Why Do You Need R&D Tax Credit


In these difficult times, one has to be able to exhaust all possibilities that will enable one’s business to survive. After the pandemic, the economy had been badly affected, and now with the international tension and war in Europe, inflation is at its highest, so it is difficult to stay afloat. The government had instituted policies that would help ease the financial burden of business owners in terms of their tax returns in a certain year. These policies include tax credits, which can be used by the taxpayer to lower the company’s federal tax liabilities. The tax credits can be applied to the timely filed tax returns of the business and this can significantly reduce the amount of taxes due in that year, which would mean that the money allocated for taxes can be freed up to be used by the company as additional capital, or for the purchase of inventory and that would mean additional earnings or revenues. One such tax credit that business owners can take advantage of is the R&D tax credit, which is not very popular in the sense that not many people know about it. But it is a very attractive tax credit policy as there is no limit to the number of tax credits that the company can claim as long as they can justify their research and development activities and expenses. Although the process of qualifying and claiming R&D tax credits is quite complex and difficult, once they know how it is done, then it would be easier in the succeeding years. Besides, the definition of what constitutes research and development activities is very broad and any activities related to new product development, design and implementation of new processes and systems, or the improvement of formulations can fall under research. Also, if the company can identify the expenses incurred from these activities, then they can qualify as research expenditures and can be included in the application for R&D tax credits. 

What to do to qualify for R&D Tax Credits?

R&D tax credits can be claimed during the timely filing of tax returns of the company, and it is directly applied to the tax liabilities which means that the company will have lesser tax dues to pay. However, before this can be done, the company has to prepare documentary evidence that would demonstrate that the company had engaged in research and development activities and has paid for it using the funds of the company. The IRS had devised a four-step test that must be met by the company for them to qualify for the R&D tax credits. This test is described in the Internal Revenue Code (IRC) §41(d)(1) and before tax credits can be computed, the company has to make sure that they pass all of the requirements first. Although it is not easy to do, it is doable and help from experts can always be had if the company works with a consulting firm that specializes in the preparation and filing of R&D tax credits. It is important that the first time you apply for the R&D tax credits, you need to file the IRS Form 6765 which is the Credit for Increasing Research Activities together with the tax returns of the company. The form has very specific entries which must be properly filled in and the required documents are properly done and attached to the form. For large companies with a dedicated accounting and taxes team, this can be easily accomplished as they have the resources to do so. But for small and medium-sized companies, it is necessary to hire a consulting firm to help them with the preparation, filing, and computation of the R&D tax credits. 

How can R&D Tax Credits Benefit the company? 

The R&D tax credits can provide financial relief for the company, as federal taxes are mandatory, and not paying the correct amount of taxes can mean serious consequences and lawsuits from the IRS then you need to get it right. Most companies would resort to beating the system or engaging in creative accounting methods to be able to pay fewer taxes, but that is also a dangerous thing to do. Whereas, the R&D tax credits are completely legal and provided for by the government. Reducing the company’s tax liabilities can translate to cash savings and since there is no limit to how much you can claim from it, then the more the company invests in research and development activities and expenses, the more tax credits they can avail from the government. It may be an added expense on the part of the company, but every company has to have a research and development section to remain relevant, they should come up with new products or improved ones. 

Who to ask for help in filing R&D Tax Credits? 

It is a reality that to meet the requirements of the IRS to qualify for R&D tax credits, the company cannot do it alone, and help from experts is badly needed. You can find help from accounting consultants who offer services that will help you prepare and file your tax returns with the R&D tax credit computation. As this is a specialized skill, you need to find accounting firms that can do the R&D tax credit computations. To do so, you can ask around from the accounting firms in your area if they do have consultants to work on it and if not, your next option would be to find a firm online. You can do this by searching the web with the keyword R&D tax credit providers or consultants and the search results will show you the most promising websites. You still need to read up on each website and check if they include R&D tax credits in their services, and if yes, then you can ask for a consultation and ask if they can come to your company to work with you. Some firms will not travel out of state so be sure that whoever you find will be able to commit to doing onsite visits and interviews, and ask for their rates and special packages so you do not end up paying so much.