Posted by Shaun Yeh, Esquire on 12.06.19
Many new and small businesses have limited access to the R&D tax credit. In July 2019, Senator Tom Tillis and Senator Maggie Hassan proposed a bill - The R&D Tax Credit Expansion Act, to expand the research and development (R&D) tax credits that can be taken against federal payroll taxes for startups and small businesses. Unfortunately in the past, many small businesses and new start-ups weren’t able to utilize the R&D tax credits to their advantage; however, this bill has the potential to change that. The proposed bill would double the research credit that could be utilized against payroll taxes for start-up companies. An eligible start-up small business is currently defined as a corporation, partnership, or sole proprietorship with gross receipts averaging less than $5 million for the tax year and five years or fewer of gross receipts. The new bill (The R&D Tax Credit Expansion Act) would now double the research credit applicable for eligible start-up companies by increasing the cap from $250,000 to $500,000 and then indexing the cap for inflation. The new bill would also expand the research credit to include all payroll taxes, as well as extend the credit to more small businesses by increasing the size of eligible companies from $5 million in average gross receipts to $10 million a year.
The R&D Tax Credit Expansion Act will modernize the payroll tax offset for start-up companies by the R&D credit by:
Meeting the Four-Part Test
The R&D tax credit encourages certain research activities by reducing a company’s liabilities for spending money on that research. The credit is equal to a certain percentage of a business’ qualified research expenditures (QRE) in excess of a base amount. Expenditures that qualify are more comprehensive than you may think. QREs can include the salaries of employees and supervisors who are conducting research, supply costs and even the costs of the research that is contracted out. R&D tax credit eligibility largely depends on whether the work you are conducting meets the criteria established by the IRS in its four-part test:
Find Out if Your Activities Qualify
The R&D tax credit can be a lucrative incentive for start-up businesses. To learn more about whether your industry and company activities meet the R&D four-part test, request our free assessment today.
Though calculating the R&D credit is not complicated; knowing which expenses qualify and whether you have the correct documentation to back them up, is more difficult for many small businesses. Your accountant or qualified R&D tax credit expert can help you determine whether your business activities meet the criteria of the test by conducting a tax credit study.
Tax Point Advisors provides R&D tax credit study services and other specialty tax services to CPA firms and their clients throughout the U.S. To learn more about R&D tax credits from the experts at Tax Point Advisors, please call us at (800) 260-4138 or please leave us a message below.