The Inflation Reduction Act was one of the largest spending bills in recent history to pass, aiming to improve U.S. economic competitiveness, innovation, and industrial productivity. And one of the provisions was to increase the R&D Tax Credit so eligible companies could get even more money from their R&D efforts. In other words, the more R&D you do, the higher the tax credit you can receive.
Here's how you can take advantage of the larger tax credit.
What is the Inflation Reduction Act?
The Inflation Reduction Act is a 10-year plan passed by Congress in 2022 to lower costs for families, combat the climate crisis, reduce the deficit, and ask the largest corporations to pay their fair share. In addition, the act changed several tax laws and provided funds to improve services and technologies to make tax filing easier.
This includes new and reinstated tax laws affecting individuals and businesses, including several credits and deductions. Among these are deductions for clean vehicles, energy credits, and an increase to the R&D tax credit.
How Does This Affect the R&D Tax Credit?
As a part of the Inflation Reduction Act, the R&D Tax Credit increases the maximum cap a startup can receive for their R&D efforts beginning in the 2023 tax year. So instead of maxing out at $250,000, a business can receive up to $500,000. While you can't take advantage of the larger credit for your 2022 taxes, you can increase your R&D this year, knowing that you'll receive more money for your efforts when you file your 2023 taxes next year.
Since the R&D Tax Credit applies to payroll taxes, this new legislation means that startups that meet the maximum will be able to reduce their payroll taxes by half a million dollars. Even unprofitable startups can take this incentive and reduce their burn rate. The reasoning behind expanding this tax credit was simple: the Biden administration wants to encourage startups to pursue more innovation, research, and experimental expenditures.
"Expanding this tax cut will help more small businesses and startups advance their current efforts and create the technology of the future," said New Hampshire Senator Maggie Hassan, a Democrat who helped double the tax credit in an article on Inc.com.
How to Take Advantage of the Larger R&D Tax Credit
To take advantage of the larger tax credit, qualifying companies must have $5 million or less in revenue and, at most, five years of generating gross receipts, including the current year. Startups can take advantage of the credit every year for five years, so if you receive the full tax benefit each year, you can save up to $2.5 million. And, of course, you need to prove R&D expenses. The more R&D you do, the higher credit you can receive.
Applying for this larger tax credit is the same process as before. You still have to use the four-part test to apply for these credits. As a reminder, here's what you need to prove to qualify for R&D Tax Credit:
- Qualified purpose: Are you creating or improving a business or product?
- Experimentation: Are you identifying and evaluating alternatives, performing trial and error experiments, and testing results?
- Elimination of uncertainty: Are you using an iterative process to try and eliminate the uncertainty of your project?
- Technological in nature: Can you show that your activities are based in either the hard sciences or computer sciences?
Check Your Eligibility
A common myth around R&D Tax Credits is that many businesses don't think they qualify. In reality, that's not the case, especially if you work with a CPA or R&D Tax Credit professional like TaxTaker.
We make applying for an R&D tax credit easy with our intuitive tech and the white glove service you deserve. Our vetted experts can work with your CPA to get you access to quick and easy funding with zero-risk pricing. Connect your payroll, tell us about your projects, and get your money—it's that simple!
Let your R&D efforts benefit you. Learn how we can help you take advantage of the larger tax credit today.