Maximizing Cash Flow Through Government Tax Opportunities

income tax

Deborah Roth, CPA
August 14, 2023

Amid the ongoing challenges posed by COVID-19, numerous small and midsize businesses are grappling with maintaining cash flow, operational capabilities, and their internal research and development initiatives. While the Coronavirus Aid, Relief, and Economic Security (CARES) Act did extend financial aid to these COVID-19-affected enterprises through emergency grants, retention tax credits, and forgivable loans, these solutions offer only temporary cash flow relief, falling short of providing lasting solutions.

Did you know that research and development (R&D) tax credits present a substantial avenue for bolstering your cash reserves?

Indeed, research tax credits can serve as an invaluable source of funding for many small and midsize businesses, and the best part is that these credits are not a one-time occurrence – they can be claimed consistently year after year.

Understanding the R&D Tax Credit

The R&D Tax Credit serves as a valuable business credit designed to stimulate technological innovation and job creation. These credits, available at both federal and state levels, can encompass up to 20% of the expenses incurred in the advancement and refinement of new and existing products, processes, and software. Unlike mere tax deductions, the R&D Tax Credit offers a dollar-for-dollar reduction in owed or previously paid taxes.

Qualifying for R&D Tax Credits

Qualifying Research Activities (QRAs) pertain to endeavors aimed at enhancing or developing new products, processes, and software. To be eligible for the R&D Tax Credit, these qualifying research activities must meet the Four Tests established by the IRS. Additionally, the company undertaking these activities must bear the financial risk associated with them.

Eligible Expenses for R&D Tax Credits

There are four primary categories of research-related expenditures that qualify for claiming:

  • Wages: Compensation paid to employees engaged in, overseeing, or directly supporting R&D initiatives.
  • Supply Expenses: Expenditures related to supplies utilized in R&D undertakings.
  • Contract Expenses: Payments to U.S.-based third-party contractors participating in R&D efforts.
  • Leased Computer Expenses: Expenses tied to cloud service providers used in software development.

Key Advantages of R&D Tax Credits

The benefits of R&D tax credits for businesses are twofold: they enhance profit retention while simultaneously driving product and technological advancement. These credits enable qualified businesses to deduct the expenses incurred in eligible research and innovation from their taxable income. Eligible research should be technological in nature, involve experimentation and uncertainty, and contribute to the creation of new products, processes, or software. Importantly, the success of the research is not a prerequisite for qualification. R&D tax credits can be claimed on both federal and state tax returns, and they can even be refunded if claimed. Generally, a window of three years is available to file an amended return.

Making Claims for R&D Tax Credits

To harness the potential benefits of federal and state tax incentives, thorough documentation is imperative. The process begins with assessing all activities within your company for potential eligibility. Subsequently, gather the necessary documentation and meticulously track expenses, establishing a clear and concise link between qualified projects and associated expenses. This substantiates your claim. The IRS necessitates a clear connection between research costs and research activities.

Leveraging Expert Assistance in R&D Studies

If your business has been impacted by the ramifications of COVID-19, stands ready to aid you. With over three decades of experience, we have provided federal and state research tax credit services to numerous small and mid-market enterprises. Our team of skilled accountants and engineers can help you identify qualifying development activities and expenses. We will meticulously handle complex calculations and compile comprehensive technical documentation, freeing you to concentrate on your business's demands.

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