Are you an elder sibling? Do you have one? If so, then you know the oldest child of a family is often fated into an involuntary role: the confident, the mentor, the counselor. The younger brood look to the first-borns to show them the way.
The eldest have figured out mom and dad, they’re tuned into the good school teachers and the bad, they’ve navigated crushes and heartbreaks - they have the experience. The junior kin trust the oldest to show them the way.
Clients foster a similar trust for their CPAs and accountants. Clients see their CPAs as experienced advisors who will not lead them astray. They trust their CPAs to provide income tax return preparation and compliance services.
Clients also look to them for money-saving strategies – such as the many federal and state tax credits and incentives afforded to U.S businesses.
The research and development (R&D) tax credit is one such tax-saving opportunity. However, CPAs are sometimes uncertain about which activities qualify and thus remain apprehensive about determining their client's eligibility.
When you’re feeling unsure, ask these questions to help identify R&D tax credit eligibility for your clients:
- Is your client paying regular income tax now or soon to be in the future?
This is an important question because a taxpayer must hold income tax liability to use these credits.
- Has your client developed new or improved products, processes, or software?
This credit is clouded by a misconception that only large high-tech or pharmaceutical companies qualify. Not true. Businesses of all sizes, from all industries, have the potential to qualify - from small five-person start-ups to Fortune 500 companies, and everything in between. Don’t assume your client is too modest to claim the credit.
- Does the company hire engineers, scientists, computer programmers, or other technical personnel?
If yes, there’s a reasonable probability that the company conducts eligible research activities and incurs R&D expenses.
But the questions don’t end there. What about the start-up companies on your client list? Even if they currently fall into an income tax-loss position, there may be other opportunities for them to capture credits.
Beginning in 2016, start-ups can use federal R&D tax credits to offset their employer-paid payroll taxes (i.e., 6.2% FICA tax).
Here are two questions you should address for your start-ups:
- Does your client have five years or less of gross receipts?
For companies to be eligible for the payroll tax offset opportunity, they cannot possess gross receipts older than five years. For example, for the tax year end 2018, a business cannot hold gross receipts for 2013 or earlier.
Pro tip: The broad definition of gross receipts includes not just revenue but other income such as interest, rents, royalties, grants, etc.
- Does your client have less than $5 million in gross receipts in the current credit year? A start-up company is eligible if they have less than $5 million in current-year gross receipts (tax year 2018).
If your start-up company answers yes to both questions, then their eligibility chances look good for the payroll tax offset credit. But time is of the essence since they need to elect the payroll tax offset option on an originally filed federal tax return (including extension).
With these proactive steps, CPAs and accountants can provide additional tax savings opportunities for their clients utilizing these valuable R&D tax credits. When appropriate, CPAs should reach out to R&D tax credit specialists to ensure your client captures the maximum credits possible.