Photo by Scott Graham on Unsplash

Get Your Share of 10 Billion Dollars in Tax Savings

Small businesses amount for 65% of new jobs and spend tons of money every year on research and development. However, not enough of those businesses are taking advantage of the Research and Development Tax Credit, which could be saving them huge amounts of money on taxes. 

The R&D Credit is meant for any company involved in creating new products or processes or improving existing products and processes. This is definitely a credit worth your attention as it can save your company thousands, or even hundreds of thousands of dollars in taxes. Have questions? No problem! In this article, I’ll walk you through everything you need to know about the R&D Credit for small businesses, and if you have even more questions at the end, you can visit https://hitollc.com/about/ to get your free R&D booklet. 

General Benefits 

In order to see the benefit of the R&D Credit for small businesses, it’s important to first look at the consequences of overpaying in taxes. First, overpaying in taxes leads to a decrease in overall innovation. Money that could help you to fund the kind of innovation and development you want to be doing ends up going directly into your tax bill instead. Taking advantage of the R&D Credit, however, could  get you a substantial amount of that money back, so that you can fund further development and grow your business. 

Paying more than necessary in taxes can also lead to lower quality products, as the development budget has to be lowered to account for the tax bill and the products your business are developing might no longer have access to the amount of funding they need in order to reach their fullest potential. Taking advantage of the R&D Credit will allow you to put more money into these products to create high quality, game changing products. With such products, your growth potential will be endless. 

Furthermore, the R&D Credit will prove extremely beneficial in 2020 as the Covid-19 pandemic has led to increased innovation throughout the world. Money received from the R&D Credit could also prove crucial in helping small businesses survive through this difficult time. For more information on this topic specifically, please check out our article on Covid-19 and the R&D Credit. 

Payroll Tax Offset

The Research and Development Tax Credit was made permanent by the PATH Act in 2015. Within that, section 41(h) of the PATH Act provides a huge benefit to startups founded in the last 5-6 years. Under this section Qualified Small Businesses, QSB, can elect to apply up to $250,000 of the credit towards offsetting their payroll tax liability. As you can imagine, use of this election in QSBs can help to increase cash flow and cut tax costs significantly. In order to be an eligible small business, the business must have gross receipts of less than 5 million dollars for the five years preceding the year of application for and determination of the credit with no gross receipts for years prior to that.  

State and Federal Benefits

The R&D Tax Credit is a federal benefit, but some states offer state R&D Tax Credits with extra benefits specific to that state. Some states, like California and New York, where many startups and small businesses are based, can benefit from both State and Federal R&D Credit applications. In California, for example, R&D Tax Credits can be carried forward indefinitely, whereas Federal R&D Tax Credits can only be carried forward twenty years. Furthermore, in California, taxpayers can amend the previous year’s tax return to claim an R&D Credit on that past year where they missed out. It’s worth it to note the specific benefits offered by your state. 

Top Misconceptions of the R&D Credit

  1. It’s Just for Large Tech Companies

Actually, the Research and Development Credit is for companies of all sizes and all fields of innovation and development. When it was made permanent by the PATH Act of 2015, it was also made more widely available to smaller companies. This is because Congress eliminated the Alternative Minimum Tax Bar and in doing so allowed businesses with 50 million dollars or less in gross receipts to take advantage of the credit. Today, this credit is a game changer for companies of all sizes. 

  1. It’s Just for One Kind of Research, I Won’t Qualify

Small businesses often self-select out of this credit because they assume that they don’t qualify for a variety of  reasons and don’t investigate further. Some common reasons businesses assume they won’t qualify are: lack of  a patent, no standard lab research, the research project failed… First, while it’s always a good idea to have a patent on your invention, they are not required in order to apply for an R&D Credit. You’re also not required to be doing lab research specifically. 

We often picture people in a lab in white coats while thinking of this credit, but that’s not even usually the case. Anything that is “technological in nature” can qualify for the credit, which spans a variety of STEM fields, not just the hard sciences. Finally, failed projects are expected and do not automatically disqualify you from the credit. As long as you can provide detailed documentation of these attempts, failures, and the ultimate issue your project strives to resolve, it doesn’t matter if you still haven’t actually succeeded, you could still qualify for a Research and Development Tax Credit. 

  1. I Don’t Think This Will Help Me THIS Year

Federal tax credits can be carried forward for up to twenty years and state credits can be carried forward indefinitely in certain states, like California. R&D Credits can also be carried back one year. Carryforwards can be extremely helpful in the cases of small businesses or startups who are participating in R&D activities, but have yet to become profitable or are experiencing losses and therefore have no taxable income. It’s still worth applying for an R&D Credit for these businesses, because unused R&D Credits can be applied towards future years and save on future taxes when the business becomes profitable, an ideal scenario for maximizing future growth. 

  1. It’s Too Complicated 

If you’re worried about this credit seeming too complicated, ask yourself these simple questions: Do I make something? Do I improve something? Am I in any of the following industries: Manufacturing, Architecture, Engineering, Construction, Software, Agriculture, Food & Beverage, MEP Contracting, Tool & Die, Life Sciences? If you’re consistently answering “yes” to these questions, it’s worth investigating. Take your questions to a tax professional specialising in this credit, like us here at Hito, LLC. We offer a complimentary discovery call that you can book right now right here

What’s Next? 

Don’t go it alone.  Make sure you set up an appointment to talk to an R&D specialist. A specialist can let you know whether or not you qualify for the R&D Tax Credit, provide an estimate for how much they think you could benefit from the R&D Credit, and help you in creating and filing your application. 

It’s always worth it to consult a qualified professional on tax matters, but especially when it comes to completing the R&D Credit Application, you’ll want to pay for the extra help as making mistakes could be costly and proving the validity of your claim is a complicated process, which comes with many rules and regulations strictly enforced by the IRS. A tax specialist can write and review the whole application for you so you can be assured that everything is done by the book. A specialist will also be crucial in providing audit support in the event of an audit, as that is always a possibility in tax matters. 

As I mentioned above, here at Hito, LLC, we specialize in the R&D Tax Credit and offer a free 30 minute discovery call in which we can provide customized insight into your business’s qualification for the credit, and possibly even an estimate into how much you could qualify for depending on the information you provide. If this interests you, go here to set up your call and take your first steps towards game changing tax savings.