The R&D tax credit is the largest tax benefit provided to businesses by the federal government, amounting to roughly $12 billion a year in savings — yet it goes largely unnoticed by more than 70% of all U.S. manufacturers.
Here are some misconceptions that deter manufacturers from claiming R&D tax credits:
IRS changes to the tax code have so greatly broadened the definitions of who can qualify that most manufacturing and technology organizations are able to claim R&D credits. Today, whether your company is big or small, if you are investing in a new or improved product or process, you most likely can benefit from this tax tax credit.
Many Fortune 500 companies take advantage of the R&D tax credit — but small and mid-size companies can also qualify. It’s not necessary to have a specialized “R&D” department, with people tinkering away in laboratories making new inventions. Anyone who is involved with development and innovation of a product or process can qualify — including technicians or production personnel who work on projects that improve the efficiencies of your process.
Many small and mid-size businesses are structured as S-Corp’s and Limited Liability Corporations (LLC’s). As such, eligible tax credits “flow-thru” to the shareholders, proportioned according to their percentage-share ownership of the business.
Up until a couple of years ago, R&D tax credits could only be utilized to reduce “regular tax,” and only then down to the amount of the taxpayer’s Alternative Minimum Tax (AMT). But as of tax year 2016, eligible small businesses can now use the credit to reduce AMT as well as regular tax. This greatly expands the number of entities that can claim the credit and receive immediate benefit.
Before tax year 2016, young businesses that had no income, and therefore no taxes to pay, were not incented to claim R&D tax credits, even though they could carry them forward for up to 20 years.
But today, Qualified Small Businesses (startups) can begin to offset the Employer portion of the FICA segment of their payroll taxes using R&D tax credits. These are applied against quarterly payroll tax payments. In any given year, the maximum payroll tax offset allowed is $250,000. This is a significant positive change to the code that can give startup companies an immediate cash benefit.
The federal R&D tax credit has been supported on a bipartisan basis in both houses of Congress and by every administration since it was first put in place in 1981. In 2015, Congress made the R&D tax credit a permanent part of the tax code, and expanded eligibility of who can claim it. The Tax Cuts & Jobs Act of 2017 preserved the R&D credit, which is now one of the most beneficial tax credits available to industry.
As manufacturers expand, grow, and innovate, claiming R&D tax credits is an important way to make sure they have the dollars they need to invest in a better tomorrow. But these tax credits are complicated, and require proper documentation. Let our experts help you navigate the way.
BRS’s team of professionals has over 25 years of experience and expertise, and can work with you to develop a clear and accurate history of your development efforts, capture all eligible costs, broaden the scope of qualifying activities when appropriate, and prepare the documentation you need to maximize the money you are eligible to claim.