Scientist holding dropper and test tubes in a lap

5 Advantages of the Small Business R&D Tax Credit

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Small businesses have great potential to benefit from the Research and Development Tax Credit. The R&D tax credit can save small and medium-sized businesses roughly 10% of their qualified expenses — the more you spend on technical activities, the more you can save on taxes.

Qualifying for the small business R&D tax credit is easier than many decision-makers think. If your company develops prototypes, dedicates resources to process improvements, develops software, or conducts technical activities like engineering, biotech, or life sciences, you may qualify for significant tax savings.

Here are the five key benefits of the small business research and development tax credit.

1. Many Small Businesses Are Eligible for Research Tax Credits

Small businesses that develop or improve products are typically qualified for research tax credits. These are commonly known to qualify for the R&D tax credit — expenditures related to prototyping, tooling, coding, software/app development, etc. What many don’t know is that the R&D credit not only applies to what you make but also to how you make it. 

Research that improves manufacturing methods or technical processes can also qualify, from the production line to final assembly. Technical activity and engineering that aims to streamline production, speed up assembly, reduce waste, and utilize technology that is new to your company can likely qualify for the small business R&D tax credit, which is intended to keep these activities within the United States.

 

software app developing coding code eligible research activities for small business R&D tax credit
Coding and software development activities can typically qualify your small business for R&D tax credits.

If your company is actively seeking new methods to make your processes better, faster, or less expensive, it likely qualifies for significant tax savings.

A few R&D Categories That Qualify:

  • Designing products, processes, formulas, or systems
  • Computer programming and software development
  • Creating prototypes tooling, jigs, or models
  • Evaluating alternative designs and materials
  • Contracting outside firms to do these activities

2. Small Businesses Typically Save 10% on Qualified R&D Expenditures

There is no ceiling on the money you can save through the R&D tax credit for small businesses. If your company spends several thousand or several million dollars on R&D supplies, equipment, and wages, you can still use roughly 10% of those expenses to offset your company’s taxes. Small and medium-sized businesses can utilize the credit as a dollar-for-dollar reduction in federal income tax liability.

3. Eligible R&D Activities Are Simpler Than You Think

Many small business leaders believe their research activities are not eligible for the R&D credit because they haven’t made groundbreaking discoveries. That used to be true, but in the early 2000s, Congress eliminated the “Discovery Rule,” greatly expanding the pool of businesses eligible to receive the credit.

Today, you don’t have to build A.I. robots or cure cancer to qualify. Instead, your development must only be new to your company. Even if the goal of your research is to keep up with your competitors, it can likely qualify — you only need to develop or improve products, processes, or techniques. Your research activities do not have to be incredibly complicated, either. For example, a project to improve efficiency or automation could make your small business eligible for the research credit.

4. Small Businesses Can Claim R&D Tax Credits Retroactively

Companies that engaged in qualified activity in previous tax years can perform a retroactive study to document unclaimed credits, generally up to three or four years. Tax returns filed within that window can be amended for refund claims on overpaid taxes. If your small business has done research activities for several years, it is wise to investigate your credit eligibility as soon as possible, as the window to claim your refunds expires on a rolling basis.

5. Several Paths to Monetization

There are several ways to monetize the R&D credit. The first is as a tax credit against liability on the current year’s income tax return when filed. If a taxpayer has made estimated payments against this liability, they may be entitled to a refund of those payments. The second way is to refund prior years’ tax overpayments where the credit was not claimed. The third is as an offset of quarterly estimated taxes based on anticipated future credits or carryforwards. Finally, small startup businesses may be eligible to convert the income tax credit to a payroll tax credit if they satisfy the definition of a Qualified Small Business.

employee wages conducting qualified activities for irs small business research tax credit
Money spent on employee wages may also qualify as eligible research expenses.

The R&D Credit Is for Businesses of All Sizes

The R&D credit was designed by lawmakers to encourage businesses of all sizes and industries to keep scientific and technological jobs in the USA to keep our country at the forefront of innovation. Small businesses often overlook the R&D tax credit, because it requires an additional report to be furnished to the tax preparer. This report should identify which expenses are R&D, why the business considers those expenses to be R&D, how that was determined, and which expenses were determined not to be R&D.

R&D tax credits for small businesses are easier to access than many decision-makers think. If you believe your company may conduct eligible research activities, contact a tax credit expert to help you claim the small business R&D tax credit.

Omega Accounting Solutions is a data-centric consulting firm that empowers business owners to make better-informed decisions. They build custom business intelligence tools to find fresh insights that yield action, sustain healthy operations, and promote new growth. They also specialize in helping small & mid-sized businesses utilize incentive programs to maximize cash flow. Omega’s team of Research and Development Tax Credit experts can quickly determine if your small business is eligible for research credits, calculate your credit amounts, and claim the maximum credit you qualify for. Contact Omega to get started now.