Two things we know with certainty about tax laws: First, they are always changing. Secondly, they are always confusing. In the ever-evolving regulatory and legislative tax landscape, small business owners, in particular, can often find themselves struggling to keep pace with larger organizations. A prime example of smaller companies failing to capitalize on earned deductions and getting lost in the tax legislation shuffle? The research and development (R&D) tax credit.
R&D Tax Credit: Original Legislation Favored Large Businesses
It's not surprising that innovation tax credits and deductions often elude even the most motivated and discerning small- to mid-sized business owners. When first launched in the 1980s, the R&D tax credit very clearly favored large enterprises that demonstrated qualifying research and development practices. Each year, Fortune 500 companies and the like were uniquely positioned to claim potentially significant deductions to offset expenses and infuse their organizations with an influx of capital to keep their operations running at maximum capacity.
2015 PATH Act Redefined the Innovation Tax Credit for Small Businesses
In 2015, the innovation tax credit underwent a major, game-changing overhaul. Congress passed the PATH (Protecting Americans from Tax Hikes) Act, a reform that directly impacted the R&D tax credit terrain. These recent modifications extended the number of industries covered by the credit as well as broadened the definition of "qualifying expense." No longer was the innovation tax credit exclusively reserved for activities performed in sterile labs by scientists in white coats. Instead, business owners had to demonstrate the conduction of development activities within their own operations that discovered information using hard sciences within a large number of industries.
Unfortunately, despite the recently updated legislation, many qualifying small businesses still miss out on eligible deductions simply because they aren't aware of the new updates. A basic breakdown of qualifying expenses and activities include:
- Costs of wages, contractors, and materials for research and development activities
- Wages paid to employees for supporting research activities may also qualify
- The actual operation performed designates eligibility, not employee title or job description
- Supervisory expenses may qualify if they directly supervise core activity engineers
Does Your Small Business Qualify for the Innovation Tax Credit? Understanding the Four-Part Test
Do your operational functions and initiatives qualify your small business as a research and development organization? They may if your company uses domestic labor to design or develop an eligible finished product or process. Running your operational approach through a basic, four-part test can help you determine a preliminary qualification. An eligible function includes:
- Develops a product, process, technique, software, invention, or formula
- Relies on technology, including computer, biological, engineering, or physical sciences
- Eliminates questions of technical uncertainty
- Relies on experimentation to arrive at a final conclusion
Acena Consulting: We Help Small Business Partners Identify Qualifying Research and Development Functions
Is your small business missing out on vital cash flow opportunities offered through the R&D tax credit program? Acena Consulting can help. Our team of leading innovation tax credit experts partners with enterprises of every size and scope to ensure our clients maximize eligible deductions to minimize tax burden and infuse your operations with capital. Contact us today to consult with one of our on-site specialists.