With a federal research and development (R&D) tax credit, cosmetic companies can receive up to 10% of qualified research expenditures (QREs) as a credit and even more with applicable state R&D tax credits.
The cosmetic industry is constantly in a whirlwind of innovation and creativity. Due to the cost of developing new make-up, oral, and skin care products, R&D tax credits for cosmetic companies empower businesses to be competitive. Unfortunately, many beauty entrepreneurs are missing out on this incredible resource. Keep reading to learn how a federal R&D tax credit can boost your business and how to get a state R&D tax credit too.
What is an R&D Tаx Credit?
R&D tax credits are a reward for companies spending money on R&D. In 2015, the federal government passed the PATH Act, which made the once temporary R&D tax credit program permanent. Federal R&D tax credits are incredibly useful as you can use your credit to reduce your tax burden.
For example, if you run a beauty start-up and have developed formulas for a range of halal beauty products, you could put your R&D credit towards your payroll tax expenses. On the other hand, companies that have been in business for more than five years and are profitable can use the credit to reduce the business income tax. Both new and established companies can choose to carry the credit forward 20 years.
Now, before you rush out to apply for a federal R&D tax credit, you’ll need to familiarize yourself with the rules and determine if your company qualifies.
Federal R&D Tax Credit Requirements
Companies must pass a quick test before applying for a federal R&D tax credit. Do you qualify for an R&D tax credit? Answer these questions to find out. Has your company:
What are R&D Tax Credit QREs?
You can’t count every cost of running your business as a QRE. Specific expenditures fall under that category. For example, the wages paid to employees conducting R&D activities count, but the air conditioning bill for your entire building wouldn’t. You can’t claim general office supplies either; however, you can claim disposable supplies needed for the R&D process as a QRE. You can also claim 65% of the cost incurred by hiring an outside contractor for R&D work.
Let’s examine specific activities in the beauty industry that could be considered QREs.
Qualifying QRE Activities
The beauty industry is vast and filled with R&D, but here’s a short list of potential QREs:
- Exploring alternatives to animal testing
- Developing nontoxic make-up products
- Formulating new lines of environmentally friendly hair products
- Creating new chemical product formulations
- Designing environmentally packaging
- Generate prototypes of new products for testing
- Producing new skin care formulas
- Conducting quality аѕѕurаnсе tests
- Testing sustainability techniques
- Exploring new product tests and evaluations
While R&D your company is undertaking may not be on this list, remember that this is only a short breakdown of potential QREs. If you believe that you’re a fit for federal government tax credit, you may also qualify for your state’s R&D tax credit program.
Do States Offer R&D Tax Credits for Cosmetic Companies?
Like the federal government, many states have R&D tax credits for cosmetic companies too. Each state’s program is unique though so if you want to know how to get a federal and state R&D tax credit, you should contact an R&D tax credit professional. If you discover that your state doesn’t offer an R&D tax credit program, you can always apply for the federal one.
Don’t let these great resources slip by. Contact us at Bowers R&D to discover much your credit could be.