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.
The federal R&D tax credit is an incredible resource. It can empower start-ups and established businesses to engage in innovation processes that may have posed too much of a financial risk otherwise.
Unfortunately, while many business owners may have heard of this resource, most do not know how to secure it for themselves. 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?
Before filing for a federal R&D tax credit, you’ll need to familiarize yourself with it.
First launched by the U.S. government in 1981, the R&D tax credit program was initially supposed to be a temporary project designed to fuel innovation throughout the U.S. Year after year though, politicians from both sides of the political aisle kept voting to keep the project running due to its popularity among business owners.
The program’s proven economic benefits and popularity allowed 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?
Since the function of the federal R&D tax credit is to reward your business for increasing R&D over time, you don’t want to miss out on this resource. 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 a great tool to entice potential investors. Now that you know more about this credit and how it can benefit your business, let’s examine the application process.
How Do Business Owners Apply for an R&D Tax Credit?
Unlike individual taxes, it’s not the best idea to pick up the R&D tax credit form (Form 6765) and start filling in information.
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. R&D experts 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.
Once it’s been determined that your company does qualify 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; this study provides a clear and complete picture of your business and the R&D projects you undertook. Be prepared to share the following information:
- 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. You’ll also need to share what industry your business is in as well as specific examples of problems your business was working to solve through innovation or experiments your business undertook.
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. Doing so will allow you to complete the majority of your study and give you plenty of time to provide as much necessary detail as possible. Putting together an exemplary study is crucial to proving that your business deserves the federal R&D tax credit.
If your company engages in R&D, don’t wait to get started on your R&D study. Contact Bowers R&D today to discover how much your credit could be.