2020 wasn’t a great year for many, but if you are looking for ways to optimize cash flow for your business in 2021, the R&D Tax Credit can be a valuable financial tool. Each year the government sets aside billions of dollars to reward U.S. businesses for innovating. The Research and Development Tax Credit is both a federal and state incentive that can help qualifying businesses free up cash flow by offsetting their payroll and/or income tax liability. The R&D Tax Credit has been in place since 1981, rewarding businesses that invest in US-based R&D.
There are many misconceptions about what qualifies as R&D, and this is the biggest reason why many companies don’t claim the credit. Here’s something to keep in mind: R&D is not just scientists in white lab coats developing the next novel drug.
In the eyes of the IRS, the definition of R&D is much broader than people often realize. If you improved existing products and technologies, developed new products, or increased day-to-day process efficiencies, you could potentially claim this tax credit regardless of company size and industry.
The IRS has put in place the following 4-Part Test to determine which business activities are eligible:
Your company has worked to develop a new or improved product, process, computer software, technique, formula, or invention, which is to be held for sale, lease, license, or further used in its trade or business.
Your business has tried to learn something new about the product or process being changed in order to improve it and it has demonstrated that the product or process could not be improved without going through this discovery process.
The development of your business component relied upon the principles of the physical or biological sciences, engineering, or computer science.
Your company went through a process of elimination, trial and error, or other evaluation of alternatives to arrive at the new or improved product or process.
To gain a better understanding of real-world R&D Tax Credit criteria, you may ask yourself the following questions:
If you answered yes to these questions, you may be eligible to claim the R&D Tax Credit!
The R&D Tax Credit can be filed along with your company’s annual tax filings. For this year’s tax season, qualified businesses can file an R&D Tax Credit claim with their 2020 tax return by the March or April tax deadlines. If you file on extension, you’ll have additional time to have an R&D Credit study completed.
For eligible startups claiming the R&D Credit to reduce payroll tax liability, you must file your claim before your filing deadline. If the deadline is missed, you lose the ability to claim for the current tax year and must wait until next year to take advantage of this incentive.
Businesses that qualify to offset their income taxes have more flexibility with the R&D Credit. This version allows you to amend tax returns from the last 3 years to claim the R&D Credit retroactively and potentially receive a refund for overpaid historical taxes. Even though there is no need to panic if you miss the filing deadline, we strongly recommend a timely filing so you can access your funds sooner.
Claiming the R&D Tax Credit for your business can mean immediate savings on your taxes owed in 2020, and potential refunds on qualifying activities from 2017, 2018 and 2019.
If you are eligible, it can mean the following for your business:
As start-ups and businesses of all sizes head towards an economic recovery, the R&D Tax Credit can offer a much needed source of financial flexibility. If you are still uncertain about your eligibility, contact us to schedule a free 30 minute assessment with our experts to find out if your business qualifies for the R&D Tax Credit.
Founded in 1997, Leyton is a global innovation funding consultancy dedicated to helping our clients improve their business performance. In the US, our specific expertise is in optimization of Federal and State Research & Development (R&D) Tax Credits. As a business, we want to help unleash our clients potential and be a strategic partner in their evolution and growth.