7 February 2014. You operate a small business. You'll take any tax credit you can get your hands on. Why wouldn't you? You're taking the usual business tax deductions right now, you're spending more than ever on advertising and company benefits, but do you know about the R&D tax credit?
What Is The R&D Tax Credit?
The R&D tax credit is a research and development tax credit. Yes, that's right. It's not an income tax deduction. It's a bottom-line credit against income tax due and it can potentially result in a cash refund. This credit isn't new either. It began in 1981 as part of an economic stimulus package and was intended to encourage investment in the U.S.
Every since then, the biggest benefactors have been large corporations. Many small businesses, however, could take advantage of it - especially those in the engineering or technology industry. Even startups with no income can claim the credit for qualified research and experimentation.
How Can Your Business Take Advantage Of It?
To take advantage of the credit, your company must make products, or develop services, that are technological in nature. This is where this tax credit is aimed. It must also be based on hard science and there must be a defined process of experimentation where there's some kind of uncertainty as to whether or not your project will pan out.
By scientific, the government means that there must be at least one other alternative that you're testing your product or service against to determine the best course of action. That means, unfortunately, things like marketing, surveys, and other non-scientific or non-hard-science experiments and research don't qualify.
Don't get immediately discouraged if you don't think you qualify or you're not currently doing any research. Work with your CFO to see if there's a way to open an R&D department. Speak with your tax advisor about the best ways to go about doing this.
Carrying The Tax Credit Forward
Because this isn't an income tax deduction, but rather a tax credit, you can take advantage of the ability to carry the credit forward. This particular credit can be carried forward for 20 years. Certain state credits don't have any expiration and can be carried forward indefinitely. Some states even have cash refund options, so even if you normally wouldn't pay tax, you'll get a refund anyway.
Other Benefits
Many tax franchise operations aren't out there advertising this credit. In fact, for the most part, companies that could be taking advantage of it aren't simply because they don't know about it. If you are eligible to claim the credit this year, you could see an immediate earnings-per-share increase as well as an improved effective tax rate.
In general, companies that can claim the R&D credit for all open tax years can do so for 3 to 4 years. In other words, if you missed the credit, you can go back and retroactively claim it for the last 3 or 4 years, depending on the state you live in and your specific line of business.
