Breaking Down the R&D Tax Credit Basics

3 Minute Read
Posted by Brad Mols on Apr 21, 2020 9:16:53 PM

COVID-19 has caused significant economic disruption for enterprises throughout the world and across every industry. As a result of the financial upheaval many businesses are facing, the federal government has extended the typical April 15 deadline to July 15 this year. This 90-day reprieve does more than enable business owners to hold on to capital a little longer as they work to right their operational ship. Many entrepreneurs, financial advisors, and CPAs are also using this extra time to uncover additional tax benefits they qualify for to increase cash flow for operations, capital investment, and growth opportunities.

Understanding the Many Benefits of the Innovation Tax Credit

In these difficult times, the R&D Tax Credit is one of the most lucrative tax incentives for business owners. If your organization conducts eligible research and development activities, you may qualify for this dollar-for-dollar benefit. Understanding the basics of the innovation tax credit can help you decide if you should conduct an R&D study for your business during these unusual circumstances.

 

What is the R&D Tax Credit Program?

First launched in 1981 (and referred to as the Research and Experimentation credit), this program was developed to help U.S. entities remain competitive with global innovation leaders. Almost forty years later, the R&D tax credit still offers business owners a significant opportunity to both minimize tax burden and boost cash flow. 

The R&D tax credit has undergone multiple iterations over the last several years. Recently, the program was adjusted, evolving to be more inclusive for small-  and mid-sized businesses. Unfortunately, despite offering businesses of every size potentially significant ROI, the research and development program is often severely underutilized, with many qualifying companies failing to file each year.

 

The Benefits of the R&D Tax Credit

Because it offers a dollar-for-dollar credit against tax liabilities, the R&D benefit has earned recognition as one of the most impressive incentive programs within the U.S. Participating businesses can claim expenses incurred on relevant items, such as wages, supplies, and contract research. Additionally, the innovation credit is allowed for any open tax year, which typically includes the last three years filed, but can also go back further if the business demonstrates tax losses. Also, enterprises with an insufficient tax liability can carry the credit forward for use in future tax years.


Does Your Company Qualify for the Innovation Tax?

Many business owners assume that only scientific companies qualify for the benefit. Fortunately, that is not the case. The latest legislation extends eligibility to organizations in over 40 industries that perform relevant activities, such as:

  • Design and engineer new products
  • Enhance existing products
  • Apply for prototypes and patents
  • Test new procedures or materials
  • Develop software systems and programs
  • Conduct trial and error assessments


Meeting the Criteria of the Four-Part Test

Most importantly, any qualifying activity must meet the criteria outlined in the program’s Four-Part Test to receive the benefit. The Four-Part Test requires that every eligible activity must:

  • Demonstrate Technical Uncertainty
  • Use the Principles of Science in the solutions
  • Satisfy the Business Component Test
  • Show Process of Experimentation that attempts to eliminate technical uncertainties

 

Acena Can Help Your Business Qualify for Relevant R&D Tax Credits

If you think your company qualifies for the research and development tax credit, Acena Consulting can help. Our team of skilled and experienced accountants partners with CFOs to pinpoint relevant credits to optimize client ROI. Contact us today to hear more.

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