Because the Research and Development Tax Credit (R&D tax credit) may seem technical and complicated, it can be hard for businesses to visualize their exact dollar savings. It may also seem like it’s too difficult to qualify for the credit or that the extra work needed to do so would erase the benefit of the credit.
In reality, the R&D tax credit is a relatively straightforward money saver with the help of your accountant. But how can a company actually use this credit to its advantage?
Below, I’ve outlined five ways that a company may be able to take advantage the R&D tax credit.
1. Receive 5-10 Cents for Every Dollar in Qualified Expenses
The R&D tax credit is typically worth 5 to 10 cents on each dollar of qualified expenses. For example, if you had $100,000 in research and development costs, you’d generally be eligible for a tax credit worth $5,000 to $10,000. This could end up being slightly higher or lower depending on your exact situation.
If your expenses weren’t in-house, you may not be able to claim 100% of the expenses. You can typically only receive the credit on 65% of contracted research services and 75% of amounts paid to a qualified research institution. For example, if you had $100,000 in contract research expenses and assume your R&D credit is worth 7 cents on the dollar, your credit would be $100,000 x 65% x 7% = $4,550.
2. Use Any Unused Portions of the Credit in Future Years
Businesses that haven’t yet achieved profitability or that have low profits may not be able to fully benefit from the Research and Development Tax Credit in the year they incurred the R&D expenses. If your credit is greater than your income tax due, it is not refundable, but there are still two possible ways to use the remaining portion.
All businesses can carry forward the unused portion of the credit for up to 20 years. This allows you to use the credit to pay future taxes in the same way you would have used it to pay current year taxes. Eligible small businesses can also apply the Research and Development Tax Credit to payroll taxes.
3. Use the Credit Towards Payroll Taxes as an Eligible Small Business
An eligible small business can use the Research and Development Tax Credit to offset up to $250,000 in payroll taxes. To be eligible to use the R&D tax credit in this way, your gross receipts for the current year must be less than $5 million, and you can’t have any gross receipts from more than five years ago. In many cases, this means that your business must be less than five years old. When you file your income tax return, you can elect to apply the credit towards payroll taxes. Beginning with the next calendar quarter after you file, you can use the credit towards your employer portion of FICA taxes. You can continue to use the credit each quarter until it’s used up, provided that you don’t go over the $250,000 annual limit. If your credit exceeds $250,000 due to having the credit multiple years, you can carry forward the excess amount towards your regular income tax liability.
4. Use the Credit Towards AMT as an Eligible Small Business
As a general rule, the R&D tax credit can’t be used against alternative minimum tax, but there is an exception for eligible small businesses. For the purposes of being able to use the R&D tax credit against alternative minimum tax, an eligible small business must be privately held and have less than $50 million in average annual gross receipts over the previous three years. If you qualify, the credit would apply against your minimum tax liability as it would against regular income tax liability. Note that corporations are no longer subject to alternative minimum tax beginning in 2018.
5. Go Back and Claim Credits You Missed in Previous Years
If you had qualifying research and development activities in the past but failed to take the credit, you may still be able to take it. You can go back and amend your income tax return to include the Research and Development Tax Credit. This would allow you to receive a refund for the amount of the tax credit and/or to carry forward any amount of the credit over your income tax liability for that year. You generally have three years to amend an income tax return.
Where to Go from Here
The R&D tax credit may be easier to claim than you think. Warren Averett and our tax professionals can help you determine if you have eligible expenses and how to best use the credit to improve your profits and cash flows. Contact our team to schedule a consultation, or you can begin by utilizing our free Quali-Finder™ diagnostic tool, which may help you identify tax credits and incentives for your company.