There is no substitute for competition.
It makes us stronger, more agile, more aware and more competitive. Yet so many US companies are still missing out on critical tax advantages that foreign companies are utilizing to reduce their operating and development costs.
While there are many federal and state tax credits and special deductions that companies should be taking advantage of, the research and development tax credit is available to many industries and in a majority of states.
Let’s look at the top 5 benefits or advantages of the R&D tax credit:
Increased Cash Flow for Operations and Growth
Assuming you are able to utilize an R&D tax credit, it will provide a reduction in your federal and most likely, state income taxes. These funds can be used to reduce operating costs, invested in new capital equipment or hire additional employees to drive growth and innovation.
This is a dollar-for-dollar reduction in your tax burden not an additional deduction.
Broad Definition of Research and Development
Qualified research as defined in the Internal Revenue Code is relatively broad. Simply, the development or improvement of a product, process, software, technique, formula or invention can qualify. Improvements need to be functional and the effort put into the development projects must still pass the 4-part test but the types of projects that can meet these definitions tend to be broad and provide substantial opportunity.
See Navigating the R&D Tax Credit Minefield (part 2) for a more detailed discussion of the 4-part test to qualify development projects.
Applies to a wide range of industries
Because the definition of research and development (as defined by the US Treasury and IRS) is broad, the industries that can take advantage of the R&D credit is broad as well and includes, construction, defense, aerospace, engineering, electronics, manufacturing, contract manufacturing, agriculture, food service, plastics, apparel, architecture, software, financial services, and many others.
Keeps US Companies Competitive in the Global Marketplace
Most developed nations in the world today provide some type of subsidy for research and development. When comparing the US R&D tax credit to that of other nations, we are actually ranked behind many highly developed nations including Spain, Portugal, Australia, Canada, Austria, Korea, Denmark and others. Taking advantage of the US R&D tax credit does help level the playing field in a global marketplace where cost varies dramatically due to wage disparities and cultures.
As a credit designed to increase employment by subsidizing research and development, the R&D tax credit’s main function is to reduced taxes thereby increasing cash flow that can be used to add additional employees. Ideally, if the additional cash flow is used to fund and support additional R&D efforts, the jobs created should be higher paying positions that bring intellectual capital to the company and US. This increased employment in R&D should then result in more innovation, revenue, profit, etc. When applied properly, the research tax credit should continue to drive US innovation and success.
What Say You!
Does your company take advantage of the R&D tax credit?
How do you compete in a global marketplace?
How important is cash flow and lower taxes to your long term growth?
Randy Eickhoff, CPA is President of Acena Consulting. With more than 20 years of tax and consulting experience, Randy focused on helping companies successfully document and secure tax incentives throughout the US. He has been a long-time speaker nationally as well as conducted numerous training sessions on R&D tax credits and other US tax incentives.