You may have heard about the research and development (R&D) tax credit. After all, it’s been around for quite some time. But with the “Protecting Americans from Tax Hikes Act of 2015” (i.e., the PATH Act) now in place, it’s a good idea to learn more about this potentially game-changing benefit, especially if you are a smaller business.
Why does the R&D credit exist, and how is it calculated?
Generally speaking, the R&D tax credit provides cash incentives for companies performing R&D in the U.S. The credit is meant to encourage businesses to invest more in R&D than they would otherwise through a tax credit for spending on qualified research. The credit is calculated as 20 percent of current-year qualified spending that exceeds a base amount related to gross receipts from certain previous years. Taxpayers can, however, irrevocably choose a less complex calculation.
How could your company benefit from the R&D credit?
- Offset your payroll taxes if you aren’t profitable.
Thanks to the PATH Act, the credit can now offset your payroll tax if you qualify for it but don’t have income to apply it against. This is great news for startups that are doing advanced research but are not yet profitable. Keep in mind this applies only for companies with gross receipts of less than $50 million.
- Apply against your alternative minimum tax (AMT).
Prior to the PATH Act, the R&D credit was applicable only against regular tax. Beginning in 2016, eligible small businesses (again, less than $50 million in gross receipts) may claim the credit against AMT.
- Provide tax savings year after year.
One of the provisions of the PATH Act was to make this popular credit permanent. With the R&D credit firmly in place for the foreseeable future, you now have the ability to plan ahead.
Do you qualify for the R&D tax credit?
If your company is involved in any of the following activities, you may be able to claim the R&D tax credit:
- Developing an innovative, new-to-market product
- Engineering and designing a new product
- Designing product alternatives
- Evaluating product alternatives
- Designing, constructing, and testing preproduction prototypes and models
- Engineering activity to advance the product’s design to the point of manufacture
- Experimenting with new technologies
- Engineering to evaluate new or improved specifications/modifications in terms of performance, reliability, quality, and durability
- Developing new production processes during prototyping and preproduction phases
- Conducting research aimed at significantly cutting a product’s time to market
If your business is involved in any of these activities, it’s worth looking into the credit. And it’s not too late to take advantage of it this year. We can help you determine whether or not your business qualifies, as well as aid you in calculating the amount of credit you could receive. If you’d like to learn more and get your R&D questions answered, please give us a call.