The Research and Development Tax Credit (or sometimes called Research and Experimentation or just R&D Tax Credit) is a business credit that you can take against your taxes as long as you have qualified research and development expenses. The credit was made permanent by Congress in late 2015. Many of my clients are unaware of it and those that do know about it have a few misconceptions. So allow me to refute some of the more popular myths you may have heard and attempt to clear up any confusion about the Research and Development Tax Credit.
Myth #1: It’s only for pharmaceutical companies.
The Research and Development tax credit is not just for pharmaceutical companies. The R&D Tax Credit can be used by companies, small and large, in industries ranging from wine making to ship building.
Myth #2: The Tax Credit can only be applied to income tax.
This is not true. If you’re a small business or startup with less than $5 million in yearly revenue, you can take up to $250,000 of the R&D Tax Credit against your payroll taxes for up to five years. So, even if you don’t have any income or are subject to the Alternative Minimum Tax calculation, you may still be able to take advantage of this provision.
Myth #3: Your accountant can help you with the R&D Tax Credit.
Perhaps, but determining expenses for the R&D Tax Credit can be complicated and in the world of finance, things have become more and more specialized. Your accountant, as good as he or she may be, may not be up to spewed on the intricacies of the calculations required. The best accountants will work with or recommend experts who specialize in the field of state and federal tax incentives and credits.
Myth #4: You don’t do work that would qualify for the credit.
You probably do. In fact, there are lots of things your staff are doing internally that could be considered research and development. You could be developing, engineering, designing or researching a new product or even working on product alternatives. If you’re putting out products or services, it’s worth asking your accountant whether or not you qualify.
Myth #5: Outsourced development doesn’t qualify.
Many expenses related to the activities listed in Myth #4 qualify for the credit. That means outside contractors and firms as well as internal costs of payroll, taxes, benefits, materials, supplies and related overheads qualify as well. Just remember to keep good records so that it’s easy to figure out these expenses and perform the calculation.
Myth #6: The calculation is complex.
Not so. All you do is figure out how much you spent on qualified research and development during the three preceding tax years, on average, and then multiply by 50 percent. That’s the base. The credit is 14% of any expenses above that base. The calculation really isn’t complex. What’s more complex is the determination of “qualified” research and development expenses, which should be the job of an outside expert.
Myth #7: The savings aren’t worth it.
Are you kidding? There are many examples of companies saving tons of money because of the R&D Tax Credit. Tax Point Advisors, a firm that specializes in the calculation, lists clients of theirs that have seen big benefits, including a contractor who saved $300,000 and a construction firm who claimed credits in excess of $1 million. Remember, this is a credit, not a deduction, so any amounts you reap would be applied directly against taxes owed.
I’ve been talking up the R&D Tax Credit to my clients and community over the past year. Regardless of what your company does, it’s worth looking into this tax credit – unless you enjoy giving more money than necessary to the government.
Join writer and small business owner Gene Marks each Wednesday on the Small Biz Ahead podcast. You can also submit a question for Gene to answer on the podcast.