The research and development tax credit allows business owners to claim qualifying R&D expenses as a dollar-for-dollar offset against tax liabilities. First passed by Congress in 1981 to help U.S. industry remain competitive in the global technology and innovation vertical, the research tax credit was both modified as part of the PATH Act of 2015, and made permanent as of January 1, 2016.
As a still relatively new program, business owners in multiple industries often miss out on cash-infusing credits every year simply because they are unaware of their eligibility or misunderstand the R&D tax credits regulations and requirements. The recently passed Tax Cuts and Jobs Act further compounded the confusion as many financial professionals and entrepreneurs were left to wonder how the TCJA would impact the future of the innovation credit program.
Don't miss out on qualifying R&D tax credits that can increase cash flow for your business. Knowing some of the program's most common misconceptions can help you understand and recognize your company's eligibility. Here are six research and development tax credit myths you can officially stop believing.
Myth #1: Only Scientific Companies Qualify for the Program
This is perhaps the biggest R&D tax credit misunderstanding. The phrase "research and development" instantly (and understandably) conjures up images of scientists clad in white lab coats inventing groundbreaking and revolutionary technology. While that may be the case, it doesn't have to be. The credit is available to companies in more than 40 designated industries that demonstrate proof of "eliminating technical uncertainty" through creating new or improved products and/or processes – with no white lab coat necessary.
Myth #2: The Credit is Only for Big Companies
While large corporations often file the most substantial claims, the innovation tax credit is available to all companies, regardless of size or total revenues. Program eligibility is based entirely on qualifying development initiatives and expenditures, effectively leveling the playing field for small and big businesses alike.
Myth #3: Only Successful Research Activities Qualify
Many business owners assume that the program doesn't benefit research and development activities that fail. Nope. Eligibility requirements are based on evidence of effort; the legislation actually specifies that success is not mandatory to qualify. In short, the U.S. government not only recognizes that sometimes failure is part of the process but also rewards businesses simply for trying.
Myth #4: The R&D Tax Credit Only Benefits Profitable Businesses
Technically, this one is somewhat of a myth/fact hybrid. Yes, the program is a credit against taxes, which means your business must be profitable to qualify. However, the incentive's legislation allows the credit to carry back one year and forward 20 years, offering business owners flexibility to apply in future and previous years as relevant. Additionally, small or startup businesses generating less than five million dollars in revenue can claim up to 250 thousand dollars against payroll taxes for up to five years.
Myth #5: Claiming the Credit Makes an Audit More Likely
Not true. Fear of being audited often deters business owners from filing relevant claims, particularly those running smaller companies with limited resources. Claiming an eligible research and development deduction will not flag your organization for an audit.
Myth #6: My Corporate Tax Accountant Can Manage My R&D Claims
The research and development tax credit calculation is complex, requiring extensive and detailed documentation to substantiate every claim. Unfortunately, entrepreneurs and financial specialists running businesses of every size and scope realize too late they don't have the internal resources needed to effectively manage their claim using internal resources. The best way to ensure you're equipped to minimize tax burden is to work with an innovative firm that specializes in R&D tax legislation. A qualified and experienced team of research tax professionals will manage, document, and file your claim for optimized access to available capital and overall return on investment.
Have questions about your company's research and development initiatives? Contact Acena Consulting today for answers.