R&D tax credits to offset payroll taxes
The R&D tax credit has been a powerful profit booster for established businesses for decades, but many start-up and early-stage companies can also benefit. Prior to the passage of the PATH Act in 2015, many start-ups with research and development activity were not able to take advantage as tax credits could only be used to offset a business’ federal income tax liability. Since many start-up companies operate at a loss, they have no income tax liability, so credits could only be carried forward until they could be used or they expired.
The PATH Act, however, allows qualifying businesses to use up to $250,000 of research credits to offset their payroll tax liability. Qualifying businesses must:
- Have generated gross receipts for 5 years or less
- Have less than $5 million in gross receipts in the current year
- Have qualifying research and development expenditures
R&D tax credit is more available than you 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 finances. 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:
- Information Technology
- Banking, Finance & Insurance
- Software Development
- Tool & Die
- Food & Beverage
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 your start-up or early-stage company 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. Call us or contact us for more information or to schedule your assessment with one of our tax advisors.