How R&D Tax Credits Provide Tangible Value

Leila Rayburn | Source Advisors

June 1, 2020. 3 min read
  • The R&D tax credit can help companies generate much needed cash flow by offsetting taxes owed or paid.
  • In many cases, the cash generated is used by companies to grow and remain competitive by funding additional research activities perhaps leading to expanded manufacturing lines or equipment. An interesting way to assess the value of an R&D credit is to compare the amount of the credit to the amount of top line revenue needed to produce comparable cash flow.

  1. The R&D tax credit can help companies generate much needed cash flow by offsetting taxes owed or paid.
  2. In many cases, the cash generated is used by companies to grow and remain competitive by funding additional research activities perhaps leading to expanded manufacturing lines or equipment. An interesting way to assess the value of an R&D credit is to compare the amount of the credit to the amount of top line revenue needed to produce comparable cash flow.
  1. The credit oftentimes produces a windfall of cash equal to a substantial increase in sales. Let’s use a manufacturing company as an example. The company knew about the R&D Tax Credit , but didn’t believe they engaged in enough R&D to warrant the time and fees associated. They were wrong. Using an experienced R&D Tax Credit firm like Source Advisors, they were able to generate $320,000 of annual R&D Tax Credits . This was equivalent to growing revenues by over 5% but without actually selling anything!
    Average Revenue: $40 million
    Net Profit Margin: 15%
    Average R&D Tax Credit : $320,000
    Revenue Equivalent: $2,133,333

    This company claimed credits for the three prior years. So with a minimal investment of company time they generated nearly $1 million in cash back. In other words, the company would have had to increase revenue by 16% in the current year to create the equivalent increase in cash

  2. Start-up companies are able to use the research credits against payroll tax. Does your start-up meet any of these minimum requirements? If so, it might be time to investigate a R&D Tax Credit .
    • 5 years old or less
    • Defined as a corporation (including an S corporation) or partnership
    • Gross receipts of less than $5 million for the current taxable year
There are many other ways that R&D Tax Credits provide a tangible value. There are ever-changing laws and regulations that are too cumbersome even for many CPA firms to take on. Talk to an established firm that specializes in R&D. Let them evaluate whether or not there is ‘value’ for your company.

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