Start-ups developing new products in Oklahoma can utilize a federal research and development (R&D) tax credit. A federal R&D tax credit can reduce payroll or income tax expenses.
The Sooners state is home to the scissor-tailed flycatcher and the Oklahoma rose, but not to a state R&D tax credit program. Unlike many other states, R&D tax credits in Oklahoma don’t exist for residents investing in innovation. Oklahoma business owners do have other options available to them though like the federal R&D tax credit program.
This information may leave you wondering if you qualify for an R&D tax credit from the federal government. This article will review requirements for applicants and reveal how the federal R&D tax credit can fuel your professional vision.
Can Oklahoma Businesses Get a Federal R&D Tax Credit?
Federal R&D tax credits are available to small and large Oklahoma businesses. The federal R&D tax credit program is open to innovators across the nation and provides a generous reward for U.S. companies conducting R&D. Of course, there are strict stipulations in place denoting what types of businesses can receive this credit.
What are the Federal R&D Tax Credit Requirements?
The first step to determining R&D tax credit eligibility is to identify your company’s industry. Industries that qualify for the tax credit include:
- Physical science
- Computer science
So, can a family business utilize R&D credits in Oklahoma too? Yes, as long as the business falls into one of the categories above, and the owner can positively answer these questions:
- Has your business developed a new product or process or improved upon existing functionality?
- Has your business dealt with some form of uncertainty in the development process (appropriateness of design, the method used, etc.)?
- Has your business utilized a process of experimentation to eliminate uncertainty (modeling, prototyping, trial and error, or other testing)?
- Has your business conducted experimentation that relied on engineering, biological, physical, or computer science?
If your business meets all of the federal regulations, the next step is to total your qualified research expenditures (QRE). This step is necessary so you can calculate your R&D tax credit estimate.
Calculating the R&D Tax Credit
There are many costs to running a business, but not every business expense is considered QRE. Only these three items can be labeled as QRE:
- 65% of the hiring cost of U.S.-based contractors conducting R&D for your business.
- The salaries of part and full-time U.S.-based employees engaged in R&D.
- The cost of disposable supplies solely purchased for R&D activities.
Your R&D credit will be 7-10% of your total QRE if you qualify. How you can use your credit will depend upon certain circumstances. Let’s examine how this credit can benefit your business.
The Benefits of an R&D Tax Credit
An Oklahoma start-up that is no more than five years old and is pre-revenue or making less than $5 million can use the credit to offset the social security portion of its payroll tax. Since the social security portion makes up 6.2% of an employer’s payroll tax, that’s no laughing matter. For example, let’s say that your company contracts a business to work on R&D for $55,000. The salaries of your R&D focused employees totals $200,000 and the cost of disposable R&D supplies is $10,000.
Enter those figures into an R&D tax credit calculator, and you’ll see that your R&D tax credit could be as much as $24,575. That sum can be used, dollar-for-dollar, to reduce your tax burden.
Now, a company that’s more than five years old or making more than $5 million in revenue can offset its income tax with the credit. Both companies have the option to carry the credit forward by 20 years, making this credit a tax asset as well.
Are Oklahoma Contractors Eligible for an R&D Tax Credit?
Unfortunately, Oklahoma contractors hired by an outside company to conduct R&D can’t apply for this credit. Of course, contractors still can use the credit to their advantage. You can use the credit as a selling point for your business, and by educating your potential clients on the credit, you could make business invaluable.
What You Need to Know About R&D Tax Credits in Oklahoma
While the state of Oklahoma doesn’t offer a state R&D tax credit program, the federal R&D tax credit is available to innovative businesses nationwide. A tax credit totaling as much as 10% of your QRE can be used to reduce your payroll or income tax burden. Don’t wait to utilize this incredible tool. Since this credit is massively beneficial for both contractors and R&D focused companies, contact us at Bowers R&D to learn more.