Research & Development Tax Credit
Keep more money in your pocket & less in Uncle Sam’s
Written by Jeremy Feinberg, CPA/ABV, MBA of Taksey Neff Feinberg and Karen Kalantzis, Launch Workplaces
If your business is doing research and development for new products or processes, State and Federal Research and Development (R&D) Tax Credits are available to companies that incur qualified expenses. They can provide permanent benefits in driving down your effective tax rates and generating cash flow, and can also be claimed in addition to any tax deduction taken for R&D expenses. Based on the experience of CPA firm Taksey Neff Feinberg, the research and development tax credits can save eligible businesses anywhere from $1,500 to $80,000 in income taxes. Typical startups less than 5 years old can expect a tax credit equal to 10-11% of revenue. Who wouldn’t want to save that kind of money?
Many companies think that you need to have an engineer or scientist on staff to qualify; however, these incentives apply to a broad range of companies. The key is innovation and experimentation rooted in some sort of technology. Various activities apply including production, quality assurance, purchasing and information technology. Your company is eligible for the R&D tax credits if it is in the process of developing new, improving on, or making more reliable products, processes and formulas. This includes such activities as:
- Testing, developing, improving new concepts, products or materials.
- Developing or improving production, manufacturing processes, enhanced formulations, upgrading systems, and software.
- Design and analysis of prototypes or models, trial and error experimentation.
- Hiring consultants/contractors to perform any of the above and many more.
If your company currently does not have any tax liability, you can still claim the credit on the research done today and claim the R&D credit prospectively in a year when taxes are owed. If your company is already established, depending on when your tax return was filed, you may be eligible to claim research credits for three prior open tax years. This happened to a local business owner who was delighted to receive a check from Uncle Sam for $21,000.
Some states including Maryland offer a refundable tax credit, meaning if your R&D tax credit is valued at $10,000 and your tax liability is only $5000, your tax liability will be reduced to $0 and you will receive a check for $5000.
Think your business might qualify? Check with your CPA and start setting systems in place to gather the data necessary to claim your whole credit. If you don’t have a CPA contact us at Launch Workplaces for some names we can recommend from our community.