RD-Tax-Credits

Small Businesses May Be Eligible for Thousands of Dollars in Tax Credits from this Little Known Program

As a savvy small business owner, unlocking potential savings through tax credits is a game-changer. Understanding which credits apply to you and how to leverage them is key. Today, let’s explore the Research and Development tax credit (R&D tax credit) – a valuable opportunity for small businesses to offset their R&D costs.

What is the R&D Tax Credit?

The R&D Tax Credit is a federal dollar-for-dollar tax credit designed to help companies cover the expenses of developing new or improved business elements. This includes processes, products, technologies, and innovations such as new formulas, techniques, or inventions. Any activity enhancing quality, performance, reliability, or functionality may qualify, whether it’s software development, product quality enhancements, or updated manufacturing processes.

Eligibility Criteria

To determine if your business qualifies, the IRS has a four-part qualification test:
1. Purpose of Research:
Develop a new or improved function, performance, reliability, or quality for a business component.
2. Eliminate Uncertainty:
Tackle a problem with a high degree of technical uncertainty using your procedures.
3. Technology:
Engage in technical research, relying on hard sciences like machine learning, physics, chemistry, biology, software, or electrical engineering.
4. Experimentation:
Include simulation, evaluation of alternatives, trial and error, testing, modeling, and refining in your research process.

Qualified Costs
Qualified expenses for R&D tax credit include salary and wages, supplies, and cloud services for software under development, all tied to qualified activities meeting the four-part test.

Ineligible Costs
Certain costs, like research outside the U.S., third-party research without rights or payment, market research, training, troubleshooting, customizing for specific customers, and attorney fees for patent filings, do not qualify.

Claiming the R&D Tax Credit
To claim the credit, maintain meticulous records, including expense details, payroll records, project notes, lab results, and communications related to research. Complete Form 6765 for the federal credit and, for small businesses, file Form 8974 once approved. Start-ups can apply the credit against payroll taxes.

Misconceptions – Dispelling myths:

  • Your company doesn’t need income taxes to claim.
  • Cutting-edge scientific work isn’t a must; meeting criteria and the four-part test is sufficient.
  • No R&D department is needed; meeting criteria and the test is key.
  • Companies subject to AMT may still qualify.

Risks and FAQs
Be aware of IRS audits, penalties, and interest. Frequently asked questions:

  • Yes, you can retroactively claim for up to three years.
  • Profitability is required to utilize the credit, but federal credits can carry over for 20 years.
  • Failure in research and development doesn’t disqualify if other criteria are met.

Federal and State Credits
The R&D tax credit is both federal and available in 37 states, providing a wide opportunity for businesses to benefit.

 

In conclusion, the R&D Tax Credit is a powerful incentive for innovation. Whether you’re a tech company or not, understanding the criteria and documenting your efforts can lead to significant savings. Reach out to lynnt@herretirement.com if you’re a small business owner interested in the R&D Tax Credit program.

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Have Your Cake & Eat it Too: New PPP Basics and Tax Savings

Good news. The new Paycheck Protection Program (PPP) law enacted with the stimulus package adds dollars to your pockets if you have or had PPP money.

Did you miss out on the first two opportunities to receive your tax-free Paycheck Protection Program (PPP) cash? Many did miss out. Why?

One reason: the word “loan.”  Who wants a loan? No one. Well, almost no one.  But who wants a cash gift, tax-free?  If you do, read on for the details. But first, you should know that the big picture works like this:

  1. You obtain your PPP tax-free monies from a lender (it’s called a “loan,” but watch that word disappear as you read this letter).
  2. You spend all the PPP money on yourself if you are self-employed or operate as a partnership; on payroll (including pay to you, if that applies); and on other covered expenses such as rent, interest, utilities, operations, property damage, suppliers, and worker protection.
  3. You apply for loan forgiveness and achieve 100 percent loan forgiveness, which is easy-peasy when you spend 60 percent or more of the money on payroll (and yourself if you are self-employed or a partner in a partnership).
  4. You deduct the expenses that you paid with the PPP loan monies that were forgiven.

New Money on the Table

The new COVID-19 stimulus act sets aside $35 billion for first-time PPP applicants, with $15 billion of that made in loans for first-time applicants with 10 employees or fewer or made in amounts less than $250,000 to businesses in low-income areas.

New Deadline

The new deadline of March 31, 2021, replaces the expired deadline of August 8, 2020. The monies available in this new round of PPP funding are on a first-come, first-served basis. Don’t procrastinate. Get your application for your first-time PPP monies in place now.

Before we go further, please note the PPP money comes to you in what appears to be a loan. We say “appears” because you typically pay back a loan. Done right, however, the PPP loan is 100 percent forgiven. The word “loan” makes some businesses leery of this arrangement. Don’t be. The PPP monetary arrangement is a true “have your cake and eat it too” deal.

And this remarkable deal applies to your past PPP loan, the PPP loan you have outstanding, and the PPP loan you are about to get if you have not had one before. Here are the details.

Loan Proceeds Are Not Taxable

The COVID-related Tax Relief Act of 2020 reiterates that your PPP loan forgiveness amount is not taxable income to you.

Expenses Paid with Forgiven Loan Money Are Tax-Deductible

As you may remember, the IRS took the position that expenses paid with PPP loan forgiveness monies were not deductible.

Lawmakers disagreed but were unable to get the IRS to change its position. The IRS essentially told lawmakers, “If you want the expenses paid with a PPP loan to be deductible, change the law.”

And that’s precisely what lawmakers did. The COVID-related Tax Relief Act of 2020 states that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income.”

In plain English, the expenses paid with monies from a forgiven PPP loan are now tax-deductible, and this change goes back to March 27, 2020, the date the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted.

Good luck to all small business owners as they navigate this new PPP process.