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R&D Tax Credits

Whether it’s through new products, new tech, or new systems, virtually all businesses need to innovate in order to continue growing. This innovation requires research and development (R&D). However, high costs, prolonged development, and uncertain return on investment can discourage businesses from investing in this department.

 

Simply put, R&D can be prohibitively expensive for many small businesses. Thus, the R&D tax credit was created under Section 41 of the Internal Revenue Code to encourage businesses to continue innovating.

 

R&D tax credits allow qualifying businesses to deduct the cost of applicable research and innovation from their taxable income. Originally established in 1981, the research & development tax credit helps numerous businesses save money each year. Federal research and development tax credits became permanent thanks to 2015’s “Protecting Americans from Tax Hikes Act,” also known as the PATH Act.

Benefits of R&D tax credits include:

 

  • Reduced tax liability
  • Increased cash flow and market value
  • Increased earnings-per-share
  • Lower effective tax rate
  • Allows the business to keep more of its profit
  • Mitigates alternative minimum tax, Federal Insurance Contributions Act (FICA) payroll tax, etc.

 

Haynie & Company has experience calculating R&D tax credits for small and large businesses nationwide. We leave no stone unturned in our efforts to save you money. Read on below for more information about R&D tax credits, or contact us now to see how we can help! Find a location near you.

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How Does Research & Development Tax Credit Work?

Now that you know a bit more about research and development credit, you may be wondering what counts as qualified research expenses. The following costs may qualify for an R&D tax credit claim:

 

  • Wages
  • Supplies
  • Contractors
  • Patent costs
  • Computer costs and software development

 

Note: As of 2022, the Tax Cuts and Jobs Act requires businesses to amortize their R&D costs over five years instead of deducting them immediately.

Who Can Claim R&D Tax Credit?

R&D tax credit eligibility requires hard science. Most companies that engage in the following activities within the United States can claim the credit:

 

  • Testing products
  • Employing engineers
  • Investing in data science and data analysis
  • Outsourcing product research

 

Even if the project ultimately failed, you may still qualify for the tax credit. However, all of this qualified research activity must also meet the criteria of the following four-part test:

 

  1. You have a qualified purpose (i.e., you are developing something new or improving upon something that already exists)
  2. You are experimenting and evaluating possible alternatives
  3. You are relying on hard sciences
  4. You aim to eliminate uncertainty during the process

 

If a business does not engage in hard science and research but still tries to claim an R&D tax credit, they may be audited by the IRS. Always keep proper documentation! Aside from thorough payroll information, you should also track detailed R & D expenses, progress reports and designs, lab results, copies of contracts and invoices paid to outsourced researchers, and any other proof of your R & D process.

 

To find out if your business qualifies for this credit, contact us today.

The Regular Research Credit Method vs. the Alternative Simplified Credit Method

Regular Research Credit Method

 

The Regular Research Credit Method, also known as the traditional credit method, is the original method for calculating R&D tax credits. It involves calculating the credit based on a percentage of a business’s qualified research expenses (QREs). Under the Regular Research Credit Method, the credit is calculated as follows:

 

Credit = qualified research expenses x credit percentage

 

The credit percentage generally equals 20% of QREs over a base amount. The base amount is calculated as a fixed percentage of the average QREs for the previous four years. The base amount is meant to ensure that companies that consistently engage in R&D are not penalized for doing so.

 

Alternative Simplified Credit Method

 

The Alternative Simplified Credit Method, also known as the ASC Method, is a simplified method for calculating R&D tax credits. It was introduced in 2006 as an alternative to the Regular Research Credit Method. Under the ASC Method, the credit is calculated as follows:

 

Credit = 14% x (QREs – 50% of average QREs for the previous three years)

 

The ASC Method uses a fixed percentage of 14% instead of the variable 20% credit percentage used in the Regular Research Credit Method. Additionally, instead of using a base amount to calculate the credit percentage, the ASC Method subtracts 50% of the average QREs for the previous three years from the current year’s QREs.

 

Generally, the ASC Method is easier to use than the Regular Research Credit Method, but it may result in a lower credit amount for businesses with consistently high QREs. However, for businesses with fluctuating QREs, the ASC Method may result in a higher credit amount.

 

The tax professionals at Haynie & Company understand every business is unique. We will take your specific circumstances into consideration as we determine which method is the best fit.

 

What is the “Startup Provision?”

 

Startup companies and small businesses could qualify for up to $1.25 million (or $250,000 each year for up to five years) in federal R & D tax credit to offset the FICA portion of their annual payroll taxes. To be eligible, the company must not exceed the following:

 

  • $5 million in gross receipts for the credit year
  • 5 years of gross receipts

For Help with R&D Tax Credits, Contact Haynie & Company CPA Firm

Did you know less than one-third of companies that qualify for R&D credits actually apply for them? Don’t miss out on the money you’re entitled to!

 

Knowing which expenses qualify for an R&D credit — and if you have the necessary documentation to back them up — is tough for many small businesses. As R & D tax credit specialists, the pros at Haynie & Company can help you calculate this federal tax credit by analyzing your qualified research expenditures and organizing vital documentation. We can carry the credit forward up to 20 years and even perform look-back studies to find unclaimed credits for open tax years (generally 3-4 years.)

 

With audit defense, tax preparation, financial planning, and much more, Haynie & Company is the CPA firm you can trust. Partner with us today and watch your business grow to new heights.

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