R&D Tax Credit OR Employee Retention Tax Credit (ERTC) – Can you claim both on your tax return?

by Ashwini Vasudeva

It’s a pleasant surprise when you put on a jacket or pair of jeans and find several crisp twenty dollars bills in a pocket. It may even prompt you to check other pockets to see if there’s additional cash lying around that you can put to good use.

The same can be said for businesses that find extra cash – in the form of tax credits; companies of all sizes and sectors are always searching for more credits for their tax filing. Once you find these golden nuggets you can use them to grow your business. Fortunately, it’s not as difficult as looking for a needle in a haystack. We will take a look at two valuable tax credits that you may have overlooked, which may lower your tax liability: Research & Development Tax Credit (R&D) and the Employee Retention Tax Credit (ERTC).

Calculate and Claim It

It’s important to note that a tax credit isn’t the same as a tax deduction. A tax credit is a dollar-for-dollar reduction in the amount of taxes owed.

Since the R&D tax credit has been around for four decades, most businesses may be familiar with it. If not, here’s a quick summary: Businesses that attempt to develop or improve products or processes may be able to receive an R&D tax credit for eligible expenses that were incurred – even if it was an unsuccessful attempt. If you have not claimed a R&D tax credit, your company may be bypassing a valuable cash infusion.

Catching a Break with the ERTC

Life as we knew it changed when the pandemic made its assault, and many businesses suffered a severe financial blow. This prompted Congress to create the Employee Retention Tax Credit (ERTC) in March 2020, which does not need to be repaid.

Congress later amended and expanded the ERTC twice to enable more employers – who meet certain eligibility requirements – to take advantage of the credit.

In essence, it provides financial relief for eligible employers in the form of a credit against certain employment taxes. It’s been a lifeline for employers that were forced to shut down due to the pandemic or experienced substantial reductions in 2020 or 2021.

Can your Business Benefit from both Credits?

The ERTC allows businesses to offset up to $5,000 of employer payroll taxes per eligible employee for 2020 and up to $7,000 per employee for 2021. Note: it’s critical that you carefully track wages that were allocated to the R&D credit.

The Employee Retention Tax Credit rules were revised for 2021 to exclude wages used to determine the ERTC from being treated as “qualified research activities”. Employers calculating ERTC and R&D credits should confirm that there is no overlap between the credits.

If your company employs 100 or more full-time employees, you may claim only the ERTC on wages paid to employees who were not engaged in “qualified research activities” under the R&D Tax Credit. When calculating R&D wages pages, you should verify if workers were performing qualified research activities.

Talk to an Expert to Learn if you Qualify

Each organization’s facts and circumstances are unique and trying to decipher the IRS’ provisions can be a complicated process. Thus, it’s wise to speak with an accounting firm that specializes in R&D and ERTC. Taking a proactive stance in tax planning will ensure you leverage claims for which you are eligible, giving your business a financial boost.

Can I claim the ERTC and still get the R&D credit?

Qualifying businesses looking to claim both credits need to be careful as wages used to claim the ERTC are excluded from the calculation for the R&D tax credit. Businesses looking to claim both credits should take a thorough look at their qualified wages to ensure that they are maximizing the value they receive for both.

Please connect with me if you have questions.

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