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R&D Tax Credits

Does Your Business Qualify for R&D Tax Credits?

Whether developing new products, implementing cutting-edge technology, or streamlining internal systems, your small business thrives on fresh ideas. However, the high costs, extended timelines, and uncertain ROI associated with research and development (R&D) can make it a daunting investment.

 

The good news is the federal government recognizes the importance of R&D for small businesses. Established under Section 41 of the Internal Revenue Code, the R&D tax credit aims to incentivize continued innovation by allowing qualifying businesses to reduce their taxable income through deductions for qualified research expenses. This translates to significant tax savings that can be reinvested back into your business, fueling further innovation and growth.

 

Ready to see if your R&D efforts qualify for these valuable tax benefits? Schedule a free consultation with Haynie & Company today!

How Do Research and Development Tax Credits Work?

 

The R&D tax credit rewards companies for innovation by offering a dollar-for-dollar reduction in their federal tax liability for qualified expenses. But what exactly counts as “qualified research?” Here’s a breakdown:

  • Wages: Salaries paid to employees directly involved in R&D activities.
  • Supplies: Consumables used during the R&D process, like materials for prototypes or chemicals for testing.
  • Contractors: Fees paid to external consultants or firms conducting R&D on your behalf.
  • Patent Costs: Expenses associated with filing, prosecuting, and maintaining patents related to your R&D efforts.
  • Computer Costs and Software Development: Costs of hardware, software, and personnel dedicated to developing new software or using existing software for R&D purposes.

Tax law changes require businesses to amortize certain R&D costs over five years rather than deducting them immediately. This doesn’t disqualify you from receiving the credit, but it does impact how you account for those expenses.

How Your Business Benefits

  • 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 Federal Insurance Contributions Act (FICA) payroll tax, alternative minimum tax, etc.

 

Haynie & Company has extensive experience calculating R&D tax credits for small and large businesses across Utah, Texas, Nevada, Colorado, and Arizona. We leave no stone unturned in our efforts to save you money. Contact us today to see if your business qualifies for R&D tax credits.

Regular Research Credit Method vs. Alternative Simplified Credit Method

Regular Research Credit Method

 

This is the original method for calculating R&D tax credits and involves calculating the credit based on a percentage of a business’s qualified research expenses (QREs). Under this 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, which is calculated as a fixed percentage of the average QREs for the previous four years. The base amount ensures companies that consistently engage in R&D are not penalized for doing so.

 

Alternative Simplified Credit Method

 

This 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.

 

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

R&D Tax Credits FAQs

Who Can Claim R&D Tax Credits?

The R&D tax credit isn’t just for labs and tech companies! Many businesses in the US can claim it if their activities involve innovation. This includes things like:

 

  • Testing and developing new products or services
  • Employing engineers or scientists who work on improvements
  • Using data analysis to find better ways to do things
  • Outsourcing research and development to external specialists

 

Even unsuccessful projects can qualify as long as they meet the goals of creating or improving something. To find out if your business qualifies for this credit, contact Haynie & Company’s R&D tax credit specialists today.

How Much Are R&D Tax Credits Worth?

The value of the R&D tax credit depends on several factors, including your company’s size, profitability, and the amount you spend on qualified R&D activities. Generally, it’s a dollar-for-dollar reduction in your federal tax liability.

What Does the IRS Look for When Evaluating R&D Tax Credit Claims?

Strong documentation is key to a successful R&D tax credit claim. The IRS wants to see clear evidence that your activities meet the four-part test: developing something new, experimenting with solutions, using scientific principles, and reducing uncertainty about the outcome.

 

Here’s what kind of documentation helps:

 

  • Records of employee hours spent on R&D projects
  • Receipts and invoices for R&D expenses (materials, supplies, etc.)
  • Progress reports and designs related to your R&D efforts
  • Lab results (if your R&D involved lab work)
  • Contracts and invoices for any outsourced R&D work

 

Having this documentation readily available will make the claim process smoother and reduce the risk of an audit.

Contact Haynie & Company for Tax Credit Services for R&D

 

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—Haynie & Company can help!

 

We’re R&D tax credit experts serving businesses throughout UT, TX, NV, CO, and AZ. We’ll analyze your activities, maximize your credit, and handle the paperwork. Schedule a free consultation today!

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