3 Myths About the R&D Tax Credit for Small Businesses
Regardless of how much we earn, which politicians we support, or what type of music we like to listen to, the one thing that unites pretty much all Americans is the desire for a lower tax bill.
When it comes to America’s largest tax credit for innovation, the R&D tax credit, big corporations have historically had the upper hand in receiving its benefits. Nearly 90% of R&D tax credits go to businesses over $100MM in revenue even though smaller businesses and startups clearly qualify. But why is this?
I believe it is due to some common misconceptions that have persisted even though changes have been made to expand the credit and make it more more accessible. So allow me to refute three of the more popular myths you may have heard.
Myth #1: I don’t qualify.
Many businesses perform activities that qualify for the R&D tax credit without realizing it. The R&D tax credit can be used by companies of any size in industries ranging from software development to breweries. If you do anything technology-based, improve it, and sell it to customers, you probably qualify.
Also, companies who participated in the Paycheck Protection Program or who plan to take advantage of the Employee Retention Tax Credit may still be eligible to claim the R&D credit.
Myth #2: It can only be applied to income tax.
This is not true. The credit can be taken as a payroll tax offset, up to $250K per year, by qualified small businesses. You are considered a qualified small business if you have less than $5 million in revenue and are within five years of your first gross receipt. If you have no payroll, the credit can be carried forward to the next quarterly return. The credit doesn’t expire and continues to be available until it can be fully used against payroll tax. Unused credits can also be useful upon exit.
Myth #3: The savings aren’t worth it.
Are you kidding? We have many examples of companies saving tens and even hundreds of thousands of dollars with the R&D tax credit. Remember, this is a credit not a deduction. It’s applied directly against taxes owed. Plus, our technology-driven solution simplifies the process of claiming the credit and reduces overall fees.
Regardless of what your company does, it’s worth looking into this credit. According to the tax law, the R&D credit is here to stay — and is likely to be an ongoing part of small businesses’ annual tax strategies.