When R&D (Research and Development) Tax Credits were introduced in the early 1980s, they strictly were only available to businesses that developed new inventions and formulas. However, the updated regulations that govern obtaining these lucrative tax credits now include either creating a new invention, formula, process, packaging, product, techniques, technology, or software. Or, improving on an existing invention, formula, process, packaging, product, of software. And, that also includes internal software that any business with W-2 employees has developed for their business. This means that millions of businesses are now eligible to get tens of thousands of dollars in Governmental tax credits that they likely have no idea currently exists!
For example, the field of Craft Brewing has exploded in recent years. No matter what the brew, be it Beer or Hard Cider, and no matter how that alcoholic beverage is distributed would be a candidate for R&D Tax Credits. That would include Brew Pubs which are restaurants that serve their own brews that they serve. And, the brew does not have to be alcoholic in any manner. So, could any Tea or Coffee maker. What does all this mean in terms of dollars and cents to the business?
Let us say that the Brew Pub, or any business has never previously filed for R&D Tax Credits. The IRS allows that business to actually go back and file R&D Tax Credits for the past three (3) years. For businesses such as Start-Ups that may not yet have made a profit in the current or prior tax years, they can carry the new R&D Tax Credits forward up to twenty (20) years. Businesses may also opt to use the R&D Tax Credits to apply to Payroll Taxes up to five (5) times up to $250,000 annually amounting to an overall maximum of $1,250,000. R&D Payroll Tax Credits unused can be applied going forward indefinitely. Applying R&D Tax Credits to Payroll Taxes expedites refunds to the business quicker.
There are many States that also offer State Research and Development (R&D Tax Credits including: Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Hampshire, New Jersey, New Mexico, New York, Ohio, Pennsylvania, Rhode Island
With the Government, it seems that there is always a catch. And, alas, there is a catch. The IRS requires that any claim of a Research and Development Tax Credit requires an independent Study to be submitted. And, in most cases, that means retaining the services of a service provider that can facilitate bringing together both tax experts with fluency in R&D Tax Credits as well as engineers, scientists, medical professionals, and degreed Ph.D. experts who can attest that the claims that are being made are indeed legitimate. In order to determine if a business qualifies for the R&D Tax Credit, it is necessary to ascertain information in an interview between the business that is seeking the R&D Tax Credits and both these industry experts and specially trained Tax professionals that fully understand the IRS requirements to approve their R&D Tax Credit Claims. Engaging the services of such a firm is done a shared savings basis where the vendor takes a portion of the R&D tax credits that they identify for Clients. Secondly, the calculations of determining the R&D Tax Credit itself is complex, once the qualification of a business for R&D Tax Credits has been established.
Once the R&D Tax Credit specialization firm has been engaged, and it has been determined by them that the business seeking the R&D Tax Credit has met the threshold of proving they would qualify, they obtain prior tax documentation from that business so that they can calculate the amount of R&D Tax Credits that can be claimed. Then; after preparing the required Study that the IRS now requires, coupled with obtaining the proper past tax documents that the Client previously filed with the IRS, the vendor provides both the Study and the new IRS Tax Forms necessary to the Client which they can then provide their Accountant, or whomever it is that files their taxes, to submit the claim. The good news is that businesses can apply for R&D Tax Credits annually.
© Permission to reprint provided to BizCatalyst 360°. All rights reserved (2022).