Myths surrounding the R&D tax credit are the reason why so many companies fail to understand the eligibility requirements. The fact is that the IRS and our government want to encourage as much research and development as possible, but the R&D regulations are constantly changing.
The following are five reasons why your business needs the R&D tax credit:
- You Reduce Your Federal And State Income Tax Liability
One of the biggest reasons to file for an R&D tax credit is to reduce your income tax liability. The majority of states have an R&D tax credit program: some offer refundable tax credits, while others offer credits that are carried forward. Many aspects of the state tax credit mimic federal eligibility requirements, but the most common differences relate to credit rate and base amount computation.
Both state and federal R&D tax credits represent a dollar-for-dollar reduction in regular income tax liability, so it’s important to look for these opportunities with both federal and state tax credits.
- You Improve Your Company’s Cash Flow
Because an R&D tax credit provides a dollar-for-dollar benefit, up to 14 cents on every qualified dollar in certain states, the reaped tax savings address a company’s cash flow needs.
And, there’s enough of the tax credit to go around. Less than a third of eligible companies recognize that they qualify for the credit each year, meaning cash is left untouched. Also, although some R&D tax credits aren’t utilized at all, there are companies that don’t claim the entire credit they are entitled to. This is where working with a certified tax expert benefits your company by ensuring you get the largest return.
- You Identify And Pursue Unclaimed Credits More Easily
As mentioned above, there are many missed opportunities for companies filing a claim for the R&D tax credit. One avenue of R&D opportunity is unclaimed credits from prior years.
For example, for federal credits, there is a three-year look-back period, using what is known as the Alternative Simplified Credit (ASC) calculation. Recently amended IRS rules on ASC allows companies to claim ASC on prior year tax returns. Previously, companies had to elect ASC on originally filed returns that didn’t allow companies to claim prior year credits under ASC. Now, claiming an R&D tax credit for past years is easier. This is the IRS’s way of encouraging businesses to reap the R&D reward.
- You Benefit From Carryover Periods Of Up To 20 Years On Unused Credits
If you cannot use part or all of your federal R&D tax credit, you may carry the unused credit back one year and carry it forward up to 20 years. Some companies are not in the position to use the credit. The advantage of taking the reduced credit is to avoid having to reduce the current year R&D expenditures. Another benefit of carryover for unused credits is a lower starting point for the state income tax.
- Your Business Qualifies For The Credit
The biggest reigning myth about the R&D tax credit is that it’s a tax savings activity associated only with manufacturing, technology and pharmaceutical companies. This was once true based on former regulations that required a company to develop a product or process that was unique to the world.
However, due to recent, relaxed regulations, a company that develops a new or improved business component (product, process, technique, formula, invention, or software) based on technology and experimentation grounded in sciences is eligible - regardless of the industry.
If your company makes new, lighter, stronger, cheaper, more reliable products, or designs more economical or versatile processes, you are performing R&D activities.
The R&D tax credit should be the part of your company’s smart tax planning, so you take advantage of all available benefits. If you believe your business qualifies, it is essential to your business’ financial health to pursue both the federal and state R&D tax credit.
When rewarded a significant tax savings, improved cash flow increases your competitive advantage by funding important aspects of your business otherwise ignored due to a lack of resources.
Ready to start the journey toward your tax savings destination? Call 866-444-4880 or click here to speak directly with an experienced tax expert at Corporate Tax Incentives.
