If 2020 taught us all one thing, it’s that things can change quickly and businesses need to be prepared. This year in particular, COVID-19 undermined even the most robust plans and challenged companies across all industries. But there is good news among the pandemic chaos: the Research & Development (R&D) Tax Credit. Predictions at the end of 2020 provided insight into the direction this credit could have gone. Now that the new year is here and tax season is quickly approaching, it’s time to assess whether the R&D Tax Credit may be available to your business!
What is the R&D Tax Credit?
The Research & Development Tax Credit, a.k.a. the R&D Tax Credit, is an incentive for businesses and other qualifying entities. Launched in 1981, this federal credit specifically encourages research and development in the United States. You’re likely to see this credit under slightly different names depending on where you look, including Credit for Increasing Research Activities (its official name from the IRS), Research & Experimentation Credit, R&E Credit, or even just “research credit.”
The R&D credit is calculated by adding up the total of two types of expenses, basic research payments and qualified research expenses. Contrary to popular belief, your research activities do not have to result in a new invention to qualify.
Who can access R&D tax credits?
Entities of any size, in any industry, that are conducting qualified research may be eligible for the R&D Tax Credit. This includes small businesses, partnerships, corporations, estates, trusts, and even individuals who qualify. This isn’t just limited to the manufacturing industry, as people often assume. It goes across the board to retail, health, entertainment, and more.
Broadly speaking, it’s more important that your activities meet the requirements (and aren’t excluded). Even if your R&D department is small, or the research “failed”, or you don’t consider the work “groundbreaking,” you may still be able to claim this credit.
How do you claim the R&D Tax Credit for your business?
There are a couple of different ways to claim the R&D Tax Credit. For partnerships and S Corporations, this can be done using IRS Form 6765 Credit for Increasing Research Activities. Others may be able to claim it directly on a General Business Credit form (IRS Form 3800), with some restrictions. A Tax Accountant can help you determine whether you qualify and the best way to claim this credit.
Take advantage of the 2020 Research & Development Tax Credit.
Perhaps unsurprisingly, studies show that businesses often miss out on the R&D Tax Credit. That’s because many businesses are still largely misinformed about this credit. One thing to highlight is that the CARES Act has made R&D credits even more beneficial. Businesses can now carry back 2020 losses up to five years and receive tax refunds for previously paid taxes.
Historically, claiming the R&D tax credit has given businesses the opportunity to reinvest into their operations. Things may be different now, with companies rethinking how to reach their goals while facing tough, new challenges. But simply put, the R&D tax credit is one way to get there.
This is a time when companies are looking for liquidity to either maintain their growth or keep their doors open. With the right professional help, claiming the R&D tax credit can be a simple process that consumes little time and presents low risk. It is definitely worth the effort.
Take advantage of this opportunity to generate needed capital and reduce tax liabilities for this year, as well as past and future years. Lodestar’s Tax Accountants can show you how.
