Written by Sensiba San Filippo
As companies around the country begin to pivot from a sprint to preserve business operations to taking strategic steps to help ensure continued prosperity, several tax planning opportunities should be considered. One option available to companies is the Research and Experimentation tax credit (commonly called the R&D tax credit). The R&D credit is a general business credit that allows any company that can demonstrate eligibility to offset tax dollar-for-dollar. Additionally, “startups” can elect to offset payroll tax. The payroll tax offset election will enable companies to receive a cash benefit even when they have no income tax liability.
Now, more than ever, it’s crucial to get the point, so here is what you need to know:
How much can the R&D credit save my company? The federal credit rewards companies performing qualified R&D in the United States with a credit of 5-10% of qualified research expenditures. The credit amount varies slightly based on calculation methodology and company history. Additionally, state R&D credits are often available, providing an additional benefit. For instance, the California R&D credit provides a benefit similar to the federal credit.
How does the IRS define “startup”? Eligible small businesses or “startups” are defined as companies with less than $5 million in gross receipts in the current tax year and no gross receipts outside a five year period ending with the current tax year. Note: companies can only qualify as a startup for up to 5 taxable periods. Companies meeting this definition can offset up to $250,000 per year of payroll tax (the employer portion of Social Security tax). All-in, the start-up payroll tax offset can keep up to $1.25 million in the bank to be used for operations and to accelerate growth. The payroll tax offset must be elected on a timely filed (including extensions) tax return.
What business activities qualify? Any product, process, or software development that meets the IRS 4-part test is eligible to have the associated wage, supply, and contract research expenses included in the credit calculation. The 4-part test requires the project to be technological in nature, possess technological uncertainty, follow a defined process of experimentation, and be conducted for a permitted purpose (making the product/process faster, cheaper, or better).
Anything else I need to know? The cascading implications of the CARES Act will likely create situations in which amending tax returns will generate valuable refunds. This opportunity is perfect for taking advantage of the R&D tax credit (or reevaluate a prior claim). Any “open” tax year can be evaluated for the R&D tax credit opportunity missed.
The current economic environment presents many challenges to all types of companies. However, there are opportunities available to enhance your position going forward and enable you to emerge stronger than ever. The R&E tax credit experts at SSF can provide quick direction and a plan to allow you to capitalize on this opportunity. The R&D tax credit process, while complex, can be navigated efficiently and effectively with the right help.