The benefits of the R&D tax credit for small businesses are many. The R&D tax credit can be critical to the success of small, innovative businesses. However, it has not always been accessible. Until 2007 the reporting procedures were extremely complex, and higher risk. Large companies were better able to absorb these risks than smaller businesses. However in 2007 a bill was passed to alleviate the pressures and make the R&D tax credit for small businesses more accessible through the Alternative Simplified Credit reporting method. While the 2007 version was a great step forward, it only helped businesses that were filing taxes for the current year. You weren’t allowed to amend your previous tax returns to account for R&D expenses.
However this all changed in 2014. Businesses using the ASC reporting method can now amend previous years’ taxes. This change means that now is a great time for small businesses who qualify for the R&D tax credit to make their claims and make up for lost time. Many small businesses might not see enough of a benefit from one year of applying for the credit. The added cost of the complex tracking and application for the credit eats up some of the benefit. Now that small businesses can get the credit retroactively through amended returns, the cost-benefit math has changed significantly in the favor of small businesses.
The most important hurdle for small businesses to overcome is the belief that they do not qualify for the credit. Chances are good that if your business does research, then at least some of that research is eligible. Both basic level research and applied research qualify for the R&D tax credit.
Some small businesses may believe that their industry won’t qualify for the R&D tax credit. In many cases this isn’t true. The list of industries that qualify is quite large, and is dealt enumerated in our article “Who Qualifies for the R&D Tax Credit”?
2015 saw some major changes to the way businesses can apply the credit. Small businesses can now apply the R&D tax credit against their Alternative Minimum Tax. This means that small businesses previously locked out of the credit may now be eligible to benefit. So even if you haven’t been eligible in the past, it is worth looking at again. Small businesses can also take the credit against their payroll taxes for five years, which is a massive benefit to newer small businesses.
If you don’t have a full time professional on staff handling the R&D tax credit, it is important to find a professional service to work with your company. Professional services that specialize in the R&D tax credit for small businesses will make sure you take full advantage of the credit, and don’t make any costly mistakes. The good news is that hiring one of these services is making more sense for more companies with the many changes to the R&D tax credit. It is now easier, and more beneficial to take advantage of this credit than it ever has been in history.
Examples of qualified research and development activities, according to the Journal of Accountancy, are those that involve developing or improving products, processes, formulas, models, and prototypes. Certification testing, developing new technology, environmental testing, and streamlining internal processes can also qualify. Developing and improving software technologies, and building and improving manufacturing facilities are also possible areas of qualification. These are just the primary categories. Specialists with an extensive knowledge of what will qualify are essential for small businesses, especially businesses claiming the credit for the first time.
Here are some other important ideas to keep in mind when deciding whether or not to pursue the R&D tax credit. Even research that fails is eligible for the credit. Your company can benefit even if it isn’t profitable this year (the credit can be applied to the previous years profits, or banked against future profits). The tax credit is available to you, even if your research is federally funded (even though the financial risk isn’t to your company, there is a financial risk to the taxpayers). Remember that 2/3s of states provide R&D tax credit programs, so the credit can help with both state and federal taxes. Remember that even if you are already getting a big tax deduction, the R&D tax credit can still yield extra money. It is important to remember that while the credit is awarded in comparison to previous years’ research spending, it is compared to 50% of that spending, meaning even if you spent less money this year than the last three years, you can still be eligible for the credit.
Overall it is crucial that small businesses make absolutely sure they don’t qualify for the R&D tax credit before deciding not to apply for it. In today’s market, small, innovative companies are important to the economy, and yet are the most precariously positioned. If your company does any kind of research, the R&D tax credit is worth exploring. Make absolutely sure that if you eliminate it as a possibility, you are absolutely sure your company can’t benefit.
There are plenty of services out there that can help you determine whether or not your company will benefit from the credit, but it’s important to pick the right service for your company, and the industry you inhabit. And remember, if your company does research and development of almost any kind, you probably qualify. Contact a firm that specializes in the R&D tax credit for small businesses to see if you might be eligible today.
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