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R&D Tax Credit FAQs

September 21, 2016


Many businesses don’t realize they qualify for the R&D tax credit.

How much did your business pay in tax last year? Do you like paying Uncle Sam more than you need to, or would you rather reinvest that money in your business? Reduce your tax burden and boost your cash flow by taking full advantage of the R&D tax credit.

The research and development (R&D) tax credit is an incentive offered by the federal government (and many state governments) to spur companies to invest in and promote innovation in American business. However, many large and small companies qualify for – but don’t take advantage of – this tax-saving benefit.

The R&D tax credit is more available than you might think.

Despite the great value this tax credit can offer, many businesses that have qualifying expenses incorrectly assume they aren’t eligible. If your business has engaged in any of the following endeavors, you should seriously consider the impact the R&D tax credit could have on your bottom line. Qualified expenses include wages, supplies and contract research that support:

  • Development of new or improved products
  • Creation of software applications
  • Advancement of your manufacturing process
  • Engineering and design of fabrication and/or production equipment

Many companies believe they need sophisticated research labs, employees in lab coats or a staff full of PhDs, all working to develop cutting-edge technology, to qualify for the credit. However, if your company simply spends time, money and resources making your products or processes better, faster, lighter, less expensive, more efficient, more durable, more reliable or more effective, you may qualify.

What industries could qualify?

You may also be surprised by the broad range of industries that often claim these tax credits. Just a small sample of likely industry candidates include:

  • Manufacturing
  • Information Technology
  • Engineering
  • Architecture
  • Aerospace
  • Banking, Finance & Insurance
  • Software Development
  • Tool & Die
  • Pharmaceutical
  • Food & Beverage
  • Construction

What are the benefits of the R&D Tax Credit?

Potential benefits can include:

  • Substantial reduction in taxes (it’s not just a deduction, but rather a dollar-for-dollar tax credit)
  • Increased cash flow and earnings
  • Future tax savings (the credit can be carried forward up to 20 years)
  • Reduced effective tax rate
  • “Look back” provision allows you to recognize unclaimed benefits for all open tax years (generally 3 years, plus the current year)
  • Evidence to potential buyers or investors that you have valuable technology and the ability to innovate

In fact, many businesses claim the R&D credit annually, not just for tax saving benefits, but for the specific purpose of enticing M&A activity. These companies believe the tax credit provides validation of their ability to innovate. Additionally, credits can be claimed in one year and taken in another, making it possible to transfer them to a buyer. Both of these benefits could bring additional value to a business in an M&A situation.

Why companies don’t claim the credit

  • They don’t realize the credit exists
  • They believe only new, cutting-edge products or design standards qualify
  • They fail to document research activities
  • The believe the tax credit is only for big companies
  • They think the credit is not available for companies that fail in their research activity

What are the next steps?

Now that you’ve determined you may qualify for the R&D tax credit, what are the next steps? While claiming the credit can be complicated, companies in a variety of industries have found that the benefits of tackling the credit study, and the subsequent application process, far outweigh the costs and complication. But it’s important to work with an advisor with deep knowledge and experience that can guide you throughout the process.

Clark Schaefer Hackett offers a free feasibility assessment to help determine whether your company could qualify for and benefit from conducting an R&D tax credit study. Contact us for more information or to schedule your assessment with one of our tax advisors.

The tax credit has been permanently extended.

The R&D tax credit has been around since the early 1980s, but it was never made permanent and had to be continuously extended. Businesses have long complained that the annual threat of extinction to the credit deterred them from pursuing critical research into new products and technologies. On December 18, 2015, President Obama signed into law the bipartisan Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), which finally made the R&D tax credit permanent and also provided new benefits. Beginning in 2016, businesses with $50 million or less in gross receipts can claim the credit against alternative minimum tax (AMT) liability, and certain start-ups (in general, those with less than $5 million in gross receipts) that haven’t yet incurred any income tax liability can use the credit against their payroll tax.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.


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