That almost sounds like an Oxy Moron, Tax and Incentive, but if you are not taking advantage of all available tax incentives, you are leaving money on the table.
So, just what is a tax incentive? An incentive is a motivator to achieve a particular outcome, and a tax incentive enables one to reduce their state or federal tax burden when they perform a desired action.
The most powerful incentive is a tax credit, as this is a dollar for dollar reduction in taxes owed. One of the most powerful tax credits available today is the Research and Development Tax Credit, and if you think you have to be in a lab, wearing a white lab coat, with a beaker in your hand, think again.
Today’s R&D tax credit is not the credit of decades ago. In the past you basically had to have a patent, and shout “EUREKA” in order to qualify for the credit. And, in addition to inventing something new to the world, you had to maintain mountains of contemporaneous documentation. This is no longer the case, and unfortunately many in business still believe this to the gospel of the R&D tax credit.
The rules and regulations regarding the R&D tax credit change all of the time, and chances are that if you did not qualify for the credit in the past, you may now be able to do so.
The Research and Development Tax Credit is a permanent federal tax incentive meant to stimulate innovation, technical design, and manufacturing within the US. The credit can be captured for the current tax year, as well as up to three years in the past. If you performed a significant amount of activities in the past, you may want to capture the credits for prior years. Capturing prior years can be quite substantial because if you were going to claim a $100,000 tax credit for example in the current year, this can add up to a total of $400,000, or more.
To make the credit even stronger, startups can now take advantage of the credit. Most startups are in NOLs, and in the past could not use the credit because they are not paying tax. As so much Research and Development occurs in startups, the rules and regulations recently changed with the Tax Cuts and Jobs Act, and payroll tax can now be offset by the tax credit.
The Research & Development Tax Credit can be very technical, which is why you want an expert to examine capturing the credit for your business, and it should definitely be an avenue to be explored. As previously stated, if you are not capturing the credit, you may be leaving money on the table!
Jill Mazur, CPA
Director, Engineered Tax Services