The Federal Research and Development (R&D) tax credit can be availed by companies incurring qualified research expenditures (QREs) in the development of new and improved processes, products, or software in the US. The R&D tax credit was initially introduced to incentivize research and development spending in the US. The R&D tax credit can be used as a potent tax savings tool but is often underutilized by organizations. With our help, you can understand how this tax credit can save you money.
Eligibility Criteria and Benefits
Industries Eligible to Benefit from R&D Tax Credits
The following industries generally incur QRE:
- Software and technology
- Food and beverages
- Consumer products
- Construction
- Healthcare
- Manufacturing and distribution
- Cannabis
Qualified Research Expenditures (QREs)
To be eligible for R&D tax credits, your business expenditure should include QREs by fulfilling a four-part test. Expenditures should:
- Be technological in nature with activities fundamentally relying on the principles of traditional sciences like engineering, computer science, or physical or biological science.
- Be for a permitted purpose aimed at improving the performance, quality, functionality, or reliability of a new or existing business constituent.
- Eliminate technical uncertainty by discovering information regarding the development or enhancement of a product.
- Involve a process of experimentation that includes tests, modeling, simulations, and systematic trial and error.
What is R&D Tax Credit?
Aiming to promote business investment in research and development in the US, the US Congress conceived two significant incentives:
- The ability to choose to deduct such expenditures currently
- The enduring entitlement to a credit for increasing research expenditures
Research costs eligible for these incentives are those paid for research performed by the taxpayer as well as those paid for research conducted on behalf of the taxpayer.
Possible Benefits of R&D Tax Credit
Companies should verify whether they are eligible for R&D tax credits due to the significant benefits in tax savings. Moreover, several states also provide R&D tax credits for businesses. These federal and state credits if employed efficiently can aid small and medium-sized firms augment liquidity during their growing years. The primary benefits these tax credits provide include:
- Generate dollar-for-dollar cash savings through a reduction of federal and state income tax liability
- A sizeable reduction in federal tax liability (up to 12-16 cents for every qualifying dollar)
- Up to $500,000 of tax credits used by qualified small businesses to offset employer-paid FICA and Medicare taxes
- Setting off federal R&D tax credits against payroll tax for certain startups
- Affording substantial state credit tax incentives
- Performing look-back studies to identify unclaimed credits for open tax years (3-4 years)
- Higher earnings per share and augmented cash flows
- A lower effective tax rate
Companies should judiciously consider their eligibility for R&D tax credits in consultation with a tax advisor to increase tax savings.
Finlotax: A Trustworthy Accounting and Taxation Firm in CA
We are Finlotax, a skilled bookkeeping and taxation firm in CA. We provide superior bookkeeping and taxation services to individuals and businesses. We can help you determine your business's eligibility for R&D tax credits and ensure you lower your tax liability. Contact us today at 4088229406 to schedule a consultation.