5 Reasons Your Business Needs A Research And Development Tax Credit Study

Written by Mark Echols. Updated Sep 28, 2017.

knowledge-1052010_640.jpgThe R&D tax credit provides benefits to companies of all sizes by improving overall cash flow, reducing your effective tax rate and decreasing your federal and state income tax liability, to name a few. The R&D tax credit has come into its own over the last decade, as new regulations, court rulings and IRS guidance have resulted in broader positions taken by companies to maximize, and benefit from, the credit.

Even still, many businesses commonly report an unsubstantiated R&D tax credit amount on their tax returns, which results in audits and penalties down the line. That’s why it’s important to conduct an in-depth study of your company’s R&D tax credit eligibility.

A thorough study by an expert tax consultant ensures you don’t miss an opportunity to take the R&D tax credit. With a proper research and development tax credit study, your business may experience the following tax credit benefits:

1. Your Research And Development Investment ROI

Part of maintaining a competitive edge in your marketplace is putting a percentage of company resources into product innovation. Funding your business’s research and development costs could even result in opening up new market channels and expansion for your company. However, it may be difficult to allocate money to projects without a promised return on your investment. R&D tax credits are designed to help businesses recoup some of your qualifying research and development costs in the year incurred to recover these allocated funds. The credit can also be carried forward for up to 20 years.

2. Keeping Your Business Relevant With Research And Development

Research and development activities are conducted to allow you to continue offering your customers something new and improved in the marketplace. This happens through retaining the talent for innovation. When you’re able to keep in-house talent for research and development, you more easily achieve significant strides in sales and secure your position within the marketplace.

3. Receive A Dollar-For-Dollar Reduction In Your Tax Liability

On both the federal and state level, R&D tax credits are not a deduction, but a dollar-for-dollar credit against taxes owed or taxes paid. Even the smallest business may save hundreds of thousands of dollars each year, simply for performing necessary research and development activities that help it remain competitive in their industry. R&D tax credits can be utilized by your business in the current year to reduce its tax liability or can be carried forward into the future to be used at a later date.

4. Reduce Your Company’s Effective Tax Rate

When a company claims an R&D tax credit, the benefit of the credit is recorded as a reduction to tax expense. So, if your company normally has an effective tax rate of 38% without claiming any credits, you would expect to have a tax rate lower than 38% due to a reduction in tax liability achieved through the use of R&D tax credits. This adds value to your company’s bottom line and is also appealing to potential outside investors.

5. Improve Your Company’s Cash Flow

A major benefit of the R&D tax credit is that it’s an immediate source of cash, with more than $7.5 billion in federal R&D tax credits given out annually. As you reduce your estimated tax payments with R&D eligibility, your company is able to retain more of its cash.

Working with an outsourced tax consultant ensures you properly identify and document every available R&D tax credit benefit for your business.

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Topics: R&D Tax Credit

Mark Echols

Written by Mark Echols

Mark leads CTI’s national research and development (R&D) tax credits practice and is involved in all aspects of providing R&D tax credit services to his clients, including: conducting high-level R&D tax credit feasibility analyses, managing complex and comprehensive R&D tax credit studies and defending R&D tax credit claims under IRS and state taxing authority examinations.