The Federal Research and Development Credit, or R&D Tax Credit allows companies engaged in qualified R&D activity to claim a tax credit for their efforts. This is a lucrative credit as it is a dollar-for-dollar offset of a company’s tax liability. Unfortunately, several businesses are not claiming this credit due to their belief that their work does not qualify for the credit. If your company is developing or improving a software, product or process, it could potentially qualify for the R&D credit and thereby benefit from substantial tax savings.
Below are the most common misconceptions businesses have about the R&D Tax Credit.
My company isn’t large enough to claim the R&D Tax Credit
People often assume that the R&D credit can only be claimed by large companies. In fact, the R&D tax credit is available to companies of all sizes, including small and medium sized businesses. Companies with less than $25,000 in gross receipts are the 2nd largest group of companies to claim the R&D credit.[1]
My company is in losses so I cannot benefit from the R&D Tax Credit
Recent legislation now allows the credit to be used by companies that are in losses. Specifically, the credit can be used to offset the employer portion of FICA taxes if a company has…
- Less than $5 million in gross receipts
- Has only had gross receipts for a maximum of 5 years
The credit can offset up to $250,000 a year beginning in the first quarter after filing the company’s tax return. This legislation is extremely beneficial for start-ups, as it allows for an immediate cash benefit when cash flow is tight. Additionally, several state R&D credits are refundable or can be used against payroll withholding taxes. For example, the Georgia R&D credit can be used to offset Georgia payroll withholding taxes. It is important to evaluate both federal and state R&D incentives.
The R&D Tax Credit is only available to companies within specific industries
People often believe that R&D requires someone performing work in a laboratory by people in white lab coats. However, the qualifications for the R&D tax credit are much broader and can apply to a variety of industries, including but not limited to:
- Software
- Manufacturing
- Life sciences
- Architecture
- Construction
- Engineering
- Agriculture
- Food and beverage
The R&D Tax Credit is only available for new inventions
Companies that develop or enhance products or processes could potentially qualify for the R&D tax credit. The project can be an ongoing project from year-to-year and still qualify towards the credit. Therefore, the credit is available to companies that are either enhancing an existing product or inventing a new product.
The R&D project must be successful to qualify
Many believe that the project must be successful to qualify for the R&D credit. The project can ultimately fail or continue into the next year and can still qualify towards the credit. In fact, the policy reason behind the credit is to encourage innovation and to incentivize companies for taking risks which may lead to unsuccessful projects.
Still Have Questions?
Bennett Thrasher’s has tax advisors that specialize in R&D tax credits to ensure companies are maximizing the tax credits available to them. To get more information about the R&D tax credit or to see if your company qualifies, contact contact Betsi Barrett or Nina Desai for a free consultation.
