Photo by Louis Reed for Unsplash
What is the R&D Credit?
R&D stands for Research and Development. The R&D Credit essentially operates as the government’s way to incentivize business owners to take on the risks of innovation costs, by offering a dollar for dollar reduction of the company’s tax bill based on qualified R&D costs. Qualified costs can include wages, contractor expenses up to 65%, qualified research expenses, supplies, and basic research payments paid to qualified institutions, like research universities, for up to 75% the cost incurred. To learn more about the basics of the R&D Credit and upcoming changes to it due to the Tax Cuts and Job act, see our blog post here, or better yet visit this page to download our free e-booklet on the subject, which includes a complete breakdown of the subject with example cases and all of the detail you could need.
The R&D Credit Helps Businesses Survive Tough Times
The 2019 tax season, for most, has already passed, but it never hurts to plan ahead, particularly because R&D Credit applications typically require a write-up. This document is where your tax professional shows the IRS how the expenses qualify for the credit by using documentation provided by the company and detailing the process of experimentation, thus proving that R&D activities pass the IRS’s four part test, also outlined in our free R&D info booklet. 2020 has been rough for most businesses, life threatening for many small to mid-sized businesses. Implementing an airtight tax strategy for 2020 could lessen your company’s tax bill significantly, in some cases by hundreds of thousands of dollars. Instead of spending this money on their tax bill, business owners could put this money right back into helping their business heal from the hit it took because of the coronavirus. One important thing to remember is the possibility of carrybacks and carryforwards – if a business qualifies for the credit, but don’t have taxable income in that year, they could carry back the credit one year and carry forward up to twenty years, increasing their savings. The Coronavirus Aid, Relief, and Economic Security Act (CARES), provides additional benefits, with a provision that allows businesses to reduce taxes by carrying back net operating losses that were incurred in 2018-2020 for up to five years. The net operating loss carryback and the R&D credit carryback can provide a significant benefit when they are working together.
The R&D Credit in particular is one of the most overlooked and valuable tax credits. Choosing whether or not to take the government up on this offer could be make or break for some businesses. Another reason, this type of tax planning is an excellent idea in a crisis is that your tax professional will commonly take their fee as a percentage of your credit. They get paid when you save, it’s simple. The extra cost of hiring a professional comes out of money you would be spending anyway. Why not put it to better use?
COVID-19 and Innovation
The amount a business gets from the R&D Credit, depends on how much they incur in qualified innovation and research expenses. And one bright side, as a recent Forbes article pointed out, to the global pandemic, is the sheer amount of innovation that came of it. While the virus has proven to have an uncanny ability to reveal the cracks in modern society and brought with it death, anxiety, and, for many, sudden poverty, it has also forced us to adapt more quickly than ever before. The way we do business, for example, has changed. In February, I didn’t know what Zoom was, and now I live there. Office buildings sat out of use while the corporate world went digital and services designed for cyberspace like Asana, Slack, and, of course, Zoom, increased their marketing budgets. Online services and retailers worked quickly to make improvements to their existing systems to handle the sudden increase in demand for better, faster, and cheaper ways to do business online.
It’s not just technology and convenience based businesses that have taken on projects in innovation either. While many industries that have historically depended largely on person-to-person had to shut down during the initial lockdown, many have used that time to focus on adapting, on developing and implementing safety solutions. Restaurants have installed plexiglass to protect the safety of employees and found creative ways to ensure guest safety, some going as far as building pods to promote social distancing, sending tray carrying robots out to greet guests instead of waitresses and waiters, and designing conveyor belt systems to deliver food.
In software, app development is huge. Google recently came out with their Sodar app, which allows users to project a virtual reality circumference around themselves in order to double check whether or not their proximity to other people follows specific social distancing guidelines. A company called Sodexo has also recently developed an app to allow their corporate employers to pre-order their morning coffee without having to gather and mingle in the cafeteria.
The medical fields, obviously, are also doing large amounts of innovation to fight the pandemic. The whole world is in a race for a vaccine, which has led to a clear spike in research and development costs incurred by pharmaceutical companies and research universities alike, but that’s not the only thing that’s being done. The epicenter of the pandemic, China, helped to slow the spread of coronavirus by introducing care robots to hospitals. These were designed to deliver food and supplies, like hospital gowns, to virus infected patients. This helped to keep possible transmission between patients and medical employees to a minimum. Furthermore, even non-medical fields have pivoted to help out. Recently, we’ve seen almost any company with the means to manufacture pivot, in some capacity, in a way that could help out the medical fields. Apparel companies started making masks and PPE, while breweries dropped beer production to mass produce hand sanitizer.
The Bottom Line
As you can see, when the world was asked to change, it went above and beyond to deliver. We are in an unmatched period of research and development at this time, and that makes the R&D Credit even more useful and crucial than ever as companies hike up large research and development costs in an effort to keep up. If your business is developing to adapt, it’s important not to overlook this opportunity to mitigate these costs and put money back in your business as the world continues to shift. All of this can be an opportunity to grow in the end.
From our team to yours, we hope this message finds you well. If you have any questions, we would love to hear from you. Visit us at www.hitollc.com and let us know how we can help.