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 in a multitude of industries, you are able to claim tax credits for work you are most likely already doing! For example, take a start up that is making a new app, their focus is on development and ensuring the software interacts with other systems. However, 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 while also instituting a carry forward of up to 20 years if the company is unable to take the credit in the current year.

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 a credit.

The R&D Tax Credit comes from section 41 of the Internal Revenue Code. As such, 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, its necessary to gather the following documents:

i. Prior 4 years of tax returns
ii. Prior 3 years of W2 Wages
iii. Prior 3 years of Trial Balances

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

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.

At the federal level, there are no required industries. However, certain states limit the state credits to specific NAICS codes. Consult with an R&D Consultant to learn more.

Yes! You are able to amend tax returns for up to 3 years according to Section 6511 of the IRC. However, there are additional rules which may allow you to go back further. Consult with your CPA and an R&D Consultant to maximize your tax credits!

In addition to the tax credit savings, working with an R&D Tax Consultant helps in providing your company guidance and best practices on documentation to keep, identification of which processes can qualify for credits, or provide insight based on visiting hundreds of other companies. These best practices save you time in case of an income tax audit as projects, costs, and tasks are properly documented.

There will be the financial documentation required (w2s, tracking of expenses, contracts, etc.) that help you to calculate your credit. BUT due to the variability of industries that claim the credit, there are no specific requirements for required documentation. An R&D Tax Credit consultant can help you gather appropriate documentation for your industry in order to fully substantiate your claim.

Just claiming the R&D Tax Credit does NOT increase your chances of audit. This common misconception comes from the old IRS Tiered System that labeled credits as Tier 1 issues. However, the tiered system was retured in 2012 and not it is up to the discretion of the field auditor as to where to focus each audit. So, while claiming the credit does NOT increase your risk of audit, certain factors of your credit can increase your chances of having the R&D Credit being audited:

i. Overall size of credit (i.e. The larger the claim, the higher likelihood of audit.
ii. Traditional VS Non Traditional Industries
iii. Amending Returns
iv. NAICS Code

If you are in an audit or are concerned about an audit of your credits, reach out today to discuss how we can help you with the IRS!

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: 

Once it is determined that you have qualifying activities, think of how much you spend on these developments! We can look at the following types of costs: 

If you have claimed the credit in the past, its important to remember you can claim the credits every year for activities that occurred within the tax year. If you are concerned about whether credits are properly supported or calculated appropriately, reach out and we would be happy to review it with you!

Another common misconception about R&D is that only those that are creating and inventing new items for the world, but instead inventing, creating, and developing only needs to be new and innovative to you and your company.

Most CPAs are inundated with tons of clients and do not have the time to spend the hours required to gather the proper documents, perform the calculations, and assist with substantiating the credit. As such, LEAF works as part of your team to help your CPA complete your tax return in the most efficient manner.

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. 

Visit our CONTACT US page today to receive a FREE estimate. 

YES! There are additional rules to consider when calculating the credit, but each business is entitled to claim the credit.

The R&D Tax Credit was first introduced in the United States through the Economic Recovery Tax Act of 1981.  With worries that the U.S. was falling behind in production and innovation relative to the global economy, the Economic Recovery Tax Act aimed to stimulate the U.S. economy and encourage investment within the United States. Though this tax credit was originally only anticipated to last for two years, the PATH Act of 2015 permanently extended the R&D Tax Credit due to the immense value that research and development brings to the U.S. economy each year.

Claim your R&D Tax Credits Today

We recognize that your time is valuable and that your business matters. So, let us help you save time, save money, and give you back some of your freedom. With years of experience across multiple industries, we have seen companies benefit from these credits. So, if you are curious about “What’s Next?” then visit our CONTACT US page today to receive a FREE estimate.