How rewarding knowing that you are contributing to the discovery or development of something that can make a difference in people’s lives or a change in the world! Every contribution matters!
Unfortunately, innovation can be expensive, but the government is willing to help. So why is it that most small businesses do not take advantage of this CASH incentive?
Unlike most special tax provisions, there is a clear and strong economic rationale for the R&D tax credit, and believe it or not, both the federal and state governments want you to take this tax credit. Why, because the R&D incentive boosts innovation, drives economic growth, and enhances competitiveness both nationally and more importantly internationally.
The Research and Development (R&D) tax credit encourages companies to engage in R&D benefiting not only the company who is performing the R&D, but it also benefits the country.
There are four main reasons that this tax credit is not used by more businesses.
1. Many companies are unaware of the tax credit.
2. Others are aware but believe they do not qualify.
3. Misconceptions or lack of knowledge by tax advisers, accountants, and CPA's. Many professionals do not understand tax credits, especially R&D tax credits. Unfortunately, it is easier to say, "no your business does not qualify," rather then, "I have no experience with tax credits."
4. Most believe the expense for obtaining the credit is too high. If you can save $100,000 would you pay $5,000 to gain $90,000. That's a no brainer. Also, you pay nothing if the tax credit is not beneficial.
Dollar for dollar tax reduction. For instance, your business is structured as a S-Corporation and your net income or net loss from your business, (of course), passes to your personal 1040.
Payroll Offset. New businesses or start-up companies may be eligible to apply for the R&D tax credit against their payroll taxes for up to five years. Many new companies or companies in certain industries have net losses. Here is a perfect example of the government's intention to help businesses succeed.
If your company had net income
Dollar for Dollar Tax Reduction Example - Your tax liability for the year ends up being $40,000. For a small business owner this is a lot of money, however, your tax strategy was to use the R&D tax credit, which came to be $80,000. In this example you pay $0 to the IRS, and the remaining $40,000 can be used over the next 20 years.
If your company had a net loss
Payroll Offset Example - An early stage company meets the criteria and receives $250,000, (the maximum amount for payroll offset), in federal tax credits. The company has a net loss, so the dollar for dollar reduction will not serve in the present year. The $250,000 can be used against its FICA payroll taxes on its quarterly Form 941 filling. Let's say the company's payroll obligation for the quarter is $25,000. Using the tax credit for payroll obligations allows the company to literally keep the $25,000. Yes, that's right instead of sending the United States Treasury $25,000 the company keeps the $25,000. The remainder of $225,000 can be carried forward and used in future periods.
Unfortunately, not all states offer the R&D tax credits, but many do. The nature of these incentives varies from state-to-state, and many states use the federal R&D tax credit model.
ABS is located in Georgia, and most of our clients are located in Georgia. Presently, Georgia ranks as the top state for business in the United States, and the R&D tax credit is only one of the reasons it does, and as mentioned above it uses the federal model as an incentive.
Dollar for Dollar Tax Reduction. In Georgia for every dollar you owe, you can reduce your tax obligation for the amount of your tax credit.
Payroll Offset. In Georgia you can either take the dollar for dollar tax reduction, or in some instances you can use you tax credit to offset payroll taxes. That means instead of paying the Georgia Department of Revenue for your withholding tax liability you get to keep that money. Lastly, you can use both together.
There are roughly 40 states that offer the R&D tax credit. Please call us to see if your state offers this incentive. Even if it doesn't you can still capitalize using the federal R&D tax credit.
So how do you know if you qualify.
Elimination of uncertainty. A company must demonstrate it has attempted to eliminate uncertainty about the development or improvement of a product or process.
Process of experimentation. A company must demonstrate—through modeling, simulation, systematic trial and error, or other methods—that it has evaluated alternatives for achieving the desired result.
Technological in nature. The process of experimentation must rely on the hard sciences, such as engineering, physics, chemistry, biology, or computer science.
Qualified purpose. The purpose of the research must be to create a new or improved product or process, resulting in increased performance, function, reliability, or quality.