It’s an obstacle many small and medium-sized business owners face: You want to expand and grow your product line or services but don’t have the funding to do it. However, an expansion seems just the thing to bring in more capital, stay competitive, or add value to potential customers. It’s a real Catch-22 – you need to grow to be more profitable, but you can’t grow without an increase in profits. What’s a business owner to do?
Partnering with a certified public accounting firm can help you better plan, prepare, and make decisions regarding this scenario and many other business conundrums. A knowledgeable CPA team can help you maximize dollars and minimize expenses. In the case of a scenario like the one above, one such tax advantage comes to mind…
The Good: Tax Credits and Incentives
Since 1981, many companies have benefited from a federal research and development tax credit. The credit matches dollar-for-dollar the amount a company (ahem, your company) spends on research and experimentation (sometimes referred to as the R&E tax credit). Many states followed the federal government’s lead by introducing their own R&D tax credits to encourage and support their local economies and spark job creation.
A business with qualifying research and development expenses can recoup those costs at tax time. In turn, they can use the additional funds they get to keep to offset growth and expansion costs. For example, money not paid on taxes can be used to expand facilities, hire more employees, or invest in adequate research and development.
Who Can Use It
One remarkable aspect of the tax credit is that there aren’t many limits on who can use it. It’s handy for small and medium-sized businesses that can use a boost with raising capital to stay competitive. The R&E tax credit depends on the activities it’s used for, more so than specific industries.
What counts as research and development? Well, those activities include any type of development, design, product, service, or process improvement.
Here are some ideas to give you a better concept of how and when to use this credit:
- Developing models or prototypes
- Designing or exploring new technologies
- Creating new processes, products, or services
- Construction
- Environmental testing
- Certification testing
Any business in any industry can take advantage of the R&E tax credit. However, below are some suggested industries to inspire you to consider investing in research and development/experimentation within your own industry:
- Aerospace
- Agriculture
- Architecture
- Auto-making/Repairing
- Brewing
- Engineering
- Food/Beverage
- Life sciences
- Machining/Manufacturing
- Software/Tech development
- Wine-making
Benefits
Incentives of the R&E credit include:
- Reducing tax liabilities
- Increasing Earnings Per Share
- Minimizing effective tax rate
- Boosting cash flow
- Carrying credit forward up to 20 years
- Recognizing unclaimed credits going back three or four years
- Using against payroll tax
The Not-so-good: Less and Slower
Like many states, North Carolina also passed the R&D Tax Credit. Unfortunately, that advantage ended in 2015. Residents of our state only have the federal R&E tax credit to go on.
Also, in 2017, Congress changed the tax bill by requiring R&E costs to be amortized over five years instead of expensing within the same tax year. What that means for you is that your cost recovery will be more gradual. Instead of crediting the entire amount spent on research and development/experimentation within the year you spend it, you’ll slowly reap the benefits over five years.
The Unpleasant: Document, Document, Document
Local accounting firms in North Carolina are happy to advise and help you apply for the federal R&E credit. But first, a bit of homework – it’ll take some documentation on your part to supply your accounting firm with the proper proof the IRS requires.
That’s right. Applying for the federal R&E tax credit requires plenty of proof and documentation. On a positive note, your NC accounting services partner can assist you. The secret to your success lies in strong, open communication with your CPA firm and organizing the evidence.
Bright Futures
Undoubtedly, some R&E tax changes have left a bad taste in people’s mouths. However, legislators nationwide are proposing adjustments to the tax credit so that it’s more appealing and lucrative for businesses to invest in development. Industries that innovate and design strengthen their local economies and the nation’s.
To maximize your dollars and minimize expenses, your CPA team needs a holistic understanding of your company, not just a financial snapshot at tax time. We’re here to help you make the most of every available opportunity or tax credit.
We want to make you aware of the tax credits available so you can alert your CPA team to your intentions. If you plan on researching or developing anything within your business, communicate that with your CPA partner so they can ensure your success.
