Increasing Cash Reserves with the Research and Development Credit
The federal Research and Development ("R&D") credit is an incentive program every U.S. company should consider for a potential refund of federal taxes paid in open tax years and reduction of federal tax liability in future years.
The Economic Recovery Tax Act of 1981 created the R&D credit to incentivize U.S. companies to conduct R&D activities in the United States. The incentive is an incremental credit based on increased spending on business activity qualifying as R&D over the previous year. The most common eligible expense is the wages paid to employees while conducting qualifying R&D activities.
What Activities Qualify?
Many senior executives and business owners believe the R&D credit is available only to large life sciences and advanced technology companies conducting experiments in laboratories. The reality is that almost anyone making or improving a product, process, or service may be engaging in eligible R&D activities. Think of companies' actions to stay ahead of competitors, such as increasing longevity, reliability, speed, strength, technology, and reducing excess raw material.
Industries that Qualify for R&D Credits
A few of the many industries that qualify include:
· Financial Services
· Food Processing
· Medical Devices
· Professional Services
Legislative Actions Impacting R&D
Several legislative actions have made the R&D credit available to a greater universe of employers:
· After years of Congress offering short-term extensions to the program, the Path Act of 2015 extended the R&D credit permanently,
· The Path Act also allows new businesses with no federal tax liability and gross receipts of less than $5 million to take the credit against FICA payroll taxes, and
· The Tax Cuts and Jobs Act ("TCJA") of 2017 repealed the Alternative Minimum Tax ("AMT"), resulting in a larger universe of smaller companies becoming eligible to pursue the credit and reinvest funding into their business.
State R&D Credits
An added benefit is that close to 40 states offer similar state-level R&D credits. Many states allow a taxpayer the ability to "sell" the credit if the company has minimal or no state tax liability.