Our research indicates that most small businesses are unaware of an R&D tax credit. They don’t understand how it can help them earn up to 13.5 cents for every qualified dollar!
Due to a lack of information surrounding this unique tax credit, it is easy to assume that the credit is only meant for research labs or large corporations. This is a myth – thanks to the PATH Act of 2015, a wide variety of SMEs and start-ups can also reap the benefits of this tax credit if they have invested in designing or developing processes, services, software, or products in science or technology. For example, a furniture manufacturer might not be traditionally viewed as a research-based company, and yet the unique design process they use to manufacture their products makes them qualified for the R&D tax credit. It is also important to be aware that your company’s investment in R&D activities do not have to be successful – the effort is rewarded irrespective of the outcome!
To find out if your activities are eligible for the R&D tax credit, please read our earlier blog post right here.
The government is ready to provide billions of dollars in R&D tax credit – both at the federal and state level (yes, 40 out of 50 states offer R&D tax credits!). Yet, a substantial amount of this funding remains untapped year-after-year due to inaction from companies. Businesses from all industry sectors that invest in some sort of innovation can enjoy R&D tax credit. For example, let’s take a look at how manufacturing companies might not realize the numerous ways in which they may qualify for the R&D tax credit. If they have invested in any of the following activities, they could be eligible for a substantial R&D tax credit –
- Introducing new technologies that improve the manufacturing process (includes specification/design of prototypes + pilot models)
- Designing new algorithms or software architecture
- Developing new capabilities and/or functional enhancements for existing applications
- Creating software in which technological challenges pertaining to scale and complexity are present
- Developing software applications for either internal use or to interact with customers/ vendors
- Developing new/improved processes pertaining to quality assurance testing
- Developing prototypes using CAD / computer-aided manufacturing processes
- Developing automated technology/robotics
And many more…
Similarly, companies across other industries may be unaware of the variety of activities they are already investing in that are eligible for the R&D tax credit. Lack of information causes many business owners to lose a huge tax saving, which is so critical during these trying times!
R&D tax credit offers a variety of benefits, including –
- Reduced federal & state income tax liability
- Improved cash flow
- Unclaimed credit for open tax years generally lasts three to four years.
- Ability to carry credit ahead for up to 20 years
To qualify for the R&D tax credit, businesses must ensure research activities meet the following four-part test –
- The research must lend itself to the development of new or improved products or processes
- The research must engage the fundamental principles of science and engineering
- The research must be conducted with the intention to eliminate technological uncertainties
- Lastly, the research must involve experiments
Additionally, documentation like lab reports, project lists, project logs, internal emails, patent claims, experiment descriptions, online timesheets, contracts, invoices, form 1099 is required to demonstrate research and qualified expenses, such as –
- Salary for employees conducting and supervisors monitoring R&D activities, only for the percentage of time spent on eligible activities
- Cost of supplies and materials related to R&D activities, not including general office supplies and depreciable assets
- Payments issued to US-based contractors who are a part of eligible R&D activities/research
The tax filing deadline is approaching. It is time for businesses (across all industries!) to get R&D Tax Credit paperwork ready literally now. Do not let uncertainty regarding how R&D tax credits are supposed to be calculated prevent you from claiming all the funds you have rightful access to! Astute has helped many businesses across all major industries claim the R&D tax credit and save millions in tax dollars. We carefully identify all of your company’s qualified activities, calculate what your tax credit benefit will look like, and put together compelling documentation to validate all of your claims. Enjoy federal and state income tax deductions from an R&D tax credit to improve your cash flow during these challenging times. For more information, please contact us right here.