There are many misconceptions about the R&D tax credit. This article aims to dispel five R&D tax credit myths entrepreneurs need to forget. Not only do we dispel the myths, but we give you information that counters them, and shows you how your business may in fact benefit from the R&D tax credit. So if these myths have been holding you back, there is no better time than now to consult an R&D tax credit specialist.
#1. My business is too small to benefit
Major companies do take full advantage of this tax credit, and often do so internally with their own tax professionals. But that doesn’t mean it’s only for them. Eligible startup businesses average a $151,000 R&D tax credit. Over 5,600 companies with under $5 million in total revenue take advantage of the R&D tax credit every year. While small businesses may only account for 7% of the total money disbursed through the credit they make up a significant minority (roughly 29%) of the companies that utilize the credit. While small businesses may not get the kind of raw numbers the larger companies do, the thousands of dollars potentially saved will often mean more to a small business. There is no harm in having a R&D tax credit expert evaluate the eligibility of your projects.
#2. The research must be cutting edge
While qualified projects must be innovative, that doesn’t mean they have to be inventing new software or new technology. There are many different ways research can innovate. Finding new applications for existing software, improving manufacturing methodologies, and finding new applications for materials in architecture and engineering all are examples of innovation that doesn’t require the development of a new or cutting edge product.
#3. We Can’t Claim Past Years’ Credits
It used to be that you could only claim the current year’s research. However, in a 2014 effort to excite innovation, it became possible to claim the R&D tax credit on amended returns for previous years. This means that now small businesses can claim as many years as they have records for, which significantly increases the likelihood that your business will benefit from the R&D tax credit.
#4. The R&D tax credit won’t help with state taxes
If the federal R&D tax credit is a well kept secret, even fewer know about the state by state credits. There are currently 39 states that offer some form of the R&D tax credit. Some of the states that don’t offer it still have options that interact with the federal tax credit. For instance Alaska allows businesses to claim a percentage of their federal R&D tax credit. State R&D tax credits are often based off the federal so qualifying for federal often means qualifying for state, though they aren’t always exactly the same. Consulting an R&D tax professional that specializes in your state can help you better understand your eligibility.
#6. The R&D tax credit can expire at any time and can’t be counted on.
Like many myths, this one contains a grain of truth. Since the mid-1980s the credit had been renewed 15 times and expired 8 times. Even during these times the R&D tax credit was in little danger of disappearing altogether because it has always enjoyed massive bipartisan support in Washington. In late 2015, however, the R&D tax credit was made a permanent part of the tax code, ensuring that companies can factor it into their plans for the future without fear of having the rug pulled out from under them.
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