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.