In yesterday’s blog, November 23, 2019, we talked about the basic definition for the R & D tax credit. Please take a look at that before you read today’s blog.
Today, I want to talk about the five things most people get wrong about R & D tax credits. A lot of this has to do with changes that have occurred in recent years regarding the definition of what qualifies as R & D. In all cases, these changes have been favorable to the taxpayer, making it easier to take this great tax credit.
Here are some of the common misconceptions about the R & D tax credit
- You have to create something new to the world. False!
You actually have to adapt or develop something new to your particular business. It doesn’t even have to be something new to your industry. It just needs to be new to you.
- If you don’t have tax due from your business, there’s no point in getting R & D tax credits. False!
Tax credits such as these can roll forward for 20 years. Just because you don’t have income this year, it doesn’t mean you won’t have income in the years to come. Don’t give up a credit because those can be just like money in the bank.
You also are allowed now to use the R & D tax credits against the employer portion of Social Security taxes. To be eligible, a company must meet two requirements:
The company must have less than $5 million in gross receipts for that credit year, and the company must have no more than five years of gross receipts.
- You need to have a degree holding engineer or scientist on staff in order to have R & D. False!
This type of credit can occur from activities that anyone performs regardless of what their job title or background is. It all has to do with the eligible activities.
- Research has to occur in a laboratory. False!
More and more, research is occurring across the country in various forms. It could be in a winery. They could be in a test kitchen. It could be in a cubicle with someone designing new software code.
- You need to have a patent in order to have an R&D tax credit. False!
You do not need a patent, trademark, registered mark, service mark, or copyright in order to take advantage of the R & tax credit.
Those are some examples of how people get the R & D tax credit wrong. Let’s talk about how your business could get it right.
Let’s say you have a service business. You provide some kind of personal service or professional service to your clients. Maybe you want to find a new design or technology for how you provide the service. That can qualify as R & D. Or maybe you want to have improved systems for communicating with your clients, your other service providers, or prospects. In my business, probably the most likely activity for the R & D tax credit will be in new software applications.
Let’s say you are in the food and beverage industry. You may be looking for new flavors, appearances, textures, or health benefits maybe you want to develop new products that are low-carb or vegan. You are quite likely have an R & D tax credit available for them.
A construction company has a number of possibilities such as improved electrical, lighting, alarm, communication, HVAC, or mechanical systems. My husband and I just recently did a rental construction. We brought in a company to try out a new product and application for flooring. It looks to be more durable and it was half the price of an alternative. And, because of our requirements for use they had to create an innovative process for the application, even including manufacturing student tools. Guess what! That’s R&D tax credits for the contractor, plus less cost for us.
What business are you in? Is there something you’re doing that is innovative? Or, are you creating a new process that will eliminate uncertainty about the product you bring to market? Do you need to test your new product or service? Is your new process or product going to result in increased performance, functionality, reliability or quality? These are all opportunities for R & D tax credits, or at least an in-depth conversation with your CPA about them prior to tax time.
If you have questions about this, there are several ways we can help you.
If you leave a question on this blog, I will answer it, at least in a general fashion, sometime in the next three months.
If you want to ask a question and want to get a more immediate answer, the most cost efficient way to do that is to join our coaching program at https://www.ustaxaid.com/coaching-program/. I take questions during the sessions and provide an email address for our coaching students to send in questions before or after the sessions.
Or, if you’d like a private consultation please Contact Us.