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R&D Tax Credit: Incentivizing Innovation

Overview

The R&D Tax Credit is a government incentive available to companies who create or improve a product or process used by their business. Companies may claim eligible expenses for activities that align with the IRS criteria for Research and Development.

On the Federal level, there are two versions of the R&D Tax Credit that eligible companies claim. 

  • The traditional R&D Credit that has existed since the early 1980’s allows companies of any size across a wide variety of industries to reduce income tax liability on a dollar for dollar basis.  Many states offer some form of this Federal R&D Credit that can be claimed simultaneously.
  • With recent legislation changes, startups can use the R&D Credit to reduce payroll tax liability on a dollar for dollar basis.

With the Federal R&D Credit’s permanence, this incentive can be built into financial plans year after year yet the claims process is relatively complex, which can often result in businesses not claiming to their full potential. The work that qualifies for R&D tax relief must be part of a specific project which aims to make an advance in its field. The project may research or develop a new process, product or service or improve on an existing one.

 

Receiving the Credit

The R&D Tax Credit allows companies to reduce their income tax liability in the current tax year, and receive a cash refund for taxes paid in the last three (3) years. If there is no income tax liability the credit can be carried forward for up to 20 years. Many states have implemented their own version of the R&D Credit, and qualifying companies can claim both!

The Payroll Tax Credit is a federal incentive that allows qualifying small businesses to reduce the company's share of their FICA payroll tax liability. Improving cash flow at a critical time for small businesses. It was created in December 2015 through the Path Act to benefit younger companies with no or a very small income tax liability. The Payroll Tax Credit can be claimed for a maximum of 5 years by a Qualified Small Business.  To be considered a Qualified Small Business, your company must be within a 5 year window since gross receipts were first incurred and the gross receipts must be below $5M per year. Each year you can claim a maximum of $250K, or a total of $1.25M across the 5 years.

 

Examples of Qualifying Research Expenses

  • W2 Payroll
  • Subcontracting costs
  • Materials and Supply costs
  • Leasing of computer space

 

R&D Activity Criteria:

Business activities (and corresponding expenses) may qualify if they meet the 4-part test:

  • Technical uncertainty
  • Process of experimentation
  • Technological or scientific in nature
  • New or improved process or product

 

Eligible Industries

  • Manufacturing
  • Engineering
  • Sciences
  • Software & Technology
  • Food & Beverage
  • Construction
  • Agriculture
  • Energy
  • GreenTech & BlueTech
  • & many more!

 

Not sure if you qualify for the R&D tax credit? Our technical expertise from multi-disciplinary teams can help you uncover the R&D in your business.

We understand your time constraints and work to minimize the involvement of your teams on the claim, allowing you to keep your focus on your core business. Our dedicated in-house team is comprised of highly experienced scientists, engineers, tax accountants, and attorneys, all of whom are motivated to help your business robustly claim and realize the R&D tax credit to incentivize further innovation investment.

Reach out to us today at contact-us@leyton.com.