Research and development (R&D) tax credits for small businesses add up to billions of dollars each year and have assisted the growth of a wide range of projects across industries.
Unfortunately, many smaller companies don’t know that they’re able to take advantage of these credits. In this blog, we’ll cover everything you need to know to ensure that you can make the most of R&D tax credits for small businesses.
An Overview of R&D Credits
The size of your business is not the determining factor in whether you are eligible for such credits. Any corporation can qualify, as long as their expenses fall under the definition of R&D, according to the specific terms of the Congressional legislation.
In this context, such projects are defined as activities that companies undertake to innovate and introduce new products or services.
Every small business CPA should know the basic guidelines for these credits. After all, R&D tax credits for small businesses are part of an overall legislative strategy to spur economic growth.
Below are a few additional guidelines to keep in mind:
Eligibility
To be eligible for these credits, your business must have existed for at least five years. In addition, your firm must have less than $5 million in gross receipts for the current tax year, and no gross receipts for more than five years prior.
You also need to engage in activities that are technological in nature. This includes an aim to create or improve a product, process, software, or formula.
Limits and amounts
R&D tax credits for small businesses allow you to claim up to $1,250,000 in credits, with the annual maximum spread over this period.
However, they must be used for eligible expenses. The credits will cover up to 20% of these, with an annual maximum of $500,000 starting from 2023.
Such expenses include:
- Qualified wages and salaries paid to employees who are directly involved in qualified research activities.
- Supplies used and consumed during the research process.
- Contract Research Expenses such as payments made to contractors or research firms.
- Computer Rental or Lease Costs for equipment used directly in qualified research.
Note that there is also a special part of the law that covers small businesses who owe AMT in a given year, are privately held, and have less than $50 million in gross receipts during the previous three-year period. If your company meets all those criteria, you can use R&D credits against payroll and your alternative minimum tax liabilities.
Timing
It’s important to claim R&D tax credits for small businesses when you file your tax returns, before the relevant deadlines. Still, you can make amendments for up to three years to claim credits for previous years.
If the credit exceeds your company’s tax liability for the current year, you can carry it back a year, or carry the credit forward for up to 20 years.
Credit Best Practices
One of the most important aspects of applying for and using these credits is accurate documentation and record-keeping. After all, the IRS requires detailed records to verify that all the expenses you claim are directly tied to qualified R&D activities.
Consult professionals
Fusion CPA, we understand the challenges of applying for and using tax credits. Our small business accountants provide high-quality bookkeeping services that cover all the detailed requirements of the R&D tax credit laws. We also offer a full range of tax planning and accountancy services to simplify your financial management.
To see how we can help your small business make the most of R&D tax credits, schedule a complimentary discovery call today!
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