The R&D Tax Credit - The Basics

Nurturing and expanding a business in many industries often requires you to develop new technologies, systems, and products. This type of expansion and growth is not only vital to your business but the economy as a whole, which requires a significant degree of innovation to thrive. Innovation, however, often requires costly research and development, which in many cases offers no return on investment at first. Such expenses can prevent businesses from investing in research and development. For this reason, the R&D tax credit was conceived to promote innovation across a wide range of industries. 

What is the R&D Tax Credit?

The Credit for Increasing Research Activities, often referred to as the Research and Development or Research and Experimentation tax credit, is part of the United States tax code. It exists to boost economic growth by encouraging companies to innovate, develop new technologies, and conduct research. First introduced in 1981, the credit was made permanent beginning January 1, 2016. Since 2016, the R&D tax credit can mitigate the alternative minimum tax. Startups also have the ability to use the R&D credit against their payroll taxes. According to the Internal Revenue Service, the tax credit is for any business with “expenses paid or incurred for qualified research.” 

What Are the Benefits of the R&D Tax Credit?

Offering companies tax credits for developing and researching systems, products, and processes can have a positive impact on the economy. Beginning in 2022, instead of deducting them immediately, businesses must amortize their research and development costs over a five-year period. 

Despite this requirement, businesses can still enjoy the following benefits if they claim the credit: 

  • The ability to keep a greater share of profits
  • Lower federal and state tax liabilities for the current and future years
  • An increase in a company’s market value and general cash flow

For many small and midsized companies, these benefits translate into extra cash. This cash can especially be beneficial when a company first starts out. 

What Documents Do You Need To Claim the R&D Tax Credit?

Unfortunately, the IRS does not directly specify what documents are needed to claim the R&D tax credit. The burden of proof lies on the company that wishes to claim the credit, so companies should maintain as much documentation as possible in the event of an audit. If you intend to claim the credit, keep the following documents on hand: 

  • Payroll information for workers involved in R&D activities, as well as for the managers supervising them
  • Copies of invoices and contracts paid to any third-party contractors who do research for your company
  • Test records, design drawings, progress reports, blueprints, marketing materials, and any other documents that show the effect of your research
  • Ledger reports listing which business expenses were related to R&D
  • Timekeeping records (if available) for payroll, meetings, work plans, and any other activities to show they were related to research and development

Why Choose KBKG?

KBKG comprises a variety of tax professionals. With our in-depth understanding of the R&D tax credit, we can help you determine if your company is eligible to increase cash flow and reduce your overall tax burden. Even if your company only engages in a few research and development activities, you may still be eligible for the credit. 

Our company offers a free, easy-to-use calculator for companies. Its R&D tax credit calculations can help you determine if you can offset your payroll taxes. If you have more questions, we are here to help you obtain your maximum tax benefit. 

See if You Are Eligible for the R&D Tax Credit

If you are interested in claiming the R&D tax credit for a small business or a large, publicly traded company, KBKG is here to help. Our tax professionals use a wealth of tools to help companies find out if they can save by claiming the credit. Our company will also stand by you in the event of an audit. Contact KBKG today to see if you are eligible for the credit. 

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