Making R&D Legislation Work for Your Ohio Business
Although the federal R&D (research and development) credit expires at the end of a given calendar year, Congress has extended legislation as a matter of course more than a dozen times since 1981. And, although various administrations have added to or subtracted from definitions of who qualifies and who doesn’t, the literal “bottom line” is that this credit seems to have an indefinite shelf life. If you do business in Ohio — and if you’ve never taken advantage of this benefit— you may want to think in terms of delving into the wonderful world of R&D.
Building a Better Mousetrap
Think your business doesn’t do anything that you could claim a research credit for? Think again. As an old proverb says, “Build a better mousetrap and the world will beat a path to your door.” Now, you may not be in the mousetrap business — but does any aspect of your company’s day-to-day activity improve upon an already-established practice or procedure? If so, you may have some tax relief coming.
You don’t have to invent from scratch to be inventive, and you don’t have to be doing groundbreaking research “where no man has gone before” in order to qualify as performing research. If your sales people work at new sales techniques that increase your growth…if your customer-service folks learn about the competition in order to highlight your product’s superiority…or if you really are building a “better” anything, you can apply for R&D credits to offset your corporate taxes.
In terms of Ohio businesses, this benefit is called the Ohio Research and Development Tax Credit; it’s a nonrefundable credit against the Commercial Activity Tax (CAT). If you qualify for federal R&D tax credits under Section 41 of the Internal Revenue Code, you qualify for this credit as well, in that wages, supplies and other company expenses qualify as well as contract expenses.
Calculating it works like this: over the past three years, average your qualified research expenses; this becomes the basis upon which you can figure what you can claim this year, which is seven percent of the amount over that. The good news is that any unused credits can be carried forward for as much as seven years. The even better news is that you don’t need to worry about any special applications or pre-approvals to claim this credit; it can be part of your normal business tax return.
Caution: Potential Tax Traps Ahead
The particulars of any extension are mainly the items in question; the extension itself, being as popular an item as it is with business, is still likely to pass — but it’s likely to have retroactive effective dates that can have “ripple effects” carrying through into the next taxable years. Also, keep in mind that at the state level, credit expiration dates are different than they are on the federal level…so make sure there are no calendar “gotchas” that can sabotage your claim.
Maintain your process and documentation levels — even if the federal rules may still be “up in the air.” It’s the safest way to ensure you gain the maximum benefit with minimum hassle. Finally, be aware that state R&D credits are tied to state budgets — so you may not know your true tax status until your state has determined its budgetary credit limitations. In case of a limited “pool” of credit available, it’s first-come, first-served, so file your claims in a timely manner.
Ask an Authority
Dealing with business and corporate tax law is a complex process, and a business owner can’t be expected to be on top of it without sacrificing something else…like running his or her business. This is where the services of an expert business-tax consultant can be invaluable; don’t hesitate to seek one out.