How can you get a robust tax break (even if you’re still pre-revenue) and do your part to stimulate the economy?
The Research & Development (R&D) tax credit was written into law to encourage creativity to benefit industry and society, and to grow the nation’s economy. When you do your part to build your business and can get your investment returned, pretty much in full, because you’re getting credit for making our economy more robust, that’s a serious win-win.
The R&D tax credit helps free up cash that can cover other expenses—helping cash flow and representing a valuable source of non-dilutive funding. And don’t worry if you don’t have revenue yet, companies investing in R&D can carry the credit forward to offset taxes owed once you are making sales and seeing cash in the door.
Here are three important things you should know about the R&D credit, and of course your VPTax Tax Director can help you learn more that applies directly to your business.
- You get back 100% of your investment. Unlike a tax deduction that reduces your tax bill by a percentage of the qualifying spend (like writing off half the cost of a business meal), the R&D tax credit is a dollar-for-dollar credit. This means that your taxes owed are reduced by the full amount you can prove you invested in research and development. Make sure your record-keeping is correct and well-documented—the rules can be tricky and your VPTax team can help make sure you are doing it right.
- You do not have to owe something to save something. Even if you are not making sales and profit now, earned credits may be carried forward for up to 20 years for federal tax filings, and indefinitely for state taxes if your business is in California. Rules differ by state, work with your Tax Director for your specific situation.
- Even without claiming the credit against owed taxes, you can increase your cash flow. Eligible businesses that make less than $5 million of grows receipts for the first time in the five-year period ending with the current year may be able to use the R&D tax credit to pay the employer’s portion of the company’s payroll taxes, up to $250K per year. Once again, work with the experts at VPTax to determine your eligibility for using a credit against your payroll tax obligations.
The R&D tax credit is one of the most flexible and valuable credits available in our tax code, and it’s a permanent offering that can be claimed by businesses annually, on an ongoing basis. The credit calculation supports each of the stages in the R&D cycle—Growth, Maturity, and Decline—so even if you’re winding down a product line there is benefit for you. If you’re spending, you can be saving, making it predictable for cash flow planning, and if you have not claimed in previous years for some reason, it is retroactive so you can often “make good” on prior expenses.
The VPTax team helps many of our startup and scale-up clients with the R&D tax credit each year. If this article opened your eyes, maybe busted a myth you may have believed about your eligibility or the high value of the credit, let’s talk—we may be able to help you reclaim a lot of cash you’ve invested to grow your company.