Don’t Forget the R&D Tax Credit this Tax Season
Not surprisingly, 60 percent of small-business owners say administrative burdens, like paperwork and confusing rules, are the worst part of filing — even more so than the financial cost of taxes, according to a recent survey by the National Small Business Association. Almost half of small-business owners file under extension, the survey found.
Nonetheless, there are many tax options available that may reduce the taxes you and your business owe — possibly by thousands of dollars. In this instance, is it best to pursue the advice of tax specialist to help with your company’s filing and ensuring you don’t miss out on any potential tax savings.
In particular, the R&D Tax Credit is a frequently overlooked tax benefit, with companies often mistakenly believing they don’t qualify. The government lets you deduct the costs of research and experimentation to develop or improve a product, formula, invention, process or technique. The costs of getting your own patent — including attorneys’ fees for the application — can be deducted, but not costs from obtaining another person’s patent. Bearing in mind the broad application of the credit and recent changes to the eligibility criteria, the R&D tax credit could be a huge game changer for companies.
While the R&D deduction is relatively simple for small businesses to take, doing additional calculations to claim the “innovation” or R&D tax credit can be more complex but rewarding for entrepreneurs. The credit reduces taxes dollar for dollar, and entrepreneurs can generate the biggest credit by ramping up research activities over time.
In addition, there were a host of tax breaks that Congress included in last December’s tax extenders legislation, the PATH Act. The new rules and regulations outlined in the PATH Act have made it easier for all types of businesses to profit from the R&D Tax Credit. Start-ups and other small businesses should take distinctive note of major changes specifically intended for their advantage. Now, start-ups (businesses with gross receipts of less than $5 million a year) will be able to take the credit, capped at $250,000 against their 2017 payroll taxes.
In addition to the direct start-up provision, starting in 2016, small businesses (businesses with less than $50 million in gross receipts) will now permanently be able to claim the R&D credit against their Alternative Minimum Tax (AMT). The removal of the AMT barrier may see a tenfold upsurge in the number of small businesses that can utilize the R&D Tax Credit. Combined, these two alterations will benefit start-ups and small businesses with approximately $2 billion in added tax savings.
Getting advice from your tax preparer is always a good thing, but the R&D Tax Credit may be outside of their normal practice. If you do claim the credit it will be beneficial to consult with an R&D Tax Credit specialist. They will help determine your eligibility, assist with confusing rules, properly prepare your claim up to IRS standards and provide guidance in the case of an audit.