What Is the Difference Between Refundable and Non-Refundable Tax Credits? 

CPAs are well aware of the intricate tax landscape clients face. Tax credits are essential in reducing their tax liability and maximizing their financial well-being. Among the various credits available, it’s important to understand refundable and non-refundable tax credits.  

Examine the difference between a refundable versus non-refundable tax credit while focusing on two prominent tax credits: the Employee Retention and the Research and Development Tax Credits. With help from KBKG, you’ll learn how to help your clients gain the most benefit from R&D credits and ERTCs.  

Connecting the R&D and ERTC Dots: Understanding Tax Credits 

Before diving into the specifics of the two popular tax credits, let’s answer two important questions:  

What Is a Refundable Credit?  

Unlike non-refundable credits that can only be used to reduce your tax liability, refundable credits can get you money back from the IRS if the credit amount is more than you owe.  

The Employee Retention Credit is a refundable tax credit that helped businesses during the pandemic by providing funds to keep workers on payroll. ERC gives employers cash back for keeping their staff, allowing businesses to stay afloat when times get tough.  

What is a Non-Refundable Credit?  

Non-refundable tax credits, on the other hand, can reduce a taxpayer’s liability to zero but do not result in a refund if the credit exceeds their tax bill. Instead, any excess non-refundable credit is subject to carryback and carryforward rules. The Research and Development Tax Credit is one of the well-known non-refundable tax credits examples.   

A Closer Look at the Employee Retention Tax Credit 

What is the ERC? This tax credit gained substantial attention during the COVID-19 pandemic as a means to assist struggling businesses. The refundable tax credit encouraged employers to retain their employees during difficult times.    

One significant feature of the ERC is its refundability. In fact, for a company eligible for ERC in 2021, 70% of the first $10,000 of gross wages per employee, per quarter, are eligible as a refund for the first three quarters ($7,000 max per employee, per quarter). 

Insights into the Research and Development Tax Credit 

The R&D Tax Credit incentivizes businesses to invest in innovation and technological advancement. While this non-refundable credit offers substantial benefits, it works differently from the ERC.  

The R&D Tax Credit can significantly reduce a business’s tax liability, but any excess credit does not qualify for a refund. Instead, businesses must carry the unused credits back one year, and then forward up to 20 years. This carryforward/carryback provision can benefit businesses with fluctuating incomes.  

Impact on Industries Using R&D Tax Credits 

The R&D Tax Credit is pivotal in fostering innovation and technological advancement across various industries, including pharmaceuticals, technology, aerospace, and manufacturing. Businesses in these sectors often heavily rely on R&D tax credits to offset their research and development costs.  

However, the non-refundable nature of the R&D Tax Credit means businesses must carefully plan their tax strategies to maximize its benefits. CPAs advising clients in R&D-intensive industries should emphasize the importance of optimizing credit utilization, carrying forward unused credits strategically and aligning their financial goals with long-term tax planning.  

The KBKG Difference 

CPAs must guide clients through the nuances of reimbursable and non-reimbursable credits, helping them navigate eligibility, claim processes, and long-term tax planning strategies. To that end, it’s imperative to have trustworthy insider knowledge sources.  

That’s where KBKG comes in.  

We’re dedicated to simplifying the complex world of credits for our clients. With our user-friendly and free calculators, you can estimate your state and federal benefits effortlessly. Plus, we help you explore how to offset payroll taxes using the R&D credit.  

Discover More About R&D and ERC: Get in Touch With Us Now  

Understanding the difference between refundable and nonrefundable tax credits is essential for CPAs and their clients. KBKG is here to help ensure your clients make informed decisions that optimize their financial well-being and compliance with tax regulations. In the ever-evolving tax landscape, staying informed and prepared for all scenarios is the key to success. Contact us today to estimate your benefits instantly or learn more about our educational resources.