State Research and Development, or R&D, Tax Credits are state-specific government incentives designed to encourage businesses to innovate. Essentially, it allows you to dedicate funds to refining your service offering as you reduce your tax liability. This not helps to keep your business competitive, but drives economic growth as companies invest more in refined development. Unlike federal R&D tax credits, state credits vary widely and offer unique benefits such as transferability and refundability, depending on each state’s economic goals.
At Fusion CPA, we have years of experience navigating tax credits and complexities. In this blog, we aim to shed light on the importance of continuous development within a business in general, and how to maximize the associated tax benefits.
Eligibility criteria for state R&D tax credits
State R&D tax credits offer a valuable opportunity to gain a competitive edge in your specific industry and position your business as a pioneer in its field. Businesses that lead the charge in terms of new developments, tend to gain credibility. However, when it comes to conducting research with government backing, you can’t just jump in. To qualify for state R&D tax credits, you must meet specific eligibility criteria.
- Your research must be intentional. Eligible activities typically involve developing or improving products or technologies.
- There are only specific expenses you can claim for. Qualifying expenses are typically limited to wages for employees involved in R&D, costs of supplies used in research activities, and contract expenses paid to third-parties for supporting development or research.
Explore your options with different types of state R&D tax credits
While there may be specific qualifying criteria, state R&D tax credits come in various forms. Each of the following credit options offer unique benefits.
- Refundable tax credits. Your business will get refunded if the credit amount exceeds its tax liability. This means that even if you do not owe any taxes, you can still receive a refund.
- Non-refundable tax credits. These credits can only reduce your tax liability to zero. If the credit amount exceeds the tax liability, the excess cannot be refunded but may be carried forward to offset future tax liabilities.
- Transferable tax credits. Some states offer transferable tax credits, which allow businesses to sell or transfer their unused credits to other companies. This can be particularly beneficial for startups or businesses with low tax liabilities, as it provides a way to monetize the credits.
- Credits for specific industries or activities. To encourage research in critical areas, some states offer targeted R&D tax credits for specific industries for example within technology or software development.
Application process for claiming state R&D tax credits
Navigating the application process for state R&D tax credits can seem daunting, but with these steps you can establish a solid foundation to claiming credits.
- Check that you qualify: Consider whether your business and research activities meet your state’s requirements for R&D tax credits.
- Have your documents handy: Keep detailed records of your research projects, including what you’re trying to achieve, how you’re doing it, timelines, and costs. This information is essential for calculating how much credit you can claim.
- Calculate the credit: Add up all the eligible research expenses to determine the total credit amount. This often involves specific formulas and may require the assistance of a CPA or tax professional to help ensure accuracy.
- Submit the application: Fill out Form 6765 and any other state specific requirements and submit them along with your business tax return. Make sure all the information is accurate to avoid any issues.
What you need to track
- Project details: Write down everything about each research project, including goals, methods, and results. This shows the technical or scientific nature of your work.
- Expense records: Keep clear records of all costs related to your research, like employee wages, materials, and any research done by outside companies. Make sure these expenses are linked to specific projects.
- Supporting documents: Be ready to provide extra paperwork like timesheets, payroll records, invoices, and contracts to back up your expenses.
- Annual reports: Some states ask for yearly reports on your research activities and expenses. This helps maintain your eligibility for future credits and ensures you’re following the rules.
Leveraging accounting software
Implementing reliable accounting software can significantly enhance your ability to track expenses accurately. This is crucial when it comes to claiming R&D tax credits. Additionally, software solutions like QuickBooks and NetSuite also streamline the documentation process. Ensuring that all research-related expenses are correctly categorized for audit trails and operational insights. As a result, precise tracking in this regard significantly simplifies the tax application process.
At Fusion CPA, we offer comprehensive software implementation and integration services to help you finances efficiently and maximize tax benefits. Contact us today!
_______________________________________________________
This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.
