Posted by Jeffrey Feingold on 05.29.24

Common Misconception

Many people believe that R&D tax credits really don't help the bottom line. That's because either they don't understand what they are, or they haven't looked at the math. This misconception keeps many companies from profiting from a tax credit that could help them, because they think it isn't worth taking the time to do. Let's look closer at these credits.

Why are there R&D tax credits?

The R&D tax credits were enacted in 1981 as part of a program to stimulate the economy and create jobs. Our government wanted to encourage private industry to stay tech savvy and to keep America competitive on the world market through new inventions and developments. 

What are the R&D tax credits?

The R&D tax credits are not a tax deduction. They are a credit that is subtracted from the tax. They present a significant tax savings. Many companies save hundreds of thousands of dollars by using this perfectly legal tax savings. By reducing taxes in a significant way, net earnings increase significantly, too. The company's overall profit looks exceedingly better, giving a much better earning per share report.

What qualifies as an R&D tax credit?

The first and obvious thing that qualifies is in-the-laboratory research that produces a new product that gains a patent. But that is not all that qualifies. Many things qualify that you might not realize. Development costs count. If you are developing a new process or method, those expenses count. These can be design changes in the way things are done. They might be changes made on the shop floor or on a job site. 

What are the benefits of the R&D tax credits?

• Obviously, the first benefit is the savings on the current year's tax form.
• Credits not used this year can be carried forward for up to 20 years.
• There may be effective tax rate benefits.
• Credits can be claimed for open tax years (usually 3-4 years), and often for some prior "closed" tax years.

Who do the R&D tax credits help?

The tax credits apply to many, if not most, industries. If you can pass this four part test, you can use tax credits in your company.

• Does your company undertake activity intended to develop a new or improved product or process for yourself or your customer? Do you create a product, process, technique, formula or invention to improve performance, functionality, reliability or cost?
• Is this activity by nature technical?
• Does this activity seek to eliminate technical uncertainty?
• Does this activity follow a process of experimentation?

Who do I contact for more information if I think I might qualify?

If you are uncertain about the answers to the above questions, or you need more information about how to proceed, contact your CPA, tax attorney, or a company like Tax Point Advisors that specializes in R&D tax credits. We offer free consultations to determine if you qualify and give an estimate of what your savings could be. Don't be afraid to improve your bottom line with R&D Tax Credits!