A research and development (R&D) tax credit study requires a lot of information about your business and can be completed in about 30 days.
For companies undertaking expensive research and development initiatives, understanding the Federal R&D tax credit is vital. This resource can help start-ups and established businesses afford to take on more innovative projects by reducing tax payments
Unfortunately, many business owners don’t know how to access it. Let’s take a look at what you need to do to get the credit you deserve.
What is the Federal R&D Tax Credit?
First launched by the U.S. government in 1981, the R&D tax credit program was supposed to provide a temporary boost to the U.S. economy.
Yet, year after year, politicians across political aisle kept voting to keep the project running due to its popularity among business owners.
Finally, President Obama to sign off on The PATH Act of 2015. This crucial step expanded the provisions of the R&D tax credit program and made it a permanent part of the U.S. tax code.
You can learn more about the rules and regulations of the federal R&D tax credit by reviewing Internal Revenue Code (IRC) section 41.
What is the Benefit of an R&D Tax Credit?
The Federal R&D tax credit rewards your business for increasing R&D over time. Not only could you receive between 7-10% of your qualified research expenditures (QRE) back in the form of a credit, but your R&D tax credit can also be used to offset:
- Business income taxes if you qualify
- Any Alternative Minimum Tax (AMT) owed in the current year while having less than $50 million in average in revenue for the past three years
- Payroll taxes up to $250,000 each year if your business qualifies
The Federal R&D tax credit can also be carried forward 20 years, making this credit incredibly flexible. Now that you know more about this credit’s function, let’s examine the application process.
How Do Business Owners Apply for an R&D Tax Credit?
The first thing you should do when getting ready to apply for the Federal R&D tax credit is contact an R&D tax credit expert. These professionals will help you ascertain if you meet the credit requirements, how much your credit could be, and if you qualify for any state R&D credits as well.
If your company qualifies for a Federal tax credit, you’ll begin what’s known as an R&D study. An R&D study is more than just a simple form. It provides a clear and complete picture of your business and the R&D projects undertaken. Be prepared to share information such as:
- Company Name
- Company Website
- Accounting Period/Fiscal Year End
- Credit Type – Payroll or Income
- Year Company was Founded
- Revenue for the Last Four Years
- Projected Income
- Company Structure
- Payroll Provider
This isn’t all you’ll need to complete your R&D study, but it will get you started.
Unlike some state R&D credits which have specific application dates, you can submit Form 6765 with your other tax documents even if you have to file for an extension.
How Long Does It Take to Complete an R&D Study?
Expect your R&D study to take about 30 days. While this length of time will vary from person to person, it’s best practice to start your R&D study well ahead of tax season.
Applying for a Federal R&D Tax Credit
Companies investing in R&D should consider obtaining a Federal R&D tax credit. Qualifying companies could recoup up to 10% of accepted R&D costs.
If your company engages in R&D, don’t wait to get started on your R&D study. Contact the Bowers R&D Associates Research and Development Tax Credit team today to discover how much your credit could be.