Many businesses can apply for both a federal and state research and development (R&D) tax credit, but meeting application deadlines is of the utmost importance.
You put a lot of time and energy into creating fascinating new products. Unfortunately, you also need to put a lot of money into R&D in order to purchase supplies for your new creations and pay those who are involved with the process from start to finish. The thought of snowballing expenses may make some innovators pause before launching their business, but, thankfully, there are amazing resources, like an R&D tax credit, that were designed to specifically help creative business owners fuel their passion projects.
In this article, you’ll learn how to apply for a federal R&D tax credit, how to find out if your state offers a similar credit, and why you should take advantage of these credits.
Is the R&D Tax Credit a Federal or State Program?
Both the federal government and several states offer an R&D tax credit program. Depending on where your business is located, you could potentially apply for a state and federal tax credit. Unfortunately, not every state has this incentive, so you’ll need to research which states offer R&D tax credits. Being eligible for a federal and state tax credit could result in an incredibly reduced tax burden that can free up your funds to:
- Hire more employees
- Expand your business
- Invest more in R&D
- Spend more on advertising
These are just a few of the benefits that come with taking advantage of an R&D tax credit. Be aware that while each state tax credit program has its own quirks, most follow the guidelines set by the federal program.
Which Businesses Qualify for these Tax Credits?
Before you even begin to applying a federal and state R&D credit, you must determine if your R&D takes place within the borders of the U.S. If it does, then your company must meet these four requirements:
- Your company developed a new product or process or improved upon existing functionality.
- Your company dealt with some form of uncertainty in the development process (appropriateness of design, the method used, etc.).
- Your company utilized a process of experimentation to eliminate uncertainty (modeling, prototyping, trial and error, or other testing).
- Your company conducted experimentation which relied on engineering, biological, physical, or computer science.
If your company meets these requirements, you can consider yourself a good candidate for an R&D tax credit. After taking, the four part test, you can get ready to apply for your credits.
When to Apply for a State R&D Tax Credit
Applying for a state tax credit is very similar to applying for a federal credit; however, different states have different application deadlines. Pennsylvania, for example, require business owners to submit their application by Dec 1st every year while Maryland’s deadline for an R&D tax credit application is November 15. Since every state’s R&D program has unique traits, be sure to review your home state’s rules and restrictions before applying.
How Much is the Federal R&D Credit?
Reading up on everything you need to know about the federal R&D tax credit is important, but typically business owners are most eager to know how much their credit could be before applying. You could get between 7-10% of your qualified research expenditures (QRE) back in the form of a credit. QREs, as defined by the Legal Information Institute, are means the sum of the following amounts which are paid or incurred by the taxpayer during the taxable year in carrying on any trade or business of the taxpayer.
Now, the total of your federal credit is based upon these three QREs:
- The salaries of your U.S. based employees conducting R&D for your organization
- The cost of 3rd party U.S. based contractors conducing R&D for your organization
- The cost of disposable supplies used during the R&D process
When you pop these figures into a free R&D tax credit calculator, you can get an estimate of how much your federal R&D credit will be. Of course, you’ll need to complete your application before you can know for sure what your total credit from the federal government and your state government will be.
How Can a Business Owner Apply for a Federal and State R&D Tax Credit?
Let’s say that you’ve reviewed everything and found that you meet the federal government’s and your home state’s requirements to apply for an R&D credit through both entities. After that, you should contact an R&D tax credit expert to complete an R&D study that will simultaneously help you apply for both credits.
While you can try tackling this on your own, filling out your form incorrectly could result in a denial of your application. Working with a trusted professional will set you up for success and provide you with an audit-proof R&D study in case the IRS ever comes knocking on your door. R&D studies can take about 30 days to complete, so make sure you know who will be helping you with your study long before tax season rears its head. Contact Bowers R&D today to get started.
