A Brief Guide on R&D Tax Credit for Small Business Owners

consulting a cpaNow that there are impending new rules to the Research and Experimentation Tax Credit (R&D), businesses are in for bigger savings. For many years, numerous businesses in the US have benefited from this IRC Code. Despite this fact, there are still some companies that are wary about claiming the tax credit. This is true particularly for small and mid-sized businesses; several owners assume that to gain such benefits, they must have working laboratories and conduct groundbreaking research first.

The truth, however, is far from that. The R&D tax credit offers any growing businesses the chance to diversify and expand while contributing to the betterment of the nation. Whether you are managing a startup or thinking about consulting a Salt Lake City CPA, it best to have a good grasp on such matters.

Take a look at some of the things you might not know about the tax code.

Expiration and Extension

Like other kinds of tax breaks, the R&D credit has a stipulated expiration date. It has expired 9 times since its introduction in 1981. But, the tax break has proven to be a success, paving the way for higher quality research and development activities in the country. This is the reason company owners and industry leaders constantly lobby for extensions. Now, the US Treasury Department is finalizing the details for the fifteenth code extension.

Four-Part Test

Generally, there are four ways to determine if your operations qualify as R&D activity. First, the purpose of the project should be geared towards creating or improving the performance of a business component. Second, the project must also eliminate any existing uncertainty relevant to the business. Then, the project should have a working system of experimentation. Lastly, the undertaking has to be scientific or technological in nature.

Credit Calculation

There are several ways to calculate the tax credit, which include the Traditional Credit Calculation, Alternative Simplified Credit and Start-Up Credit Calculation. Remember, though, that the base amount should not be less than half of your qualified expenditures for the current year. For good measure, seek help from a CPA to understand the calculation methods.

R&D Expenditure Deduction

You may also choose to deduct R&D expenditures, as long as they are in the first year when you incurred the expenditures. Deduct them from your tax return, rather than capitalizing on them. Unless you acquired the Commissioner’s consent, you do not have such options in the following taxable years.

The R&D tax credit is often misunderstood. But with help from experts in the field, you can make the most of your research and development operations and focus on streamlining your business.

Resources:

http://www.washingtonpost.com/blogs/wonkblog/wp/2014/01/24/theres-a-war-over-rd-tax-credits-and-companies-keep-winning/
http://www.cookmartin.com/salt-lake-city-cpa.html
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Current-year-Deduction-of-Research-Development-Expenditures