As businesses scramble to make ends meet and survive in the dire state of the economy, a little creativity and knowledge of taxes and government aid can help save many businesses. The R&D tax credits or research and development tax credits is a business tax that can be availed by companies to help them lower their federal tax liabilities in the current year. The company only needs to demonstrate that they have research and development activities and expenses and that these are paid for by the company funds. The definition of research and development includes the improvement of products, systems, and processes, as well as the development of new products or variations and coming out with new formulations and specifications. The company has to provide evidence that they are regularly conducting activities that would lead to a new product or manufacturing process. The activities can include product research, software development, focus group discussions, product surveys, and testing. The description of research and development as provided by the IRS is quite broad and since companies regularly conduct these activities, then it would not be difficult to qualify for it. On the other hand, it is also important that the company have evidence to support the claims that they used company funds to pay for the R&D activities. The most important component to determining R&D tax credit is whether the company paid for those activities, and this can be gleaned from payrolls, receipts, disbursements, and purchase orders as well as the salaries and taxes of employees and consultants who work solely on research and development. Although this is evident in most companies, it takes someone knowledgeable about the specifics of the tax credit policy to be able to put it together and be able to pass the tests of the IRS and qualify for the R&D tax credit. The savings a company can get from the tax credits are quite substantial if they have a performing R&D department, but since this remains to be one of the least utilized tax credit policies it is probably due to the lack of information on how it should be done rather than the lack of research and development activities and expenses.
Why file for R&D tax credits?
Businesses are required by law to file their yearly tax returns based on their sales and revenues, as well as other taxable incomes and procurements. However, there are a couple of ways that tax liabilities can be lowered, they just need to know how. The R&D tax credit is a business tax credit that can be utilized by business owners of one company or over several businesses. The tax credit can be applied directly to the tax liabilities of the company and hence lower their amount due and will give the company more funds to use for the good of the business. In a tight economy, one beset with inflation and unstable markets, it is best to have an additional source of funds that will help in keeping the business operational and hopefully profitable. The R&D tax credit amount is dependent on the number of qualified research and development activities and expenses that the company has, and since the law does not identify any limit to the credits, it can be said that the more R&D activities the company has, the higher the possibility that its tax credits will also be substantial. Filing for R&D tax credits would mean that the company has already filed the IRS Form 6765 which is the Credit for Increasing Research Activities form and is where the company identifies the research activities and the expenses incurred for it. The tax credit computation will be based on this form and it can be computed using any of the two methods, the regular credit method or the alternative simplified credit method. The choice of which method to use should be dependent on which one is the most beneficial to the company and the easiest to do.
When to file R&D tax credits?
Since businesses are required to file their tax returns every year, then, the preparation needed to claim R&D tax credits should be done before the filing of the returns. The research and development activities should be conducted in the year in which the tax returns are to be filed. For example, if the company is filing for the year 2022, then the R&D-related activities should have been conducted in the same year. Although, the company can choose to amend a previous filing where the tax credits were not included up to the 3 previous years. On the other hand, a tax credit that was not used for the year it was applied for, can be carried over to the next 20 years as it is not refundable. The tax returns of the company should be filed promptly and the R&D tax credits applied to the tax liabilities directly. So, if the company is still not able to qualify for the tax credits as they are still working on their documents and evidence, then they can still be able to use the tax credits by filing for an amendment. For example, the company was able to identify and determine research and development activities in 2022 but was not able to meet the deadline for the filing of tax returns, once the company qualifies for the tax credit after the filing, they can signify the intent to amend the tax returns for 2022 to incorporate the tax credits. This can only be done within 3 years from the original date of filing. Thus, it makes sense to hire consultants that would focus solely on the R&D tax credits qualifying tests and computation so that the company can readily use the tax credits in the same year. But since accounting firms and consultants are not built in the same way, you need to be able to find the best in the industry to increase your chances of success. Also, the company will have to pay the consultants for their services, it does entail additional expenses but one that will have positive and good implications.