Top Five R&D Tax Credit Myths Get a Reality Check
Many corporate taxpayers still think the Research & Development (R&D) tax credit is reserved for companies with labs full of scientific researchers working to cure diseases or teams of computer scientists programming the next big technological breakthrough. And while the government is happy to reward scientists in white lab coats with a generous R&D tax credit, these days, it’s rewarding many other types of R&D—in all kinds of industries—as well.
In fact, you might be surprised to learn what constitutes tax-credit-worthy research and development: A bike manufacturer that creates new packaging, so parts don’t get damaged during the shipping process could qualify. A winery that crossbreeds grapes to create a new variety could qualify. For obvious reasons, it’s important to stay on top of your company’s research-and-development activities in order to take advantage of the credit.
You don’t have to miss out one of the largest corporate tax credits in the U.S.—especially if you’re already doing the work. Here, we clear up the common misconceptions surrounding the R&D tax credit.
Myth: R&D Tax Credits don’t apply to my industry.
Reality: Any company in any industry can qualify for the credit if it creates a new product or process or improves a product or process. With so many industries embracing technology to streamline processes, making a product or process better, cheaper, more eco-friendly or efficient, qualifying activities can stem from Big Tech, Big Pharma, retail, manufacturing, or even that small craft-beer start-up that nobody knows about–yet.
Your activity just must meet the four-part qualifications:
- Qualifying purpose: New and improved process, product, formula, software, invention, etc.
- Elimination of uncertainty: Can we do this? How do we do this? What should it look like or do?
- Process of experimentation: Testing to eliminate technical uncertainty; evaluate alternative sources; iterative design, modeling or trial-and-error
- Technological in nature: Engineering; hard science (physics, chemistry, biology); computer science
Myth: Projects need to be ground-breaking.
Reality: When it comes to qualifying for the R&D tax credit now, the good news is you do not have to reinvent the wheel. When the credit first came on the scene in 1981, the Discovery Rule required that activities must be “new to the world,” which left the door open to just a few lucky innovators. Fast-forward to 2003, the Discovery Rule was eliminated, taking the new-to-the-world rule down with it. Now, projects just have to be “new to the taxpayer,” so unless you’re doing things exactly the same way you always have—or merely upgrading –then there’s a good chance some qualifying activities are lurking around your company.
A company likely qualifies if it is:
- Developing or designing new products or processes
- Enhancing existing products or processes
- Developing or improving upon existing prototypes or software
Myth: The project wasn’t successful, so it doesn’t qualify.
Reality: Sure, you had lofty goals, but maybe things didn’t go exactly as planned. No problem. The R&D tax credit is there to encourage innovation and failure might be an important part of the process. So, as long as the project meets the qualification criteria, your company doesn’t have to succeed to qualify. Even if efforts or improvement or innovation fail or carry into the following year, you’re still rewarded for trying.
Myth: Companies Must be Profitable to Benefit from the Credit.
Reality: It’s true: Years ago, start-up companies and companies reporting losses couldn’t immediately benefit from the credit because they weren’t taxable. But in 2015, the Protecting Americans from Tax Hikes Act (the PATH Act) changed all that when it enabled companies in a loss position to apply up to $250,000 of credit against the Social Security portion of their payroll taxes. As long as the company can show gross receipts of less than $5 million for that tax year and gross receipt for five years or less, even companies in the red can benefit.
Myth: Applying for the R&D tax credit is too expensive and too complicated.
Reality: Once upon a time, applying for R&D tax credits meant enlisting expensive consultants, constantly tracking changing regulations, and producing mountains of paperwork for every project. For many companies, the end just didn’t justify the means. But those days are over. Technology makes applying for the R&D tax credit seamless and inexpensive. AI-powered solutions (like CrossBorder Solutions’ Fiona) have the power to record payroll records, ledgers, project notes, requirements, specifications, automate time-tracking, and calculate the credit—not to mention, organize and store reports. You know—for next year when you re-apply for the R&D tax credit. After all, you’d be crazy not to.