Seven Misconceptions About R&D Tax Credits
The Research and Development Tax Credit can be one of the most lucrative tax credits for businesses who conduct research based on scientific principles. Also, several key details of the tax credit changed with the Protecting Americans from Tax Hikes Act of 2015, or “PATH Act.” Find out whether one of these misconceptions has been preventing you from looking into the R&D Tax Credits.
1. The credit only applies to real scientific research
It is true that the tax credit only applies to research and development based on scientific principles, but that doesn’t mean that your business needs a laboratory full of scientists in long white coats. The R&D tax credit applies to any work done within your company to develop or improve a product. If your company is improving software, investigating more environmentally clean materials, or devoting resources to improving machinery and tools, you may qualify.
2. The credit only applies to big companies
This misconception was once true, but thanks to the PATH Act of 2015, small startups, defined as businesses with under $5 million in gross receipts and with fewer than five years of receipts, can claim up to $250,000 per year in R&D Tax Credits, which can offset Payroll Taxes for Social Security and Medicare.
3. The credit does not count against the minimum tax amount
This is another truth that became a myth thanks to the PATH Act. Previously, there was a minimum tax that businesses had to pay, meaning that small and medium-sized businesses could not necessarily benefit from the R&D Tax Credit. Now, however, businesses with less than $50 million in gross receipts can claim their R&D Tax Credit against their minimum tax liability.
4. It is too late to apply for the credit for previous years
In fact, the PATH Act makes it so that businesses can make a retrospective claim for R&D Tax Credits starting in 2015. If your company is only now realizing that it could have applied in the last couple years, it is not too late.
5. The tax credit only benefits companies who make a profit
Actually, the R&D Tax Credit can be carried forward to future years, which is especially useful for new businesses who have significant R&D costs for the first few years before they can bring their product to market.
6. The credit is only federal
More and more states have adopted some form of R&D Tax Credit, such that the number is up to 43 states. However, the amount for the credit varies wildly from state to state: it is only 1.25% in North Carolina, compared to 40% in Louisiana. Look into your state’s tax laws to determine whether there is a profitable R&D Tax Credit for you to take advantage of.
7. The credit does not apply to research with outside funding
It is true that grants and other outside funding normally make research and development unable to qualify for the R&D Tax Credit. However, if your business assumes financial risk, such as because the funding is contingent on the success of the research, then your business may still qualify for the Tax Credit.
Overall, the R&D Tax Credit became a different animal in 2015, and businesses should take a second look to see whether they can benefit from this lucrative law.