Owners of new companies often seek out a CPA who understands how to navigate the complex tax landscape. Because these organizations typically have low revenue and unique, one-time expenses, exact record-keeping is essential. Nowhere is this kind of ability more helpful than in the area of uncovering R&D tax credits for new businesses.
A Short History Of R&D Tax Credits
Beginning in 1981, Congress wrote new rules that allowed for R&D tax credits for emerging companies. The primary mechanism of the credit was to allow eligible R&D expenses for newer companies who engaged in a wide range of research, not necessarily of a scientific nature. Entrepreneurs could cut their Social Security tax burden by significant amounts for the first five years of their existence. They could even carry the credits forward for up to 20 years.
The rules were popular with the public and were renewed more than a dozen times before becoming permanent in 2015.
Rules For Taking R&D Credits
One of the central aspects of proper accounting involves the correct application of the rules for taking R&D credits. The IRS allows wide latitude when it comes to defining “R&D,” but it still means you’ll need to maintain detailed records for documentation and audit purposes.
You can reduce your firm’s Social Security tax burden with a direct write-off of research and development expenditures of 10 percent of total R&D investment in a year. There’s a $250,000 annual limit on the amount you can take. However, any excess credits can be carried forward for up to 20 years.
Another stipulation is the timing rule. The credit is only available during your first five years of existence, or during the first five years that your firm generates revenue.
Possible Complications
The IRS has challenged a company’s definition of R&D expenses before. It’s not enough for the expenditure to be valid. You also need supporting documentation showing how and why the expenses are considered to be research and development. The IRS accepts things like lab results, projects lists, notes, payroll records, and expense details from your general ledger.
One challenge here is knowing what types of records to maintain. You also need to understand when to file for the credit, and apply consistent annual standards.
Where to Begin: Accounting
Fusion CPA, our team of experienced accountants can help you navigate R&D tax credits on qualified expenditures. You’ll have access to a CPA with a strong background in tax planning and bookkeeping. Our team can show you how to minimize the risk of potential penalties, carry excess R&D credits forward, and accurately document eligible activities. To learn more about our services, schedule a complimentary discovery call today!
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