Many small business owners are unaware that they may be eligible for R&D tax credits. The truth is, even if your business only has a small number of employees and your research and development activities are relatively minor, you still may qualify for these incentives.
Unfortunately, there are several common misconceptions surrounding R&D tax credits and the qualifications for claiming them that have caused many small business owners to "write-off" the idea without even considering it.
The History: Small Business and R&D Tax Credit
The research and development (R&D) tax credit has a long, proven track record spanning over 40 years. Established in the early 1980s, the R&D tax credit was explicitly launched for economic incentives and growth stimulation for organizations demonstrating qualifying operations. Since its launch, the R&D tax credit has delivered a cash infusion of working capital to U.S. businesses operating in various industries across the U.S.
Every Year Countless Small Businesses Miss Out on the R&D Tax Credit
Despite its well-established, successful history, countless eligible small businesses fail to claim the innovation tax credit every year. This is especially true for owners of smaller businesses and startups, who assume they don't have the activities needed to qualify.
Fortunately, this is no longer the case. While it's true that the R&D benefit was first introduced as an income tax credit, the federal government revamped the program in 2015, changing the legislation around how companies could qualify. As a result, the R&D tax credit field has officially been leveled. Today small and even pre-revenue companies can take advantage of the research and development program in ways that were once only available to large organizations.
Common Misconceptions: Small Businesses vs. R&D Tax Credit
Still, many qualified small businesses continue to miss out on the innovation tax credit program. Here are just a few of the many reasons why qualified small businesses don't think they qualify for the research and development tax program:
"There Has to Be a Catch"
Some entrepreneurs assume the program sounds too good to be true, so they don't pursue more information about the benefit. At Acena Consulting, we work with small and mid-sized business owners to discuss the logistics and requirements of the plan, answer their questions, and educate them on how to qualify, document, and harvest the benefits, making the process very straightforward.
"We Haven't Earned Any Revenue Yet"
Once again, companies don't have to have revenue to qualify for the credit. Qualifying smaller companies and startups can elect to take the benefit as a payroll tax offset, claiming up to $250,000 until tax years beginning after January 1, 2023 — then it will be up to $500,000. The qualifier for small businesses is showing less than $5 million in gross receipts in the credit year, with no gross receipts for any tax year preceding the five-year tax period. This means that even pre-revenue startups can qualify for the program.
"We Haven't Hired Any Employees"
While wages generally contribute most heavily to the final credit calculation, other costs, like supply expenses and contractor payments, are also eligible. Most importantly, if you do take the research and development credit as a payroll tax offset without actual payroll, you can carry the credit forward for up to 20 years. This means that when you eventually do hire employees and incur payroll taxes within five years of business, the credit will still apply.
"My Company Isn't 'Scientific'"
Assuming you must run a lab or science/technology organization to qualify for the R&D tax credit is one of the biggest reasons why companies fail to file for the benefit. The truth is, qualified research expenses span many industries and can include expenses related to both experiment-based and software development activities, to name some examples. You don't have to be the first company to develop a new product or process. So long as you are attempting to improve or develop something that you have not attempted before, your expenses may qualify. At Acena Consulting, we partner with entrepreneurs across almost 40 qualifying industries to help identify qualifying operations they are already conducting.
"Our R&D Operations Weren't Successful"
At Acena Consulting, this is one of our favorite components of the R&D tax program — companies don't have to be successful or incorporate their work into a viable end product to qualify for the benefit. Riskier initiatives often fail with no return on investment. Recognizing that, the federal government provides incentives like R&D credit to lessen the burden. Consequently, you will be rewarded for facing technical challenges and pushing forward on innovative solutions. These technological breakthroughs are all part of the research and development terrain. Even if the work isn't successful, the effort itself (and the costs associated with it) may still qualify.
Opportunity Knocks
The Research & Development tax program is an incredible opportunity for qualified small businesses, both established and pre-revenue. Understanding common misconceptions and the details of the program are key to taking full advantage of this valuable incentive.
Contact Acena Consulting Today
Acena Consulting specializes in R&D tax credits for companies of every size and scope. Contact us today to learn more about how we can help you tap into the power of this lucrative tax program.
