R&D Tax Credits Improve Liquidity for More Businesses

Could you use some additional cash flow in your business? We thought so. Recent global events have certainly incentivized many tax decision-makers to prioritize tax planning that can increase cash and enhance overall business liquidity.

This could mean a renewed focus on research and development credits (R&D credits). Specifically, more companies may be eligible to claim R&D credits to offset income and payroll tax than in the past. Qualified start-ups could also elect to convert up to $250,000 per year, for up to five years, into payroll offset credits with an R&D related Section 41(h) election.

Barriers to R&D Tax Credit May No Longer Apply

In the past, limiting regulations kept all but very large companies from claiming R&D credits. But changes to tax law in recent years, notably the PATH Act in 2015 and the Tax Cuts and Jobs Act of 2017, have expanded the scope of eligible business activities and encouraged business innovation.

There are still requirements to analyze and gather documentation for qualifying activities. The burden of proof is on the taxpayer, but the costs associated with that review may be far less than the potential benefit of income and payroll tax offsets.

Business owners looking at all options for tax offsets and liquidity right now should consider R&D as one option.

Apply the R&D Four-Part Test

A four-part test can help you determine if business expenses like wages, supplies and other activities involved with developing or improving your products and services quality for the research credit.

  1. Elimination of Uncertainty: Changes for aesthetic reasons do not qualify, but research that tangibly improves the product or service could qualify.
  2. Process of Experimentation: You must demonstrate that you’ve evaluated alternatives for achieving the desired result.
  3. Technological in Nature: The process of experimentation relied on hard sciences, such as engineering, physics, chemistry, biology or computer science.
  4. Qualified Purpose: Show that the purpose of the research was to create a new or improved product or process, resulting in increased performance, function, reliability or quality for your company.

What is the Sec. 41(h) Election for Start-Ups?

The Sec. 41(h) election allows qualifying start-ups to apply the credit against their payroll tax liability instead of their income tax liability.

To be eligible, a start-up must have gross receipts for the tax year of less than $5 million and no gross receipts in a tax year preceding 2015 for the 2019 tax year. Gross receipts for purposes of start-up eligibility include interest and dividends, and there is no de minimus rule.

Even if your business has been around for years, R&D credits might now apply to you. Contact Chris Cook of Anglin’s Tax Advisory Services team at 256-533-1040. Our firm has extensive experience in R&D reviews and tax consulting for a variety of industries. We can help you claim the maximum benefits of creating or improving a product, process, technique, formula, invention or software.

You may also be interested in this blog post about how tax reform has made the R&D credit available to more businesses.