Just to get it out of the way, the tax credit of talking about is the R & D tax credit. It’s important to make the distinction between a tax credit and a tax deduction. A tax credit is used directly against the tax you pay. A tax deduction reduces the taxable income upon which you calculate the tax you owe.
A tax credit is always better than a tax deduction.
The R & D stands for research and development. We have had the R & D tax credit around for years, in various forms. However, it has largely been just a temporary tax credit. In other words, often from year to year we don’t know if the tax credit will be still available next year. That changed with the Trump Tax Plan. It is now a permanent tax credit.
That alone is great news.
There are other developments that make it even more powerful. This blog is the first in a two-part series that focuses in on how business owners can make use of this little-known tax credit.
I covered this in depth in our coaching class for year-end tax planning that was on November 20, 2019. For more information about joining the affordable group coaching classes held twice a month, please go to https://www.ustaxaid.com/coaching-program/. When you join you’ll get access to the previous 6 coaching sessions as well as the current month.
The reason I wanted to bring this into our year-end planning coaching session is because I found that too many taxpayers are aware of the broad range of activities and expenses that are eligible for this tax credit. And, most CPAs are busy during tax season and don’t ask the right questions to draw out the information. The client doesn’t know they might be eligible for a tax credit and the CPA simply doesn’t have time during the busy season to ask the questions.
That’s why I want to have this conversation now. If you think you may have activities and expenditures that are eligible for the R & D tax credit, talk to your CPA now, before it’s tax season. You may want to set up special categories in your bookkeeping so that you can track these items separately.
Additionally, the R & D tax credit that we are discussing in these blogs is based on federal tax law. Many states additionally have R & D tax credits at a state level. This is something you’ll need to talk about with your tax preparer. If there are tax credits, you always want to take them.
So, with all of that in mind let’s look at some of the basics about the R & D tax credit that you should know. In tomorrow’s blog, on November 24, 2019, we will look at specific examples of ways that you may put the R & D tax credit in place.
First, I want to address something that I see many tax clients erroneously believe. Since the tax credit goes up against taxes due, you may think it doesn’t matter because you don’t owe any current taxes for your business. However, federal tax credits such as the R and D tax credit often can be carried forward. In this case, a R & D tax credit can roll forward for 20 years. In other words, even if you don’t owe taxes now, you probably will at some point in the next 20 years. Wouldn’t it be nice to have those tax credits stashed away, like money in the bank that you can use to pay your taxes?
There is also an even larger and more compelling reason to take advantage of R & D tax credits, if it’s applicable to you now. Startup companies and small businesses may be eligible to apply up to $1.2 million of R & D tax credits to offset that FICA portion of payroll taxes. In other words, that’s the Social Security portion that the employer pays for payroll taxes. That’s a huge benefit!
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.
The R & D tax credit is calculated on the federal income tax return as usual and then applied against payroll taxes starting the quarter after the credit is claimed. For calendar year taxpayers, the R & D tax credit can be applied against payroll taxes as early as July of the following year
Another common misconception has to do with what research actually is. You don’t need a laboratory to conduct research. For example, research can be conducted in a winery or in a test kitchen. You don’t need to have scientists or engineers working for you in order to have R & D that will qualify for the credit.
Tomorrow we’re going to look at some specific examples of how you could have R & D tax credits just waiting for you right now.
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.
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