The Six Biggest Myths of the R&D Tax Credit

The Six Biggest Myths of the R&D Tax Credit

Explore eligibility and benefits of R&D tax credits for your company's growth.

By Austen Legler ・ 6 min read
Tax and Credits

We talk a lot about the Research and Development tax credits. Because for one, it's like our thing, but also because we want to help startups and SMBs navigate this rough and tumble economy.

Every win counts right?

A quick timeline: the R&D credit was created in 1981 (cue horse and buggy sounds). It was meant to support American businesses in the country so they continue to innovate, and it was supposed to be a temporary thing.

Every few years, Congress strengthens the bill, and more businesses, like small businesses and pre-revenue companies, can take advantage of these programs.

There's also a four-part test for applying for the R&D tax credit. If you match the criteria, you're in. This is a good breakdown, but ultimately, it's best to talk to someone who knows this stuff (we offer ourselves as tribute) to make sure you’re not missing anything.

These are the things that need to be proved to qualify for the R&D tax credit:

  • Qualified purpose: Are you creating or improving a business or product?
  • Elimination of uncertainty: Were there unknowns or uncertainties when you started?
  • Experimentation: Did you test different things, make prototypes, or try different approaches to figure out the best way to reach your goal?
  • Technological in nature: Can you show that your activities are based in the hard sciences or computer sciences?

Many business owners don't think they qualify. And it might seem like there are countless hoops and red tape, but so long as you work with a knowledgeable source, the process really isn't so bad.

To help shed some light on how your company can get hooked up from Uncle Sam, we wanted to chop down some of the myths about how to apply, who's eligible, what are these research activities and what you can do to see a little more money in the company coffers.

Myth 1. Our company isn't big enough to qualify

Total myth. Any company that develops new or improved products, processes, or software almost certainly qualifies. It doesn't matter if it's a company of one or one thousand, as long as your activities meet the four part test outlined above, you’re golden.

Let’s be clear though, although what you’re doing might qualify, whether or not taking the R&D credit makes sense for you is a different story. That varies from business to business. And if you recall, it all depends on your QREs (qualified research expenditures).

Myth 2. We're not making any money yet

One of the best things about this credit is it's not married to revenue. If you meet the R&D requirements, you can take the credit as a payroll offset of up to $250K annually.

You've gotta make less than $5M in gross revenue in the previous credit year and have no gross receipts five years before the credit year. It might sound complicated to figure this out, but we can help. We’ve done this a time or two. So, if you’ve any questions and that includes anything related to your payroll tax liability, just let us know.

Myth 3. Seriously, my business doesn't qualify. I know it.

Trust us on this. The net is long and wide. If you do any of these things, you're almost a shoo-in to nab the credit:

  • Improving Quality Control for Just About Anything: Making things better in terms of their quality, whether it's a product, a service, or a process.
  • Developing Proprietary Products and Applying for Patents: Creating unique products that are exclusive to your company and getting legal protection for these inventions.
  • Improving Existing Business Components or of Existing Processes: Enhancing or updating parts of your business or the way you do things to make them more efficient or effective.
  • Creating a New Business or Manufacturing Process: Coming up with entirely new ways of running a business or making products, which are different from existing methods.
  • Developing New Prototypes or Models: Building the first versions of a new product or design to test and refine before mass production.
  • Environmental Testing or Certification: Checking products or processes to ensure they meet environmental standards and obtaining official recognition for meeting these standards.

You don't have to be a scientific company; any company can get on board. Again, it's about meeting requirements, not what you do.

Myth 4. We didn't invent anything

This credit isn't about creating anything from the ground up. It's fantastic if you do, but just the same, if you've figured out how to make better ketchup bottles, that counts too! This credit works for small business owners who design, develop, and improve.

It's all about the innovation of a process or product. The litmus is about meeting the four part test, not what industry you're involved in. And again, you don’t have to be creating something new to the world, just new to the company!

Myth 5. But our product development failed

This credit isn't about success - it's about the pursuit of the goal. Most ideas that work had a long history of failures. In fact, the IRS loves to see failure. It’s a testament that there is true R&D going on!

The name itself, "research and development," means you must put in the work to improve upon the process, and that can't be achieved by not exploring all corners, even unsuccessful ones. And many times, those innovations cost a lot of money.

Myth 6. Our taxes are already in

We know this one well. You can retroactively amend your tax returns for up to three years to take advantage of the credit. Again, this is one of those moments where working with professionals (like us) can help you look at your income taxes and make sense of what you did last year and what you can do moving forward. We’re to help you calculate the R&D tax credit to the T.

We've said it repeatedly: many businesses can claim the R&D credit. Don't get left behind on this one. The money is out there and available. If you're thinking about looking into it or want to chat, we, your tax experts are here and would love to help you save a ton because right now, every win matters and could propel the business through some rocky times.

We love partnering with CPAs and Fractional CFOs - if you work with a trusted professional who isn't familiar with R&D Tax Credits - we'd love to meet them!

Register for the webinar here

About the author

Austen Legler
Head of Partnerships

Austen Legler, an experienced marketer and sales professional, has worked with fortune 500 companies, startups, and more. As TaxTaker's Head of Partnerships, he leads the partnership strategy and is focused on building out TaxTaker's partner ecosystem.

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