Research & Development Credit - How can innovation benefit both your business and your wallet?
Form 6765 can be used to claim the R&D credit for increasing research activities as well as payroll tax credits in some cases. The purpose of this credit is to incentivize companies and individual proprietors to continue to innovate their products and create more efficient methods to push the economy forward.
The federal R&D credit was initially introduced on a temporary basis but was permanently extended with the PATH Act of 2015. Given all the technological changes occurring over the past few decades, companies need to continually update and adapt to this fast-paced economy. However, modernizing your product can be both time consuming and expensive, often times with very little results. The R&D credit can help alleviate some of the cost burden, making your efforts benefit your company regardless of the results.
How to Qualify
In order to qualify for the credit, the research needs to be undertaken for discovering information that is technological in nature, and its application must be intended for use in developing a new or improved business component. Additionally, substantially all of the activities of the research must be elements of a process of experimentation relating to a new or improved function, performance, reliability, or quality. Expenses that qualify include wages paid to employees performing qualified services, payments to contracted third parties for qualified services, and supplies used and consumed in the R&D process.
With the Tax Cuts and Jobs Act passed in 2017, the credit remained unchanged. However, expenditures paid or incurred in tax years beginning after December 31, 2021 need to be capitalized and amortized over a five-year period if research is conducted in the United States (15 years for outside the US), beginning with the midpoint of the tax year in which the specified expenditures are incurred.
An additional benefit is the Payroll Tax Credit Election. This is available only to a Qualified Small Business, which is defined as a corporation (including S-Corps) or partnership that 1) has gross receipts of less than $5 million in the current tax year and 2) has no gross receipts in any tax year for the past 5 years (including the current one). With this election, a company can receive a credit for the employer portion of social security taxes on wages up to $250,000 (a max credit of $16,500). Although this will only apply to specific businesses, the tax savings can be a huge lift for a start-up company.
If you feel like it’s time for your company to update its products or components, the R&D tax credit can be a great way to achieve tax savings while improving your business product. There are different options in calculating the credit that should be analyzed in order to maximize the benefit for your business.
Contact Us With Your Questions
If you have questions about the research and development credit, contact our accounting professionals at The Innovative CPA Group at 203-489-0612. Or contact us online.