Despite being in existence for 40 years, 90% of eligible businesses fail to take advantage and miss out on a critical opportunity to reduce their tax bill and inject funds back into their business that can be used to fuel continued growth.
Why are most businesses not taking advantage? In speaking with business owners and executives, the problem seems to be that most make false assumptions about the credit and what it pertains to. To ensure that your company isn’t missing out on this opportunity in the future, we’ve detailed the assumptions that are most frequently shared with us.
Isn’t that just for the big boys? We’re just a small company. Heck, we aren’t even profitable yet.
Changes made to the R&D Tax credit laws in 2015 helped to eliminate barriers to eligibility for small and medium sized businesses. Startups can apply the credit towards payroll tax liability of $250,000 per year if they are pre-revenue or have less than $5 million in gross receipts for the tax year with gross receipts for no more than 5 years from the tax year. Even if your company doesn’t meet these criteria, you are likely still eligible and you can carry the credit forward up to 20 years.
This is an incredible opportunity to inject cash back into the business as you continue to grow.
We don’t have a laboratory with scientists; we’re just a _____ company.
We hear this one a lot. The R & D tax credit applies to companies across many industries- from breweries to agriculture to engineering to software to renewables (and more). The R&D activities in these fields are all vastly different. Regardless of what industry you are in, if you have carried out research to eliminate uncertainty about the improvement or development of a product or process; you likely qualify.
My company was paid for the work.
Being a subcontractor or government contractor does not eliminate you for qualification. When looking at eligibility, the critical element is who has taken on the risk for the work (example, if your work is rejected do you still get paid?). There are thousands of subcontractors and government contractors who qualify for the R&D tax credit. Don’t assume you don’t qualify simply because you were a contractor.
Don’t be silly; we don’t have a patent portfolio.
Intellectual properties such as patents are a wonderful avenue to improve business growth, stability, and competitiveness, but have nothing to do with R&D tax credit eligibility. Ask yourself: does your business attempt to develop or improve products, processes, technologies, materials, or devices in order to compete? Most companies perform this kind of research every day in one way or another.
In addition, the research you are doing doesn’t need to be groundbreaking; it just has to be new to your company.
The research projects we invested in failed so we aren’t eligible.
The very essence of the innovative process-regardless of industry- is trial and error. The good news is the government recognizes this as well. Success or failure has no bearing over eligibility. In fact, failure is often a good sign that you are eligible.
The effort doesn’t equal the potential benefit.
Yes, the process is complicated and requires extensive data collection and the compilation of a strong R&D study to back your claim. A strong familiarity with the credit legislation, U.S. tax code, and case law is important. It is considerable work (especially the first time). However, the benefits are impactful. Remember, this is a credit, not a deduction. It is applied directly against taxes owed. What would an immediate injection of tens or even hundreds of thousands of dollars mean to your business?
Regardless of what your company does or what your current annual revenue, it’s worth looking into the credit. The R&D credit is here to stay and should be an ongoing part of any businesses’ annual tax strategy.
To learn more, contact RecoupeTax at email@example.com.