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What is the R&D Tax Credit? Here’s a Quick Breakdown

Find out some of the details about this company tax credit, and how a PEO can help you complete the filing.

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Mar 18, 20193 minutes

If you’re looking for a way to subsidize some of your company’s costs, applying for a research and development (R&D) tax credit may be an option — even if you’re a small business.

In this post, we’ve rounded up some common questions about the credit, and asked the professionals at Aprio Cloud to help demystify the process.

What is the R&D Tax Credit?

The R&D tax credit is an invaluable resource for companies who put innovation at the heart of their businesses. The federal credit was first created in 1981 with the express goal to incentivize American research spending; it allows eligible companies to claim the credit based on their research and development expenditures.

In addition to the federal credit, many U.S. states also boast their own credits that further enhance the incentives available to eligible companies. When the federal and state credits are claimed together and maximized with the help of knowledgeable tax professionals, like those at Aprio and Aprio Cloud. The R&D tax credit can provide your company with the resources and flexibility to continuously invest in innovation.

What Activities Can Qualify as R&D?

The umbrella of activities that are eligible as R&D expenses is quite broad, allowing for a wide variety of industries to reap the benefits. Whether your company designs software products or improves manufacturing processes, it’s likely that you’re engaging in eligible R&D activities.

The IRS bases eligibility on four primary components:

  1. The intention to develop or improve function, performance, reliability, or quality;

  2. Reliance on the principals of a hard science;

  3. The elimination of technical uncertainty related to the appropriateness or capability of the design; and

  4. A process of experimentation that evaluates alternatives and refines hypotheses through trial-and-error testing.

Additionally, only those activities performed within the U.S. can qualify for the credit. If your projects meet these criteria, then the associated costs, including wages, supplies, and other resources are likely eligible to be claimed.

Does the Tax Credit Benefit Small Businesses?

Contrary to a widespread belief, the R&D tax credit provides ample benefit to companies of all sizes, big and small. When the federal R&D credit became permanent in 2015 through the passage of the Protecting Americans From Tax Hikes (PATH) act, the new legislation included significant enhancements to the credit that improved accessibility for small businesses.

Now, eligible businesses with less than $50 million in gross receipts may offset the R&D tax credit against entity income tax liability. Additionally, eligible small businesses with less than $5 million in gross receipts may be allowed to offset the credit against payroll taxes. These changes can greatly benefit eligible small businesses and can potentially save your company millions of dollars!

In addition, picking up any relevant state R&D credits can maximize your credit even further as a small business. While the federal credit can be broad, state credits often provide additional benefits that can be even more valuable, depending on where your company’s eligible activities and sales take place.

How Justworks Can Help

Justworks can apply for the R&D payroll tax credit on behalf of our customers who are eligible for the credit.

If you believe you’re eligible and would like to claim the R&D tax credit, confirm the following with your tax advisor:

  • Company eligibility to claim the credit

  • Amount of credit your company can claim

  • Amount of credit that should be taken (if any) against income taxes vs. employer federal payroll taxes

Once you’ve gone through those steps, provide Justworks with a copy of IRS Form 8974 with all information completed other than Lines 8 through 12 of Part 2. We’ll handle the rest!

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.