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Four Misconceptions about the R&D Tax Credit

By: John E. Boseman |

Four Common Misconceptions about the Research Tax Credit

Today, more companies than ever are qualified to take advantage of the Research & Development (“R&D”) tax credit—a benefit that can often save thousands to millions of dollars annually.  Introduced in 1981 as a temporary incentive, the federal Research Tax Credit rewards companies for investing in research and development activities in the current tax year.  Thanks to The Protecting Americans from Tax Hikes (PATH) Act of 2015, this once temporary credit is now permanent and has been expanded to economically incentivize small businesses and start-up companies.

The law is intentionally broad to benefit the largest number of taxpayers.  It is intended to be inclusive, not exclusive.  Yet, in our experience, more than 1 out of 3 eligible businesses are either not claiming or not receiving the maximum benefit. This is simply because they do not realize what qualifies.

What holds businesses back from receiving their maximum Research Tax Credit benefit?

  1. We don’t do R&D work.

Even if you don’t have research labs or scientists, that doesn’t mean you’re not performing qualified research activities  in the view of the Internal Revenue Service (“IRS”).  Again, the definition is broad.  If you are attempting to develop a new product or process, or enhance an existing product or process (make something better, faster, stronger), you may well qualify for the Research Tax Credit. For instance, we work with a client in the lumber industry experimenting with ways to grow stronger, more resilient trees.  The business didn’t realize this is a qualified research activity under the law and that they were eligible for the credit.

  1. We’re not inventing anything ground-breaking.

The product or process you’re developing doesn’t have to be new to the world.  It doesn’t even have to be new to your company; enhancements to existing products or processes can qualify as well.  Perhaps even more surprising is the fact that your new product or process doesn’t even have to be successful to qualify for the credit.  The effort invested in the development activity is the determining factor, regardless of whether it succeeds or fails.

  1. We’re operating at a loss so a tax credit won’t matter.

Even startups and high growth companies who are not paying federal taxes can still benefit.  As of 2016, startup businesses, (<$5M in Gross Receipts in the current year), can elect to apply current year Research Tax Credits towards payroll taxes, up to $250,000, annually.  Also, it is notably more effective and cost efficient to support and document Research Tax Credits on a current ongoing basis, rather than waiting until you need them 5 to 10 years down the road as necessary data may no longer be available.

Additionally, companies that generate net operating losses (NOLs) after December 31, 2017, will only be able to offset future taxable income at the rate of 80% of those losses.  If they qualify for the Research Tax Credit they can use the credits to further reduce future tax liabilities.

  1. We have our Research Tax Credit handled.

The Research Tax Credit world is constantly changing and we often recommend to businesses that even if they believe they have a valid and properly supported Research Tax Credit, that the business periodically perform a review with an external Research Tax Credit expert.  We consistently find that upon these reviews, approximately 50% of businesses claiming the Credit are either under-reporting the Credit or not properly supporting the Credit in the view of the IRS.

Ultimately, business owners should not make any assumptions about whether their company may potentially qualify for the R&D credit without a comprehensive understanding of the law.  The experienced tax professionals at True Partners Consulting can help you navigate the R&D credit, determine if you qualify and ensure you don’t miss out on this important and often overlooked benefit.

Please contact John Boseman at John.Boseman@TPCtax.com to learn more about the R&D tax credit and how your company can benefit.