Investigate the tax benefits of the research credit

If your company engages in research and development, you’re driven to innovate and bring new products and improvements to market. It’s that spirit of discovery that keeps businesses in the United States on the leading edge. Even better, you may qualify for a lucrative federal tax credit for some of your expenses related to R&D. Many states also offer research tax incentives.

Improved and permanent

The federal research tax credit is now permanent, thanks to the Protecting Americans from Tax Hikes (PATH) Act of 2015. This is good news because, for more than 30 years, the popular tax break periodically expired and was reinstated (usually for a year or two), which caused uncertainty for businesses.

Generally, the credit is equal to a portion of qualified research expenses incurred during the taxable year. The credit is complicated to calculate and not all research activities are eligible but the tax savings can be sizable.

The PATH Act added two new features that are especially favorable to small businesses.

1. Beginning in 2016, small businesses with $50 million or less in gross receipts may claim the credit against alternative minimum tax liability.
2. The credit can be used by certain even smaller businesses against the employer’s portion of Social Security tax. This provision also became effective in 2016.

Tax planning opportunity

Now that the credit is permanent, companies can count on it when they plan R&D projects. There could also be an opportunity to file an amended tax return and collect a refund if you incurred qualified expenses in previous years but didn’t claim them.

Be aware that the IRS announced recently that it “does see a significant amount of misuse of the research credit each year.” Good recordkeeping is important. To claim a credit, taxpayers must document their activities to establish the amount of qualified research expenses paid. Contact us to find out how to maximize the benefits allowed under the law.