has been providing for small and growing innovative businesses whose objective is to create new products, technologies, materials, processes, and those seeking and acting to improve the existing ones. These provisions are under the Research and Development Tax Credit program.
What are the benefits of R&D Tax Credits?
- Increased cash flow
- Increase of earnings per share
- Reduce state and federal tax liability
- Allows qualified businesses to obtain benefits that they can use for research and any activities connected to these. A company can claim these benefits despite the uncertainty of whether or not you can generate income and profit from it.
- If your company is taxable, the program can also offset income taxes.
- Increased on return on investment
How do you know if your business is qualified for R&D tax credits?
- A company should have conducted or would want to try to do research and conduct activities that would develop new products as well as improve those that are existing.
- Companies that qualify are those that create new manners of processes, services, products, and technology.
- Companies that improve or make innovative changes to an existing manner of process, products, services, or technology also qualify for R&D tax credits.
- For small businesses, they should gross receipts and/or revenues that amount to less than $5 million for the current year of their operation and should not be part of the tax-exempt organization that’s under section 501. They should also have the gross receipts or revenues for five years or less. For a more specific example, let’s say a business has produced gross receipts prior to 2017. They are then not eligible to use or claim the R&D credits for the fiscal year 2021 in offsetting Social Security (SS) taxes.
Why do some companies not claim their R&D tax credits?
Most companies and small businesses might only know the R&D tax credits by name. Perhaps, most of them skip the getting to know portion because of their previous assumptions about the program. Also, there may be many misconceptions about the program, and businesses may have little to no time to confirm them. Some of the reasons and misconceptions include:
- “We are not doing something amazing or groundbreaking.” Many businesses don’t even try to apply for the program because they immediately think that the program is designed only for those who have groundbreaking ideas and activities going on. This reason is quite an exaggeration. The company’s work doesn’t need to be “groundbreaking.” In fact, they don’t have to succeed in the research and development activities they conduct.
- “Our company does not conduct hardcore researching like what they do in labs, so I guess we are not eligible for this program.” Generally, as long as the company has technical employees like developers, scientists, researchers, and engineers that continuously create and improve products, techniques, and software, then the company may apply and benefit from the tax credit.
- “Our company is still too small.” Some companies might think that even though the program is meant to support small businesses, their companies are still too small for it. To clarify, the size of the company does not equate to the size of its credits. Credits are calculated in terms of qualified spending and not based on sales.
- “Our R&D is monotonous and even slowly diminishing; we might not be qualified for a program that supports increasing research activities.” This can be a very valid concern and a pretty strong barrier to break into. However, a company is not required to escalate their research and development spend from what they had in their previous year to claim benefits from the R&D tax credits. In fact, a company’s spend can be just the same or even lesser than their prior year’s spend. These companies can still benefit from the tax credit.
What documentation do we need to support my R&D tax credits claim?
Upon application and claiming, there might be a need to provide some data in order to supplement and support your expenditure claims and prove that you are eligible for the program.
- First, it must be in sync or contemporary when a particular company did the research and development.
- Make sure that the documentations are dated and that the work and activities done was coherent with the fiscal year of your claim
- Lastly, it should emphasize the technical challenges and struggles during these times to further substantiate the R&D.
Companies have a wide range of eligible formats for the documentation that they can choose from. It could be one or some of the following:
- Prototypes, whether or both software and physical products (blueprints, patents, designs, drawings)
- Test documents
- Project and meeting notes or minutes
- Invoices, payrolls, contracts, accounts, and receipts
- Whiteboard photos
- Version control for technical documents
- Developer or engineering notebooks
Can companies existing for more than five years benefit from the payroll offset in the R&D tax credits?
The years do not play much of a significant role. As long as the company meets the requirements and criteria mentioned above, it can apply, claim and benefit. Companies that use professional employer organizations are also qualified for payroll offset.
What expenditures qualify for R&D tax credits?
- Taxable wages. This is available for employees who directly perform, supervise, and support activities that qualify.
- Cost of supplies and materials. All equipment, supply, and materials used in qualified activities, excluding the capital items or general administrative supplies, can be covered.
- 65% to 100% of the company’s contract research expenses. Contract research expenses that made under the umbrella of the qualified activities with the provision that the taxpayer keeps his rights to the possible result of the eligible activity and must fulfill his duty to fund the contractor whatever the result may be, whether it succeeds or fails.
- Rental costs or lease costs of computers. This can include payments made to cloud service providers (CSPs) for renting server space used to advance or create an upgrade for a particular component/s.