Small Business & StartupsTax

Tax Tuesdays: Research and Development Tax Credit

By October 6, 2015 No Comments

Acuity-R&D-Tax-Credit

 

See more recent updates to the Research and Development Tax Credit right here
 
If you are looking for credits and deductions for your small business, than you should know that the research and development (R&D) tax credit reduces your R&D spend by roughly 7%.
How’s that for an attention-grabber?
Seems like a ploy, but it is very true. If you have an engineer or developer on staff, you likely qualify for the federal Research & Experimentation Tax Credit.
This credit is commonly referred to as the research and development tax credit. This is a popular credit where legislators attempt to encourage innovation in our economy. Unfortunately, legislators don’t make much easy (especially when it comes to the tax code) so there are some hoops to jump through to determine which R&D costs are “qualified” to count towards the credit.
Random tax credit fact: You don’t have much time.  Legislators often wait until the last minute to extend valuable tax credits like the R&D tax credit. This leaves business owners in a bit of a guessing game.  So as of today, this tax credit expires on December 31, 2015, but it has been renewed consistently over the past decade.
For Federal Taxes
If you owe federal taxes, there are a few ways to tackle the R&D credit.  And if you are not expecting to pay taxes this year – skip down to “So you don’t owe federal tax, what is the point?” below.
1)     Talk to the CPA that prepares your taxes
We recommend having a planning session in June/July each year with your tax CPA to establish some strategies. Note: There is also a good window of availability in you tax CPAs schedule in November, so get that on the calendar if you haven’t done your planning this year.
The R&D tax credit should come up in that discussion with most companies that have an engineer or developer on staff. Together with you tax CPA you can come up with a calculation on how much the benefit can be.
Random tax CPA fact: Your CPA is technically not allowed to charge you a contingent fee if they are the person signing your tax return. Now some tax CPAs really push the envelope on this, but most lock in your cost up front. That brings us to option 2.
2)    Talk to someone who specializes in the R&D tax credit
There are people who calculate the R&D credits as their full item job. The benefit of using a specialist is that they don’t get paid unless you get paid, so your interests are aligned. They aren’t limited by the same rules as your tax CPA because they don’t sign your tax return. Their usual fee on a contingency basis is 25-30% of the amount of the credit.
This is a really complex credit that provides major benefits – think in the billions for companies each year. A specialist can make sure you take advantages of all the nuances, remember they live and breathe this every day and they know the tax rules intimately.
If you don’t happen to know someone who just specializes in the R&D tax credit, check out Massie R&D Tax Credits, LLC (http://massietaxcredits.com/).  We trust their work and recommend them to customers.
3)     Do It Yourself
If you try this on your own, you are a far better/smarter person than I. Here is the Wikipedia article on the R&D Tax Credit that stays relatively up to date – best of luck. Also don’t forget the IRS site.
So you don’t owe federal tax, what is the point?
Tax credits are no brainers for companies paying taxes. But what if you are over investing in the business and have a net loss in the current year. Why spend valuable time and energy on building up a future tax benefit that you may not realize for several years? Before you jump to conclusions, check out the benefits in your state.
Some states will also provide an income tax credit for R&D. Some of these creditss are more aggressive and have an option to offset other cash taxes (think payroll taxes) in the current year for companies that aren’t in an income tax paying position. So the state tax benefit in the current year might be enough to trigger a no brainer decision for you.
If your state has these provisions, then you might want to read the 3 steps above.
If you find any other resources for R&D credits, please link in the comments below to help out your fellow entrepreneurs!

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