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To claim the R&D tax credit, taxpayers have two options. Businesses can claim the R&D tax credit on their tax return for a given year or by amending their prior returns to claim the credit.

The R&D tax credit covers a range of qualifying expenditures, such as employee compensation costs, materials expenses, leased or rented computer equipment, outsourced services expenses.

The R&D tax credit, also known as the Research & Development tax credit, is a federal tax credit designed for qualified businesses to offset their payroll tax - this includes startups. If you have a startup company that performs research and/or technology development activities, you can apply for up to $500,000 of research credit against income tax liability on your income tax return. 

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The Tax Cuts and Jobs Act (TCJA) has had enormous, far-reaching consequences on many tax issues. One often-overlooked change is The one currently looming on the horizon is the five-year amortization of R&D expenses that went into effect as of January 1st, 2022.

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When it comes to claiming R&D tax credits, many taxpayers are unaware of the rules allowing them to carryforward the unused portion of their research tax credit. In most situations, a company that has qualifying research expenses but no income can carryforward the credit to offset tax liabilities on future profit. Any unused R&D credits will carry forward for up to 20 years. In addition to carryforwards, the research tax credit can also be carried back one year.

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The Research and Development (R&D) tax credit can benefit startups and small companies through something known as the Payroll Tax Credit. The R&D payroll tax credit became available to qualified small businesses through the Protecting Americans from Tax Hikes Act of 2015 (The PATH Act). This tax law created an opportunity for qualified small businesses to offset all or a portion of their contribution to payroll tax using federal R&D tax credits for up to five years. Prior to this time period, businesses could only take the research credit against their income tax liability.

When it comes to determining how to offset payroll tax with R&D tax credits, business owners and executives interested in saving valuable payroll tax dollars need to understand the following key points.

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The Research and Development (R&D) Tax Credit is a means by which the United States government incentivizes American businesses to continue innovating and expanding their abilities to research and develop better products. As technology evolves and provides a wider range of capabilities in every industry, companies must keep pace with that growth. That can prove difficult as many companies, big and small, face adversity in creating new products or improving existing ones. Even seamlessly integrating new products with those that currently exist is another hurdle that is often tough to overcome.

That's why R&D is so vital to the strength of American businesses. When companies can increase their technical acumen to navigate past the barriers that limit innovation, it provides a stable foundation for our economy. It stimulates competition and the result is a healthier, more robust marketplace  However,  innovation can be expensive in both financial cost and manpower. There are many variables involved in coming up with new ideas and the methods to implement those ideas into tangible value. More often than not, the trial and error that comes with R&D takes up significant time and money without the return on investment to show for it.

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If you are a taxpayer planning on claiming the Research and Development (R&D) Tax Credit, you need to decide how to calculate the credit and which method is the best for your business. This is a critical step in preparing your tax return as the credit can be highly lucrative for a taxpayer facing a significant tax liability for the filing year.

Even more importantly, making an informed decision on the calculation method must be done before filing your IRS Form 6765. Once you file using your selected calculation approach, that choice can not be changed with an amended return after filing.

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