Family businesses can benefit from federal and state research and development (R&D) tax credits if all qualifying criteria is met.

Family businesses can benefit from federal and state research and development (R&D) tax credits if all qualifying criteria is met.

You’ve built a family business that you hope will last for years to come. While your business is innovative and creative, competing with massive corporations can be tough.

That’s why it’s imperative that small business owners take advantage of research and development (R&D) tax credits. R&D tax credits can help your business thrive for generations. Keep reading to learn how to get a federal and state R&D tax credit in 2023.

What are Federal and State R&D Tax Credits?

An R&D tax credit rewards companies that spend more money researching and developing new products or systems. The federal tax credit program is a permanent structure in the US tax code.

According to The CPA Journal, you can review all of the federal R&D tax credit program’s rules and regulations in Internal Revenue Code (IRC) section 41. Over 25 states offer similar programs that closely follow the federal program’s guidelines.

These 13 states have no R&D incentives in place:

  • Alabama
  • Alaska
  • Mississippi
  • Montana
  • Nevada
  • North Carolina
  • Oklahoma
  • Oregon
  • South Dakota
  • Tennessee
  • Washington
  • West Virginia
  • Wyoming

Living in a state with no R&D tax credit program doesn’t mean an end to your tax credit journey. As long as your family business meets all necessary criteria, you can always apply for a federal R&D tax credit.

Which Businesses can Apply for Federal and State R&D Tax Credits?

Do you qualify for an R&D tax credit? Finding out is very easy. Below, you can see a list of industries that are eligible for an R&D tax credit:

  • Engineering
  • Agriculture
  • Biopharm
  • Physical science
  • Computer science

Of course, just because you find yourself in a qualifying industry, doesn’t mean that your business is automatically eligible for a credit. To determine if you can qualify, you must pass this four part test:

  1. Has your company developed a new product or process or improved upon existing functionality?
  2. Has your company dealt with some form of uncertainty in the development process (appropriateness of design, the method used, etc.)?
  3. Has your company utilized a process of experimentation to eliminate uncertainty (modeling, prototyping, trial and error, or other testing)?
  4. Has your company conducted experimentation that relied on engineering, biological, physical, or computer science?

After ascertaining your business’ eligibility, you can start putting together your qualified research expenditures (QRE) and get an estimate of your total credit.

What Counts as a Qualified Research Expenditure?

QRE are items used to determine the amount of your credit. Bear in mind that marketing and other business associated costs like purchasing staff lunches or office supplies do not count towards your credit calculation. Here are the three factors that you can use to calculate your credit:

  • The salaries of your U.S.-based employees conducting R&D
  • The cost of 3rd party U.S.-based contractors hired for R&D purposes
  • The cost of disposable supplies purchased for your company’s R&D process

When applying for a federal credit, you can expect your total credit to be 7-10% of your QRE. Once you’ve acquired your credit, you can put it go use. Let’s examine how a federal R&D credit can assist you:

  • Qualifying businesses no more than five years old that are pre-revenue or making less than $5 million in revenue can put the credit toward payroll tax
  • Companies that over five years old or that are making more than $5 million in revenue can use the credit to offset the business income tax
  • The credit can be carried forward 20 years

As shown above, your family business can benefit immensely when you acquire a federal R&D tax credit. Remember, if you live in a state that also offers an R&D program, you could be looking at a much bigger credit.

How can a Family Business Apply for an R&D Tax Credit?

When applying for an R&D tax credit, it’s best practice to employ a tax credit expert who can help you throughout the process. Be prepared to share information which can include the:

  • Names of all company owners
  • Names and titles of employees dedicated to R&D
  • Salaries of employees dedicated to R&D
  • Company’s gross profits for the year
  • Year the company was founded
  • Name of the company payroll service provider
  • Nature of the R&D being conducted at the company

As you put together your R&D tax credit application, be sure to answer every question as accurately as possible. Failing to do so could increase your chances of missing out on these great resource.

While applying for the credit may seem like a chore, working with a tax credit expert can make the process simple and rewarding.

R&D Tax Credits for Your Family Business: What You Need to Know

If applicable, your family business could receive a credit that’s 7-10% of your QRE from the federal government. Of course, if you live in a state with local R&D tax credit program, you could receive even more.

It’s in your best interest to work with an R&D tax credit expert, so you can be sure that your application has been properly completed. Don’t wait to take advantage of this resource. Contact the research and development tax credit team at Bowers R&D Associates today.

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