Research and Development Tax Credit

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The Research and Development Tax Credit, enacted in 1981, has been one of the tools most widely used by companies to reduce income taxes and fund development. Every year the Internal Revenue Service and State Tax Agencies provide billions of dollars in tax credits to companies engaged in qualified R&D activities. The Research and Development Tax Credit is currently the largest tax incentive available to businesses, providing them with an estimated $10 million per year in tax savings.

While large corporate taxpayers have long taken advantage of R&D tax benefits, those tax advantages have often been underutilized by small and medium sized companies. The primary reason for this underutilization is the credit’s reputation for complexity. In the past, Research and Development Tax Credit services have typically been provided by large national CPA firms and specialized tax recovery groups that may have been financially out of reach for many smaller companies. In addition, while the calculation of the tax credit has been available to most companies, its actual use has been limited due to the inability of many businesses to off-set the Alternative Minimum Tax. This, together with the requirement that only those businesses that actually owed income taxes were able to monetize the credit, greatly curtailed its use. However, a last minute bipartisan effort earlier this year lifted many of these limitations, thereby opening the door for use of the credit by most businesses.

Effective January 1, 2016, the Research and Development Tax Credit was made permanent for the first time in its 34 year history and, at the same time, was expanded to benefit start-up companies and other small businesses subject to the Alternative Minimum Tax. Although the credit was originally enacted to reward ingenuity and investment, many companies focusing on cutting edge technologies are typically start-ups that are not initially profitable. Because these companies were not paying income taxes, they were not able to make use of the tax benefits provided by the Research and Development Tax Credit until this year. However, the new legislation has lifted these restrictions. It allows companies with gross receipts of less than $5 million per year to take the credit against payroll taxes for up to $250,000 annually. A second provision allows businesses with gross receipts of less than $50 million per year to claim the credit against their Alternative Minimum Tax. These two changes are expected to provide an estimated $2 million in annual tax savings to start-up companies and other small businesses.

The new Research and Development Tax Credit legislation represents one of the greatest tax saving opportunities offered to business taxpayers in many years. In light of its expanded benefits, all companies investing in growth and technology would be wise evaluate their ability to take advantage of the tax advantages it provides. While the obvious beneficiaries are technology and science based companies, many other types of businesses such as those involved with construction, apparel, engineering and aerospace may also qualify to receive R&D tax benefits. Although determining eligibility may require the assistance of a licensed tax professional, the process may very well yield tax benefits that would otherwise go unclaimed. A knowledgeable tax specialist will know how to calculate the total expense amount of qualifying research and development being incurred in the current year as well as for past years available for amendment. For clients with high income or facing a taxable event, the identification and utilization of current and past year Research and Development Tax Credits may result in the saving of significant tax dollars.

The experienced professionals CGT Solutions have helped many business owners save tax dollars through use of the Research and Development Tax Credit. If you are interested in investigating how the recent legislative changes impact your company’s ability to use this tax break to reduce taxable income, contact us today to receive a free, no obligation consultation.

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