The Research and Development (R&D) tax credit is helpful for small businesses to save money on qualifying research activities (QRAs). However, several widely believed R&D tax credit myths may deter companies from claiming their credits.
R&D Tax Credits are Only for Scientists
One of the most common misconceptions about R&D tax credits is that they are only available to companies with laboratories and scientists. Fortunately, the R&D tax credit is available to companies in various industries. To qualify for the credit, business owners must ensure that their activities pass the four-part test.
For example, businesses outside of the sciences can claim tax credits by improving fabrics in clothing, automating manufacturing processes, and making food healthier. These activities fulfill all the criteria in the four-part test.
Projects Must be Groundbreaking
It is not necessary to make groundbreaking discoveries when conducting R&D. Companies only need to demonstrate that they are attempting to improve a business component, eliminate uncertainty, and use a technical process of experimentation.
Until 2003, the Discovery Rule required organizations to produce entirely new results. Congress later adjusted the law so businesses could use activities to improve existing products or services as part of their claim.
Research and Development Must be Successful
Research and development do not need to be successful for a business to qualify for R&D tax credits. Companies only need to document and track their attempts to improve or create a new business component. Effectively tracking each aspect of R&D will raise the odds of receiving credit regardless of the result.
Only Large Corporations Qualify
Organizations can qualify for the R&D tax credit regardless of size. Many startups and small business conduct research and development activities that enable businesses to be eligible for credit.
Forgot to Include it in the Last Tax Return
Companies that forgot to include research and development activities in their latest tax returns can still qualify for R&D tax credits. Business owners must file an amended tax return to claim R&D tax credits for previous years. Moreover, organizations can retroactively claim credit for up to three years.
Startups not Paying Federal Income Tax do not Qualify
If your startup was not required to pay income tax, your credit could pay down up to $250,000 of your FICA payroll tax for the first five taxable years. However, companies must have gross receipts of less than $5 million for the tax year you are claiming for and must have R&D credit for up to $250,000.
R&D tax credit myths may be causing small businesses to leave many unclaimed tax credits on the table. MainStreet searches through all R&D tax credits your business is eligible for and passes the savings to your company. Contact us to get started today!