Reasons Small Business Owners Don't Think They Qualify for R&D Tax Credits

3 Minute Read
Posted by Randy Eickhoff on Aug 13, 2020 9:50:39 AM

The research and development (R&D) tax credit has a long, proven track record spanning almost 40 years. Established in the early 1980s, the R&D tax credit was explicitly launched for economic incentive 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 Businesses Miss out on the R&D Tax Credit

Despite its well-established, successful history, countless eligible companies 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 revenue needed to qualify, because it was initially designed as an income tax credit.

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. 

Still, many smaller businesses continue to miss out on the innovation tax credit program. Here are just a few of the many reasons why small companies 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- to mid-sized business owners to discuss the logistics and requirements of the plan, answer their questions, and reassure them that many companies qualify based on the work they are already performing, making claiming the benefit very straightforward. 

We Haven't Earned Any Revenue Yet

Once again, companies don't have to demonstrate income (or pay income taxes) to qualify for the credit. Qualifying smaller companies and startups can take the benefit as a payroll tax offset, claiming up to $250,000 every year. The qualifier for small businesses is showing less than $5 million in the credit year, with no gross receipts in the previous five years. 

We Haven't Hired Any Employees

Sure, using the credit to offset payroll taxes does make it seem as if you'd have to have employees to pay. However, 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.

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. At Acena Consulting, we partner with entrepreneurs across the 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 the 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. 

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.



Randy Eickhoff

Randy Eickhoff

Acena Consulting President Randy Eickhoff, licensed CPA, has partnered with more than 200 companies during more than 20 years of experience securing tax credits and other government incentives. His corporate partners range from multinational technology firms to smaller, privately held manufacturing, sports, and technology enterprises.