The R&D tax credit is one of the most valuable for startup businesses, and you have one last chance to claim it.
We’ve been covering the changes to the R&D tax credit for several years now, first in 2015 and then again in 2016, because it is one of the most beneficial, yet often overlooked, tax credits on the books. You’ll remember that, prior to 2016, businesses could only take the R&D credit against their income tax liability. But a welcome provision in the PATH Act (2015) allowed eligible small businesses to apply part or all of their research credit against their payroll tax liability. This allowed startups to claim the credit early (when they had no income tax liability), which significantly impacted their bottom lines. The new option was available for 2016 returns.
Did you miss it? Fear not. If you act fast (and I mean really fast), you can still make the election by filing an amended return for tax year 2016. The deadline is December 31, 2017.
The election to use the R&D tax credit against payroll taxes is available to qualified small businesses (see below) for a period of 5 years, and the annual limit of the credit is $250,000. It can be used to offset the Social Security portion of payroll taxes and Alternative Minimum Tax (AMT).
A qualified small business is a corporation or partnership that had less than $5 million in gross receipts for the taxable year and one that did not have gross receipts preceding the five taxable-year periods. If that sounds like your business, chances are, you are doing something that qualifies you for the R&D credit. Activities include:
- developing or testing new products and materials
- developing new or enhanced formulations or combinations of existing products
- testing new concepts
- improving existing products
- conducting trial and error experiments
- designing tools, jigs, molds or dies
- developing or improving production or manufacturing processes
- developing, implementing or upgrading systems and/or software
Still unsure? A simple four-part test determines R&D activity. Ask yourself the following:
- Does our product or process develop a new or improved business component?
You must create a new product, process technique, formula, invention, patent or software, or improve an existing one. You must improve performance, functionality, quality, reliability, or cost - Is our product or process technological in nature?
The process of experimentation must rely on the hard sciences -- engineering, physics, chemistry, biology, or computer science. - Have we eliminated uncertainty?
You must demonstrate that you’ve attempted to eliminate uncertainty about the development or improvement of a product or process. - Have we gone through the process experimentation?
You must demonstrate through modeling, simulation, systematic trial and error, or other methods that you’ve evaluated alternatives for achieving the desired result.
Time is running out, so don’t delay. If you think your business may be eligible for this generous tax credit, reach out. We can determine if you’re eligible and get to work on an amended return. It’s a generous credit. Don’t forego it.
