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 drum up support to keep American businesses in the country innovating, and it was supposed to be a temporary thing.
Still, every few years, Congress strengthens the bill, and more businesses, like small businesses and pre-revenue companies, can take advantage of these programs, which are absolute game changers.
So, there's a four-part test for applying for these credits. 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 a tribute) to make sure there's not something you've missed.
These are the things that need to be proved to qualify for R&D tax credits:
- Qualified purpose: Are you creating or improving a business or product?
- Elimination of uncertainty: Are you solving for something and can prove you're making a positive change to a process?
- Experimentation: can you show the successes and failures of what you're trying to achieve?
- Technological in nature: You don't have to be a science-based company, but can you show that you're activities are based in the hard sciences or computer sciences?
The thing is, many businesses don't think they qualify, but spoiler alert: they do. It might seem like there are countless hoops and red tape, but so long as you work with a knowledgeable source (like us), the process 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, and what you can do to see a little more money in the company coffers.
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 QRE’s (qualified research expenditures).
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.
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
- Developing proprietary products and applying for patents
- Improving existing businesses or of existing processes
- Creating a new business or manufacturing process
- Developing new prototypes or models
- Environmental testing or certification
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.
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 businesses that 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!
5. But our product development failed
This credit isn't about success - it's about the pursuit of the goal. Most ideas that work have had a 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
6. Our taxes are already in
We know this one well. You can retroactively amend your taxes 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 taxes and make sense of what you did last year and what you can do moving forward.
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're 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.