You may not realize it, but the R&D tax credit can deliver some breathing room in terms of tax savings. However, thousands of small businesses don't even realize how it's available to all businesses including the small ones. If you have R&D costs, you could deduct them. It has remained as part of the tax code since the 1980s, and while most considered it a "temporary" credit, it was extended 16 different times before being made into a permanent law called the PATH Act of 2015.
Why Businesses Don't Take Advantage of It
Perhaps it's the on-again and off-again uncertainty of the availability that makes this tax credit less commonly used. It has been designed to help, and whatever the cause, many people have failed to claim this credit available to small businesses. In fact, some of the members of Congress have introduced legislation aimed at educating small businesses on this subject.
Reason #1: Small Businesses Don't Know It Exists
To put it simply, a lot of businesses don't even realize this tax credit exists. Especially when you're first getting started, it can be difficult to know what to take as a deduction and what not to take. Many businesses may not have even educated themselves on taxes as much as they should have, so they miss out on this credit.
Reason #2: Available Only to Specific Industries
Many business owners fail to take advantage of it because it typically gets associated with pharmaceutical, manufacturing and technology companies. That might have been true at one time because of past regulations on the R&D tax credit. In the past, a company had to develop a process or product unique to the world to get this credit, but because regulations have been relaxed, a company might qualify for this credit if they developed any one of the following:
The business component must be grounded in the sciences for eligibility, but you can now take advantage of this credit regardless of your industry. Any company that designs newer, lighter, cheaper, stronger and a more reliable product will have eligibility for this credit because they're performing R&D activities. If you believe your business qualifies for this tax credit, you should pursue both the federal R&D tax credit and the state credit. When you receive this tax savings, it improves your cash flow and hones your competitive edge to a new level.
Reason #3: They Forget Prior Years
Sometimes even when a business takes advantage of the R&D credit, they fail to claim the past years. For example, you can go back three years to make a claim on these credits through what is called the Alternative Simplified Credit calculation. The IRS recently amended the rules of the ASC to let filers claim from their past tax returns. In the past, the IRS didn't let companies claim their credits from the years past, which explains why some people have forgotten to do this. They may not even realize they can because of the changing tax laws.
For whatever reason someone doesn't claim the R&D tax credit, they could be missing out on excellent savings. The R&D tax credit remains the largest credit available to businesses, and it provides companies with an estimated $10 billion in savings, according to Warren Everett. It's a business credit that has been designed to reward ingenuity, and those who have brought us to the frontiers of knowledge and technological advancement could qualify for one of these credits. The new amendments also meant that businesses from a full spectrum of fields can take advantage of it, which is why you want to check now more than ever.