The Tax Cuts and Jobs Act (TCJA) made many changes to the tax deductions and credits that are available to businesses. One of those is the R&D tax credit. This credit can save some businesses hundreds of thousands of dollars, but only if they understand exactly when it is applicable and when it is not. Here is what your business should know about the R&D tax credit.
What is the R&D Tax Credit?
This tax credit can be used by businesses that are researching and developing new business components or improving existing business components. This can include things like computer software, processes, inventions, and products. This tax credit can be applied at the federal level, as well as at the state level in many states.
Are You Eligible for the Credit?
To determine whether or not you are eligible for the R&D tax credit, you should always consult with your accountant. However, some of the general qualifications include:
- Devoting resources, time, and money to create new products or improve on existing products
- Inventing new manufacturing processes or software
- Developing patents, software, prototypes, or processes
- Hiring staff members like scientists, engineers, designers, or R&D staff
Most importantly, the R&D tax credit can be applied retroactively depending on when you filed the applicable tax return. Depending on your state and situation, it could extend back as far as three years providing that you have documentation and re-file your tax returns.
What Are the Benefits of the Tax Credit?
The R&D tax credit provides you with dollar-for-dollar savings to lower your tax liability and allow you to grow your business with support from the government in the context of the write-off. You can claim the credit every year, and there is no upper limit for the expenses that are claimed. You can carry back the credit for this year one year or carry it forward for up to 20 years depending on your tax situation.
What Are the Top Myths About the R&D Tax Credit?
Unfortunately, many businesses fall for misconceptions about who qualifies for the R&D tax credit and they don’t file for it as a result. Some of the most common myths include:
- Start-ups and small businesses are not eligible. In reality, the R&D credit can offset $250,000 each year for five years or $1.25 million of the FICA portion of payroll taxes.
- Employees that are not degree-holding engineers or scientists cannot be covered. In reality, employees with different job titles and backgrounds who are performing R&D work are eligible.
- Companies that are not developing something new are not eligible. In reality, you can also use the tax credit if you improve existing products and processes.
Get Updated Bookkeeping and Accounting Records with Help from MKS&H
MKS&H provides tax and accounting services to businesses of every size and in every industry. We can work with you to determine the best way to update your records, plan for the future, budget and more. Contact us today for a consultation.
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.
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