The Research & Development (R&D) tax credit can enable businesses to increase cash flow and savings, reduce the Federal income tax rate, and receive Federal and State dollar-for-dollar income tax reductions. Specifically, a wide variety of businesses can potentially offset up to $500,000 in payroll tax liability for qualifying activities.
However, there are many misconceptions about the R&D tax credit that prevent businesses from taking advantage of it.
Here are the 6 most common myths:
Myth 1: The R&D Tax Credit is Only For Businesses with a Large Amount of Revenue
Many people falsely believe the R&D tax credit is only for businesses with a large amount of revenue. However, businesses with a revenue of less than $5 million in the current year are able to claim the credit.
Myth 2: Start-Ups Can’t Claim the R&D Tax Credit
Start-ups and small businesses can claim the R&D tax credit. If your business has 5 years or less in revenue, you are eligible for the credit (as long as you meet the additional qualifying criteria, which include having $5 million or less in revenue in the current year and conducting qualifying research activities).
Myth 3: The Business Must Conduct Scientific Research to Claim the Tax Credit
A business does not have to conduct scientific research in order to claim the R&D tax credit. There are a large number of activities that qualify, including (but not limited to) automating or improving internal manufacturing processes, designing tools or fixtures, integrating new equipment, developing financial pricing models, developing data centers, integrating APIs and similar technologies, and many more.
Myth 4: A New Product Must Be Created To Count as a Qualified Research Activity
This is false. You do not need to create a new product in order for the activity to qualify for the R&D tax credit – improving an existing product, process, or formula can count as a qualified research activity.
Myth 5: Only Businesses in a Research Industry Can Claim the Credit
The R&D tax credit applies to any industry, as long as the business conducts qualified research activities
Myth 6: The R&D Tax Credit Can Only Be Claimed For the Previous Tax Year
One of the most significant benefits of the R&D tax credit is it can be claimed for tax years that go back 3 to 4 years.
How Source Advisors Can Help
At Source Advisors, we can help assess your business’ federal R&D tax credit opportunity and determine any state R&D tax credit availability. In fact, many states offer R&D tax credits, with many being more lucrative than the federal credit. Our team of experienced CPAs, attorneys, engineers, and technology experts helps businesses save money, create cash flow, and potentially reduce income taxes with R&D tax credits that can then help drive overall growth.