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What are R&D Tax Credits?

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Taxation is theft! As business owners, you invest your time, energy, and money into making a business grow, only to see 20, 30, or 40+ percent of your profits taken by taxes. Federal Income Tax, State Income Tax, Payroll Tax, Sales Tax, Real Estate Taxes, Franchise Tax, etc. With so much to pay in taxes, its time to get some of those tax dollars back in your own pocket for the work you are doing to improve your business. This is where Research and Development (R&D) Tax Credits come in.

As a credit that is able to be utilized by a multitude of industries. Companies are able to claim tax credits for work you are most likely already doing! For example, take a startup that is making a new app, their focus is on development and ensuring the software interacts with other systems. Upon launching and bringing in the fruits of their labors, they are SHOCKED when they need to use their funding to pay 20% in Federal Income Tax and 5% State Income Tax. R&D Tax Credits can help to offset those tax liabilities.

Since its inception in 1981, the Federal Research and Development Credit has been used by Congress to incentivize companies to make their companies bigger, better, faster, and stronger while performing the work within the United States. As such, Congress created the tax credit to reduce companies’ tax liability. Companies are able to use the credit right away or institute a carry forward of up to 20 years if the company is unable to take the credit in the current year. In addition, start-up companies in their first 5 years, may be able to utilize their credit against their payroll tax returns.

At the Federal level, the credits are worth between 6 and 8 % of qualified costs. States vary from having refundable credits (such as in Arizona), credits that can be applied to payroll (such as in Georgia), or having multiple credits (such as in Utah). There are also some states that do not have credit. At the federal level, there is no limit to the number of dollars available for the Federal R&D Tax Credits. However, there are some states that limit the funding available and require various applications in order to claim state R&D Credits.

So, once you decide to claim the R&D Tax Credit, you need to know there are two methods to compute the R&D Tax Credit at the Federal level: Regular and Alternative Simplified Method. Each methodology seeks to determine if you are increasing your research efforts year over year. As such, in order to prepare for either methodology, it’s necessary to gather the following documents to assist in the computation of your credit:

  • Prior to 4 years of tax returns
  • Prior to 3 years of W2 Wages
  • Prior to 3 years of Trial Balances

Note that if you are a start-up and do not have 3-4 prior years of information, information is only required for years since inception.

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 the 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 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.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.

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