- When developing new products, it’s easy to overlook involving your CPA, even though the R&D Tax Credit can meaningfully lower your taxes.
- The R&D Tax Credit is a dollar-for-dollar reduction against tax that Congress created to encourage companies to use changing technology to improve products and processes.
- The credit is calculated as a percentage of Qualified Research Expenses (QREs), typically around 10%, with tax savings for non-public companies ranging from about $1,000 to $500,000 per year.
- Getting a patent is not required to claim the R&D Tax Credit, but having one is a strong indicator that a project likely qualifies and that the spending is high enough to generate a substantial credit.
- Because the R&D Credit calculation can be complex with many options at each step, it pays to work with a CPA or a specialized outside consultant to guide the process.
Creating a new product can be quite the undertaking. While trying to coordinate the efforts of engineers, marketers, patent attorneys, etc., it can be easy to overlook involving your CPA. What does your CPA have to do with engineering new products? Plenty, if you like lowering your taxes.
What Is The R&D Tax Credit?
The R&D Tax Credit is Congress’ way of encouraging companies to embrace changing technology, using it to improve their products and processes. Because a tax credit is a dollar-for-dollar reduction against tax, it can make a huge difference in maximizing cash flow.
How Big Are The Tax Savings?
The credit is a percentage of Qualified Research Expenses (“QREs”) – i.e., the spending that you can attribute to qualified R&D projects. The percentage varies but tends to be about 10% of QREs. The tax savings tend to range from about $1,000 to $500,000 per year for non-public companies.
Do I Need A Patent?
While getting a patent is not required, it is a strong indicator that you should claim the R&D Tax Credit. It means that your project most likely had the characteristics needed to qualify as an R&D project, and that the spending is likely high enough to create a large credit.
How Do I Get Started?
The R&D Credit can be complex, with many options to consider along the way, so it pays to have a professional guide you through the process. If your CPA doesn’t calculate the credits themselves, they may direct you to an outside consultant that specializes in the credit. No matter what consultant you use, you should be aware of all alternatives at any juncture in the calculations, and the level of risk associated with each option.
If you would like to learn more about the R&D Tax Credit we invite you to listen to the show below.
