Why You Need R&D Tax Credits

It is a reality that at present we live in uncertain times, jobs have been lost, businesses have closed and the continuing threat of the virus has made it difficult to pick up our lives before the pandemic. Business owners have been the hardest hit this past year, however, state and federal taxes still do need to be paid. With less income, the taxes due may also be lower than the previous years, but if your company barely survived and kept you afloat, finding funds to pay taxes can be a headache. Finding ways to lessen the taxes you are supposed to pay can be difficult but there is one way that not many people know of, and this is called the R&D tax credits. This is a business tax credit that business owners can take advantage of. The R&D tax credits were developed to provide incentives to businesses to conduct their research and development activities that are US-based. If your business has processes and systems for research and development, then you can surely qualify to claim tax credits and use them to lessen the taxes that you need to pay for the year. Most business owners would believe that their company does not have research and development activities to qualify for the R&D tax credits, but this is a false belief since the activities that can be construed as research and development is quite broad and can cut across industries and size of the company. If you are looking for ways to save money on taxes or be able to use the money for additional capital, then it is in your best interest to learn all about R&D tax credits and how to file a claim for them so that you can save money and invest it back into the company. 

What are R&D Tax Credits?

Research and development tax credits or as it is called R&D tax credits is a business tax credit that allows businesses to claim credits against their annual federal and state taxes. The tax credit can be applied to the actual federal and state taxes that the business has or as amended taxes, more importantly, the unused tax credit can be applied to the next year. The tax credit is computed based on the research and development activities and expenses of the company and applied to the taxes that are due for the current year, thus, it is directly credited dollar for dollar. This would mean that the savings gained from claiming R&D tax credits can be equal to cash and this can be used to increase R&D activities or to augment the business capital. The curious thing is that not many businesses claim R&D tax credits, which is probably due to the lack of awareness and knowledge of what it is. For a struggling business enterprise, the savings from the tax credit could mean a lot to keep the business going. Certainly, you do need R&D tax credits, whether a new and small business to the big successful brands can all benefit from it, besides, there is no limit to how much R&D tax credits can be applied for and the qualification measures are quite broad and general that every business in the country can apply for it. The R&D tax credits however are nonrefundable, unused tax credits can be accumulated and carried over to the next year and forward. It is also possible to claim R&D tax credits from previous years, even to at most three years back, which means that even with only a small percentage of total taxes can be credited back to the company, it still is quite substantial in the long run. 

How To Compute R&D Tax Credits? 

Computing the R&D tax credits for any given company generally will fall into two methods, the regular credit method and the alternative simplified credit method. The specific details of each computation method are found in IRS Form 6765 which is the Credit for Increasing Research Activities form. The business taxpayer is allowed to choose which computation method they prefer. Each method has its advantages and disadvantages thus, the business owner needs to learn the two computation methods and evaluate each so he or she can choose the one that will be most beneficial to the company. Moreover, once the business taxpayer has chosen a computational method, this will now be the default method and cannot be changed if the filed taxes is amended. However, one needs to understand that whichever computation method is chosen, the variables used for the computation are nonchanging; the qualified research and development activities and expenses. It is safe to say that the more research and development activities are found in the company and the higher the expenses are for R&D, the higher the estimate for the R&D tax credits.

How To Process R&D Tax Credits? 

The most important aspect of determining whether a business is qualified to claim R&D tax credits is the identification of qualified research and development activities and expenses. If the business taxpayer wants to process the company’s R&D tax credits, then all of the activities that can be identified as R&D should be clarified and documented. Moreover, there should also be evidence of the payment made in support of the R&D activities. One of the main reasons why most business owners have not claimed their R&D tax credits is that they do not think that they are doing R&D activities, but how research and development activities are defined by the IRS is very broad and all-encompassing, which means that of the many processes, products, and systems that a business regularly implements and develop, they are bound to have R&D activities. The R&D expenses can easily be had and documented as all businesses keeps detailed financial records and this can be used as supporting evidence for qualified research and development funding sources. After identifying the R&D activities and expenses and gathering documentation as evidence, the next step is to submit to a federal and state audit. However, it is best to trust the experts on this and hire a firm that will do the feasibility analyses, compute the tax credit estimate, do the fieldwork and interview clients and prepare the report to be submitted to the IRS and provide support during the actual audit. 

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.