The R&D Tax Credit: Making it Work
No one can afford to leave money on the table. Nevertheless, when it comes to the R&D credit, cash is left untouched all the time. Despite the fact that the R&D credit has been available since 1981, less than a third of eligible companies recognize that they qualify for the credit. Even if companies do claim the R&D credit, they frequently do not claim the entire credit to which they are entitled, either because they do not understand what qualifies or do not have the processes in place to properly document the credit.
Claiming the R&D Tax credit can be complicated. That’s why it is important to work with qualified experts like Engineered Tax Services make sure you aren’t leaving money on the table. We can help you and your clients identify and capture the R&D credit and increase cash flow for all involved. Credits for qualified activities are available on both the federal and many state levels in addition to deductions. The credit is a dollar-for-dollar cash offset against your taxes and can be significant if properly pursued.
THE R&D TAX CREDIT ENHANCED AND BECOMES PERMANENT
This is a conservative federal and state incentive that was just made permanent by Congress as part of the 2015 PATH Act. In addition to making the R&D Tax Credit permanent for the first time, this legislation includes significant enhancements to the credit beginning in 2016.
ENHANCEMENTS TO THE R&D TAX CREDIT BEGINNING IN 2016
AMT Turnoff for “Eligible Small Businesses”
Beginning in 2016, companies qualifying as “Eligible Small Businesses” will be able to use federal R&D tax credits to reduce
Alternative Minimum Tax (AMT)!!!
- To qualify, a company needs to:
- Have under $50M in gross receipts (prior 3 year average)
- Be privately held
- This is a very significant new rule especially for flow-thru entities (i.e., S Corps and LLCs) whose owners have been in or close to AMT every year
- The “AMT turnoff” rule was also in place for 2010
Payroll Tax Reduction for Start-up Companies
Beginning in 2016, companies qualifying as
“Start-up Companies” will be able to use federal R&D tax credits to reduce their Federal Payroll Taxes!!!
- To qualify, a company needs to have:
- Under $5M in gross receipts
- No gross receipts more than 5 years ago
- Payroll tax reduction capped at $250,000 per year
- Election allowed for up to 5 years
- Applies to the employer’s (6.2%) portion of FICA tax
These rules are PERMANENT going forward!
These provisions are very meaningful to business owners of companies qualifying for the credit going forward.
You don’t have to be a manufacturer to claim the R&D credit. Companies of all sizes in a wide range of industries throughout the United States have used the R&D tax credit.
- Manufacturing (high and low tech)
- Tool & Die Shops / Job Shops
- Plastic Mold Injection
- Software Developers
- Pharmaceutical Companies
- Chemical Companies
- Food Processors
- Apparel/Textile Companies
- Construction Industry
– Architectural Firms
– Engineering Firms
– General Contractors
- Design-build team in house
– Electrical Contractors
– Mechanical Contractors
Many activities can qualify for the R&D tax credit, including:
- Developing or formulating new or improved product
- Functionally enhancing existing products or formulas
- Developing new or improved production processes
- Assisting customers with technical problem-solving
- Developing new or improved software for use or sale
- Applying for patents and prototyping
SELECTING A R&D TAX CREDIT PROVIDER
The selection of a specialty tax provider to properly document and claim the Research & Development Tax Credit for you is critical to the process, the resulting benefit, and to ensure results that stand-up upon IRS examination. Performing the proper due diligence steps is vital to ensuring your tax filing position and to ensure that you gain every benefit that you deserve with the assurance of IRS compliance. Consider the items listed on the right (list would be in sidebar of design file) when looking for a company with a long history of IRS compliance, experience in your area, both geographically and professionally, as well as a strong reputation for customer satisfaction. This will offer significant insight into the integrity of the firm that you choose.