- Significant Tax Reductions- Save more with a reduction in tax liability
- Cash in On Your Hard Work- Your business may already qualify
- Use it Now or Use it Later- Carry your tax credit forward for twenty years
What are R&D Tax Credits?
Owning a business is never easy. It takes hard work, dedication, and usually more than a little sacrifice. But that’s part of what makes running a business so rewarding—being able to utilize creativity, or build on the dream of innovation and see it executed, or take an idea scribbled on a spare napkin and see it come to fruition. The ability to create and design or build upon to make something better and more efficient is part of what makes the whole process worthwhile and should not only be encouraged but rewarded. And that is where the R&D Tax Credit comes into play. Companies work hard to bring about change and make the world better. Which is why it is so important to get all the benefits you deserve.
While tax deductions have usually been the magic word for businesses, the R&D Tax Credit is about to become your new best friend. The R&D (Research & Development) Tax Credit is an advantageous incentive permanently set forth by the PATH Act in 2015. Congress initiated the credit because they wanted to reward businesses that were creating products that would drive innovation and improve processes. With this credit, businesses can receive a significant financial advantage to develop and grow, being able to reinvest and put the credit towards product development, technological advances, and other product or process improvements. If your company is innovating, changing the narrative of a process, or working on the next best thing, you could qualify for the R&D Tax Credit.
What Kind of Companies Can Qualify?
The most advantageous part about the R&D Credit is the fact that is incredibly broad in what type of work qualifies.
Your business does not need to be on the verge of inventing a car that flies or have a lab full of scientists working on a cure for cancer to receive funds (although those would certainly qualify). The Research & Development Tax Credit encompasses any company that is engaging in product or process development, that is technological in nature, and includes the process of experimenting with overcoming capability or methodology uncertainty.
The best way to determine whether or not your business would qualify is to connect with an R&D Tax Credit expert. If you are wondering whether you may have some qualifying activities, consult the four-part tax credit test and see if any of your projects check all four boxes:
Technological in nature
- Discover information that fundamentally relies upon principles of Hard Sciences (i.e. Physical Sciences, Biological Sciences, Engineering, Computer Science, etc.)
- Not social, economic, or psychological Permitted Purpose
Permitted Purpose
- Develop a new, or improve an existing, product or process
- Related to Functionality, Performance, Reliability, Quality, Significant cost, Savings, etc.
- Not Aesthetics
Eliminate Uncertainty
- Capability
- Uncertain if able to achieve desired result
- Methodology
- Uncertain of optimal design or process to achieve project goals
- Goals to show there were issues and potential alternate solutions
Process of Experimentation
- Evaluate and test alternative design or process to identify optimal solutions
- Methods to use
- Prototyping
- Modeling
- Systematic Process of Trial and Error Simulation
- Computer Science Testing (Validation, Beta, etc.)
The best way to determine whether or not your business would qualify is to connect with an R&D Tax Credit expert. If you are wondering whether you may have some qualifying activities, consult the four-part tax credit test and see if any of your projects check all four boxes:
Wages
- Employees involved in conducting or carrying out qualified research.
- Employees providing supervision of qualified research.
- Employees providing support for qualified research activities.
Supplies
- Resources consumed or used up during the carrying out of qualified research.
Contract Research
- 3rd parties paid to assist in the conducting or carrying out of qualified research.
- Requires the Company to maintain rights to the project (i.e. research performed on behalf of the Company)
- Requires the Company to bear the expense if the research is unsuccessful.
The R&D Tax Credit works at both a federal and state level. While the federal one is available for those doing work in all fifty states, many states also have tax credits that incentivize companies to work in their state boundaries.
Alabama
This state does not offer any R&D Tax Credits, therefore Companies completing work within this state are only eligible for the Federal R&D Tax Credit.
Alaska
Alaska provides a state tax credit equal to eighteen percent (18%) of a company’s federal-based credits, which includes the research and development tax credit as one. This credit provides a dollar-for-dollar offset against Alaska tax liabilities. To claim the credit, a company must file Alaska Form 6390 – Alaska Federal-based Credits along with its state tax return.
Arizona
Arizona offers a refundable and non-refundable research tax credit. The credit is equal to $2.5 Million of QREs and 15% of the QREs in excess of $2.5 Million.
To qualify to receive the refundable portion of excess credit: Company must have less than 150 full-time employees and must apply to the ACA and receive a Certificate of Qualification.
Arkansas
Arkansas offers a non-refundable R&D Tax Credit equal to 20% of QREs in excess of base year QREs. There are additional credits available if companies do development work in strategic areas, if research is university based, or if applied for as a strategic business.
California
California has a permanent R&D Tax Credit that is calculated similar to the Federal R&D Tax Credit’s regular method. The percentage is equal to 15% of QREs over the base amount and has an indefinite carry forward.
Colorado
Colorado has a credit available to taxpayers equal to 3% of of QREs over a two year base amount for companies that perform work within their Enterprize Zone
Connecticut
Connecticut has an R&D Credit available only for C-Corporations. There are two credits available: First: The Increments Credit – Equal to 20% of incremental development and partially refundable. Second: The Non-Incremental Credit equal to 6% of the current years R&D Tax Credits (depending on the number of employees and gross receipts)
Delaware
Delaware has multiple calculation methods available and must submit an application by September 15th. There is a statewide cap of $5 Million per year in R&D available.
Florida
Florida offers a tax credit for C-Corporations in targeted industries such as Clean Energy, Life Sciences, Information Technology, Homeland Defense, Financial Services, Emerging Technologies, and Other Manufacturing. The Credit is equal to 10% of Qualified Expenditures over a computed base amount, is limited to 50% of the state tax liability, and has a 23 Million Dollar Cap for all state credits.
Georgia
Georgia offers an R&D Tax Credit that is one of the best in the country due to its ability to be used against state income tax or against Georgia Payroll Tax. The credit is calculated as 10% over the requisite base amount. Of note, if claiming against payroll in Georgia, form ITWH must be filed within 30 days after the due date of the return and filed electronically through the Georgia Tax Center.
Hawaii
Hawaii offers a tax credit for qualified high technology businesses within the following 12 months of the tax year in which expenditures were incurred. Note that the credit is refundable and equates to approximately 10% of qualifying expenditures.
Idaho
Idaho offers a tax credit of 5% of current year expenditures over a computed base amount and is available for credit carryforward of 14 years.
Illinois
Illinois offers a non-refundable tax credit in the amount of 6.5% of qualifying expenditures over a computed base amount. Unused credits are available for the carryforward of 5 years.
Indiana
Under Indiana code 6-3.1-4.1, Indiana offers an R&D Tax Credit on 15% on expenditures over a computed base amount of up to $1Million. The credit is 10% of amounts over excess of $1Million. Unused credits can be carried forward for up to 10 years.
Iowa
Iowa offers a great benefit as a fully refundable tax credit and is 6.5% of qualifying expenditures over the computed base amount. Iowa does offer an alternative method to compute the tax credit at 4.55% of expenditures. One thing to note with Iowa is the ability to receive additional credits through Iowa’s Economic Development Authority if in the Enterprize Zone Program of a High-Quality Jobs program. The supplemental credit can provide an additional 10% of qualified expenses.
Lousiana
Lousiana offers a tiered tax credit for companies completing qualified work. The credit is computed as 40% for companies that employ up to 50 Louisiana residents,
20% for companies that employ 50-99 employee, and 8% for companies with 100 or more employees. Prior to claiming the R&D Tax Credits, a company must apply for and obtain a credit certification from the Department of Economic Development. The application requires a $250 fee.
Maine
Maine offers two credits in a Regular and Super credit. The regular credit is computed as 5% of the current year expenditures over a computed base amount. The super credit expired in 2014.
Maryland
Maryland offers a basic and growth R&D Tax Credit to facilitate growth within the state. The credits each require an application by September 15th for expenses incurred in the previous calendar year.
Massachusetts
The state of Massachusetts maintains a tax credit for 10% of incremental qualified R&D Expenditure. The credits however are limited to reducing the tax liability below $456 and only 75% of any excise tax due in excess of $25,000. Credits in excess of the taxpayer’s liability may be carried over for 15 years. Credits disallowed because of the 75% rule may be carried over indefinitely.
Michigan
This state does not offer any R&D Tax Credits, therefore Companies completing work within this state are only eligible for the Federal R&D Tax Credit.
Minnesota
Minnesota offers a credit equal to 10% of the qualifying expenses up to $2 Million and 2.5% for expenses above $2 Million. The credit is available for partnerships and corporations and is available to be carried forward for up to 15 years.
Mississippi
This state does not offer any R&D Tax Credits, therefore Companies completing work within this state are only eligible for the Federal R&D Tax Credit.
Missouri
This state does not offer any R&D Tax Credits, therefore Companies completing work within this state are only eligible for the Federal R&D Tax Credit.
Montana
This state does not offer any R&D Tax Credits, therefore Companies completing work within this state are only eligible for the Federal R&D Tax Credit.
Nebraska
Nebraska offers a tax credit of up to 15% of the federal tax credit allowed and prorated to costs incurred within the state of Nebraska. Research Credits are available offset sales tax, income tax, or refundable. The tax credits can be claimed annually for up to 20 years.
Nevada
This state does not offer any R&D Tax Credits, therefore Companies completing work within this state are only eligible for the Federal R&D Tax Credit.
New Hampshire
New Hampshire offers an R&D Tax Credit for manufacturing expenditures incurred within the state. The credit is the lesser of 10% of expenses incurred or $50,000. The state caps aggregate claims to $2 Million. The Credit application (Form DP165) must be submitted to NH DRA and postmarked no later than June 30 following the tax year during which the research and development occurred. The application should be submitted along with Federal Form 6765.
New Jersey
The New Jersey R&D Tax Credit is available to S and C Corporations, but not partnerships. The credit is unable to be passed through to shareholders. Credits are computed as 10% of qualified expenditures over a computed base amount and unused credits can be carried forward for up to 7 years (with some fields allowing carry forward of up to 15 years.)
New Mexico
New Mexico offers two tax credits in which the claiming business may choose either the Small Business R&D Tax Credit or Technology Jobs and Research Credit. The Small Business Credit is equal to the sum of all gross receipts taxes and 50% of withholding taxes paid on behalf of employees and owners with no more than five percent ownership, that are due to the state. Wherein the Technology Jobs credit is equal to 5% (10% if rural) of qualified expenditures and an additional 5% (10% if rural) of expenditures if certain payroll increase benchmarks are met.
New York
New York offers an R&D Tax Credit of 3% of the federal R&D Tax Credit and available for companies in strategic industries who were creating new jobs. Credits are required to be applied for through the Empire State Development office.
North Carolina
This state does not offer any R&D Tax Credits, therefore Companies completing work within this state are only eligible for the Federal R&D Tax Credit.
North Dakota
North Dakota offers an R&D Tax Credit of 25% of the first $100,000 and 8% of expenses over $100,000 over the computed base amount. Credits are able to be carried forward for 15 years and able to be sold, transferred, or assigned IF the taxpayer registers as a qualified research and development Company.
Ohio
Ohio offers an R&D Tax Credit against the Commercial Activity (CAT) Tax. Ohio’s credit is computed as 7% of qualifying expenses over a base amount and can be carried forward for up to 7 years.
Oklahoma
This state does not offer any R&D Tax Credits, therefore Companies completing work within this state are only eligible for the Federal R&D Tax Credit.
Oregon
This state does not offer any R&D Tax Credits, therefore Companies completing work within this state are only eligible for the Federal R&D Tax Credit.
Pennsylvania
Pennsylvania offers an R&D Tax Credit that must be applied for to the Department of Revenue by September 15th of the year following the year in which expenses were incurred. The credit is computed as 10% (20% for qualified small businesses) of expenses that exceed the computed base amount.
Rhode Island
Rhode Island offers an R&D Tax credit that can reduce the company’s tax liability by up to 50%. Credits are compuited as 22.5% of qualified expenditures up to $111,111 and 16.9% of expenditures over $111,111.
South Carolina
South Carolina offers an R&D Tax Credit of 5% of qualified expenditures over the computed base. Credits can reduce the tax liability of up to 50% of the company’s current-year tax liability. In addition, South Carolina allows a 10 year carry forward.
South Dakota
This state does not offer any R&D Tax Credits, therefore Companies completing work within this state are only eligible for the Federal R&D Tax Credit.
Tennessee
This state does not offer any R&D Tax Credits, therefore Companies completing work within this state are only eligible for the Federal R&D Tax Credit.
Texas
Texas offers an R&D Tax Credit of 5% of the qualified epxneses over the computed base amount. Texas’ R&D Tax Credit is used against the Franchise Tax and can be carried forward for up to 20 years.
Utah
Utah offers one of the best opportunities for R&D in the country due to the access to two credits. The first credit is equal to 5% of expenditures over the computed base amount (able to be carried forward for 14 years) . The second credit is computed as 7.5% of expenses in the current year (No carry forward available).
Vermont
Vermont offers an R&D Tax Credit of up to 27% of the federal credit with a 10 year carry forward.
Virginia
Virginia offers an R&D Tax Credit of $7M for all companies to claim within the state. The computation is 15% of the first $300,000 of QREs. Note that Virginia requires an application submitted by September 1st of the year following the year in which expenses were incurred.
Washington
This state does not offer any R&D Tax Credits, therefore Companies completing work within this state are only eligible for the Federal R&D Tax Credit.
West Virginia
This state does not offer any R&D Tax Credits, therefore Companies completing work within this state are only eligible for the Federal R&D Tax Credit.
Wisconsin
Wisconsin offers an R&D Tax Credit of 5% of expenses incurred and over a computed base amount. However, the there is an additional 5% credit for companies designing internal combustion engines, or related to the design and manufacturing of energy-efficient lighting systems, building automation and control systems, or automotive batteries for use in hybrid-electric vehicles, that reduce the demands for natural gas or electricity or improve the efficiency of its use. Credits are able to be carried forward for15 years.
Wyoming
This state does not offer any R&D Tax Credits, therefore Companies completing work within this state are only eligible for the Federal R&D Tax Credit.
See Significant Tax Reductions
What if we told you there was a way to maximize your return with minimum effort? Or that the computer parts your software development team need can be purchased with less of a hit to the budget? Wishful thinking, you say? Not really. The R&D Tax Credit is designed to help ease your tax burdens, maximizing cash flow, and helping you invest in yourself and your dream.
Extra cash flow means your company can survive tough times and have the means to take more risks. And when we say risks, we mean the good kind. The R&D Tax Credit provides you with the cushion you need to take the leap and try bigger ideas, launch lengthier studies, and perform the research you want to do—all while being able to spend less on taxes and more on development. And that is not the only benefit. With the R&D Tax Credit, owners can see an increase in profits because credits pass through from partnerships and S corps to company owners.
Now that you know the ‘what,’ it is essential to know the ‘how.’ An R&D Tax Credit expert can help you, and your company navigate the process and provide you all the information you need to get started. It is as simple as that. And the best part about using a credit tax expert? They can help you identify what work you are doing as a company to qualify. Because chances are, you are already doing it!
The R&D Tax Credit Helps You Cash in on Your Hard Work
Did you know that because of the broadness of what qualifies businesses for the R&D Tax Credit, chances are you are already performing the work that would meet the qualifications? In other words, you are already doing the work, so why not benefit from it in more ways than one?
The drive behind making the tax credit all about research and development is to incentivize companies to do more and do better and be rewarded for it. If your company is bringing about innovation— whether your focus is on technology, engineering, construction, manufacturing, or agriculture—you most likely already qualify for an R&D Tax Credit, so let’s get you the benefit you deserve!
Use Your R&D Tax Credit Funds Now or Later
There is always a scramble at the end of the year to make sure you have used your PTO or taken advantage of medical needs before your deductible goes back to zero. With the R&D Tax Credit, there is no rush. All businesses, even those who have yet to achieve profitability, can carry forward any unused portion up to twenty-years AND you can claim this credit EVERY YEAR you are doing development!
The ability to benefit even new companies is especially good news for startups who have not yet reached profitability. The R&D Tax Credit is put into place to help you succeed, as well. According to the Bureau of Labor Statistics, 56 percent of businesses fail within the first five years. Because this puts almost half of all companies at risk, the federal and some state R&D Tax Credits can be used against payroll taxes to improve your cash flow position! That means more security for you and your company to be successful, and with the help of a Tax Credit expert, you can easily secure this safety net and be prepared for almost anything.
These are just a few benefits that your company will come across when you utilize an R&D Tax Credit. Your drive to create and innovate should not be limited by a lack of funds. With the help of a tax credit, you will not be.
How to Find an R&D Tax Expert
No matter the size of your company, profits are always going to be slashed by taxes and that can take a toll on production goals. That is just how it is, and you may think there is no way to get ahead of the curve. That is where the benefit of taking advantage of tax credits can come in.
The R&D incentive is a way to lower your taxes, boost your profits and improve cash flow using a tax credit. The federal and state R&D Tax Credits are some of the most lucrative and usable credits available for companies.
As a business, you are continually working to do better for your customers. Whether you are making something new or improving what you already have. The goal is to work hard, work smart, and reap the rewards.
With an R&D Tax Credit expert, you gain access to someone who knows the ins and outs of how the tax credit works. They can navigate pitfalls, help you understand qualifications, and provide the support you need to get your funds so you can keep creating.
LEAF can help you and your business with the most efficient and most effective method when it comes to filing for your well-deserved tax credits. Plus, you get the benefit of professional tax expertise that comes from years of experience. Let LEAF handle your tax credit while you get back to what matters, your business.
