March 31, 2020

Does Your R & D Work Qualify for Tax Credits?

Small Business
By: Ronald B. Allen

You are doing research and development in your business to create new products, improve old ones, perfect production processes, and more. You do this to make your business successful in the long term. But, you can derive benefits from your R&D right now with credits on your federal income tax. Does your research and development work qualify for tax credits? It needs to take place in the USA, be based on hard science, and pass a simple set of rules from the IRS. But, if you are a startup company that has not yet made a profit, how can you use the tax credits? In that regard, you have come to the right place. At Exigo Business Solutions we handle this issue for our clients who carry out R&D both in the Kansas City area and across the nation. Contact us if you need help deciding if you qualify, to claim the tax credits that you deserve, and to most efficiently apply the credits you receive.

Does Your Research and Development Work Qualify for Tax Credits?

Research and Development tax credits are applicable for work done in the hard sciences in order to resolve issues of uncertainty in the world of technology and the work must be done in the United States. It can be done by your company, by a third party research institution, or by an educational institution such as a university.

When you do the work, employee salaries apply as well as supplies that are consumed or used up in the process of doing the R&D. When you farm out the work to a third party, 65% of your cost is available for tax credits. When a qualifying educational institution does the work, 75% of your cost can be applied to tax credits.

Take a look at our article, R&D and the Research and Development Tax Credit, for more details regarding work that qualifies.

How Can You Use R&D Tax Credits?

As we mentioned at the beginning, you are a startup company with a great idea. You have funding but you have yet to make a profit. How can you take advantage of the R&D tax credit? Here is where dealing with an accountant who routinely deals with the R&D tax credit is important.

The research and development tax credit has been around since 1981, renewed every couple of years until it was made permanent in 2015. The “new and improved” version has some benefits for small businesses and startups that older versions did not have.

Your startup is not making any money yet but you are burning through your seed money. The new version of the R&D tax credit lets you apply your tax credits to payroll taxes paid for employees who are directly involved in your R&D work. For this to apply the company needs to gross receipts of less than five million dollars. The use of the credits has a cap of a quarter of a million dollars and lasts for five years.

The Alternative Minimum Tax used to prevent companies doing R&D from making use of their tax credits. This is no longer the case with the changes in the law for eligible small businesses.

The various routes to applying R&D tax credits vary according to the size of your company, whether it is a corporation, partnership, or individually owned. To do this right and obtain the benefit that you deserve from the law, talk to us at Exigo Business Solutions today.

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