5 Questions & Answers about R&D Tax Credits

One of the biggest tax credits for business owners is the research and development credit, otherwise known as the R&D credit.  Big companies eligible for this tax credit usually take full advantage of it, but only one out of twenty small to medium sized companies eligible for this credit takes full advantage of the credit.  In this blog post we will answer 5 common questions we get from businesses about the R&D Tax Credit.

1.  Question: Is the R&D Tax Credit going to go away because of tax reform and “politics” in Washington?

Answer:

The R&D tax credit has bipartisan support from both houses and by President Obama’s administration.  It has had bipartisan support from all administrations since 1981 when it was first put into place as a tax credit.  It would be highly unlikely that the R&D Tax Credit would cease to exist with any tax reform – more likely – the R&D Tax Credit could expand in the future.

2.  Question:  Does the R&D tax credit only help on the federal level?  Does it help with my state taxes?

Answer:

 Thirty-eight states have a state R&D tax credit – and several other states are looking to expand their R&D tax credit or create one.  In most cases, if your company is eligible for the federal R&D tax credit, it will also benefit from a state R&D tax credit.  For more information you can check your state government’s list of tax credits online.

3.  Question: Will the R&D Tax Credit help my bottom line?

Answer:

Yes, it should.  With proper documentation of your activities, the credit is a widely recognized and utilized tax credit that can yield federal and state tax savings.   Also, your business may be eligible to file an amended return and clam the R&D Tax Credit for the previous three years, if of course you haven’t claimed it in those years.  Helping your bottom line even more!

4. Question:  Isn’t the R&D Tax Credit only for big companies?  I have a small company, the tax credit won’t apply.

Answer:

 The R&D tax credit is available for ALL sizes of businesses who are eligible.  Unfortunately, the R&D Tax Credit has been mis-characterized – that it is only for large companies – this is why many small and medium sized businesses have not  utilized this credit.  Big companies have more resources usually compared to smaller companies and these big companies have tax lawyers who are on top of this R&D tax credit.  Companies need to apply for the credit, and some work, time and effort goes into that but big or small, the R&D tax credit is available for those businesses who are eligible and apply.

5.  Question:  Does the R&D Tax Credit apply to my business if we aren’t inventing something brand new?

Answer:

It definitely does apply if you are inventing something or getting a patent, but if you are researching, modifying, improving, solving issues with an existing product or a manufacturing process then the R&D tax credit would be applicable.   Also, in many cases computer software, architecture, engineering and production companies may be eligible for the R&D tax credit.  This credit is for companies who utilized applied science as well as basic research.

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