R&D Tax Credits – A Viable But Misunderstood Opportunity for Economic Relief

Businesses far and wide continue struggling to maintain operations, meet financial obligations and ensure adequate cash flow during the coronavirus (COVID-19) pandemic. Thankfully, quick refund opportunities may be available relative to prior year research and development (R&D) costs.

By carefully reviewing company costs, taxpayers can determine if specific expenses are eligible for federal and state R&D tax credits. Specifically, some credits may entitle the business owner to amend prior year returns or to offset current period payroll tax liabilities.

In terms of who could benefit, taxpayers that paid or are paying income taxes in connection with their 2016, 2017, 2018 and 2019 income tax returns and/or 2020 payroll tax filings are candidates. They should consider reviewing their operations related to credit eligibility as opportunities exist to increase cash flow and reduce the tax burden.

Understanding the Opportunity

Eligible companies are permitted to amend their prior three years’ tax returns to leverage the R&D credit related to certain expenses incurred during each prior period.

Determining the Credit Amount

The federal R&D tax credit essentially allows a credit of up to 10% of eligible expenses. In addition to this, most states also provide an R&D tax credit to reduce state income taxes.

Identifying Who Can Claim the R&D Tax Credit

Section 41 of the Internal Revenue Code states that a qualifying activity can be categorized as anything that is new or improved (process or product) for the company. The credit can be claimed by any entity. While many industry sectors include applicable activities for credits, companies within the following representative industries often can secure R&D tax credits:

  • Aerospace
  • Apparel
  • Architectural and engineering
  • Construction
  • Fabrication
  • Food & Beverage
  • Manufacturing
  • Packaging
  • Pharmaceutical
  • Software Development
  • Technology
  • Wineries & Breweries

How the Credit Can Be Utilized

Credits can be utilized to offset income tax or, if eligible, employer-paid payroll taxes. Additionally, any unused credit can be carried back one year or forward up to 20 years. There is no limit on how much credit can be generated.

Understanding the Payroll Tax Credit

The payroll tax credit is a credit generally available to startup companies which have payroll but may not have an income tax liability. Eligibility to elect to reduce employer-paid payroll taxes (as opposed to income taxes) is also an opportunity provided the company has been in existence five years or less and has less than $5 million of gross receipts each year.

Do you have questions about R&D tax credits, or other tax matters? Contact SVA, we are here to help.

© CPAContentPlus 2020

Biz Tip Topic Expert: Rachel McAlexander - EA

Rachel McAlexander - EA

Rachel is a Senior Manager with SVA Certified Public Accountants and works closely with businesses advising them on tax and accounting issues that may arise throughout the year.

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