Leveraging R&D Tax Credits to Rebuild

Has your business developed a new product in response to COVID-19?

Have you modified your fabrication process or invested in automation systems?

Perhaps you’ve developed an ecommerce website to reduce personal interaction and support social distancing regulations.

The R&D tax credit is designed to return a portion of these types of investments back into your business and can amount to 14% of qualified expenses.  

The global pandemic resulting from the spread of the novel coronavirus has taken a devastating toll on businesses around the world. 

In the United States there has been an unprecedented disruption to normal business activities along with unemployment rates not seen in a century.

Unlikely Ally

As businesses try to navigate through these unpredictable times, they may find an unlikely ally in the U.S. Internal Revenue Service. 

Tax incentives created decades ago to promote job creation and technological innovation are becoming the latest weapon to recapture some ground recently lost in the pandemic.

The Research and Development Tax Credit was first introduced in 1981 and became a permanent part of the U.S. tax code in 2015.

Qualifying research activities include developing a new or improved product, fabrication process, or software program.

Designed to provide financial incentives to businesses that innovate, the term R&D was intentionally defined to include a wide array of qualifying activities.

Generally speaking, qualifying research activities include developing a new or improved product, fabrication process, or software program.

With a recession looming and many businesses still adjusting to this new normal, let’s examine why now is the right time to take advantage of this tax credit.

Claiming Credits

The R&D tax credit is a credit against taxes owed. If you are facing a tax liability for tax year 2019 there is still time to claim this credit. 

Whether you are filing on time in July or on extension in September or October, this credit may be claimed with your original tax return.

In fact, you may also amend returns up to three years from the original filing deadline to claim credits from prior years.  

Many younger businesses can even use the credits to offset the FICA portion of payroll taxes.

Does your business have net operating losses? You may still claim the R&D tax credit and simply carry the credit forward, for up to 20 years.

Many younger businesses can even use the credits to offset the FICA portion of payroll taxes, up to $250,000 per year. 

In addition to the federal tax credit, many states have a similar program designed to further incentivize innovation.

Connecticut Credits

C-corporations in Connecticut, for example, may be eligible for an additional state tax credit.

And while the federal R&D credit is non-refundable, Connecticut allows businesses to “sell back” their state credit at a slightly discounted rate. 

If you haven’t heard of the R&D tax credit before now, you’re not alone.

Recent data from the IRS suggests that over 90% of eligible small businesses neglect to take this credit.

Recent data from the IRS suggests that over 90% of eligible small businesses neglect to take this credit.

Whether your business is temporarily shuttered or you are ramping production to keep up with demand, R&D tax credits could play a meaningful role in reinvesting in the future.

To learn more, ask your CPA or contact a practitioner who specializes in the R&D tax credit.  

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About the author: Sean McKirdy is a business development manager with the business consulting firm Intrepid Advisors, specializing in helping manufacturers, engineering firms, and other technology companies benefit from federal and state research and development incentive programs.