The Carryforward Approach
In instances where your business isn't liable for income tax or your R&D credit surpasses your tax dues, an IRS refund for the unused credit isn't forthcoming. However, businesses have options to employ these surplus credits. They can be applied to the prior year's tax return or carried forward to subsequent years. Many enterprises opt for the 20-year carryforward provision, allocating unused credits to offset future tax liabilities. While this approach defers the cash benefit to a later tax cycle, it's a prevalent way of addressing surplus R&D credits.
Can R&D Tax Credits be Carried Back?
Yes, there's another avenue for capitalizing on excess research credits: carrying them back to the preceding tax year. For example, a company with a $100,000 tax liability and a $225,000 R&D credit can reduce the current year's tax burden to $18,750, utilizing the extra $143,750 credit to recover taxes paid in the previous year. In most cases, the application of these credits to the prior year doesn't necessitate filing an amended return. Shareholders and members of S-corporations and LLCs can similarly implement this tactic for their personal taxes.
Mitigating Payroll Taxes with Credits
Beyond diminishing income tax, R&D Tax Credits can also offset a company's portion of payroll taxes. Corporations or partnerships with gross receipts of $5,000,000 or less during the taxable year, and no gross receipts in the 5-year period before the taxable year, can apply their R&D credits to offset FICA tax in the first quarterly payroll tax payment after filing the corporate tax return. In any given year, the maximum allowable payroll tax offset is $250,000. Unused credits can be carried forward for use against future payroll tax payments.
In the midst of the challenging COVID-19 pandemic, many businesses face the need for cash to sustain operations. For companies employing technical innovation in product development, manufacturing processes, or software creation, the federal R&D Tax Credit proves to be a valuable source of much-needed capital.
How We Can Provide Assistance?
The present juncture presents a prime opportunity to reassess past, present, and future R&D endeavors to harness the potential of the R&D Tax Credit. Irrespective of your industry, if your company's pursuits align with qualifying criteria, it's essential not to leave potential tax savings on the table. At GOAT.tax, we're equipped to guide you through uncovering pivotal tax advantages, fueling your business growth and propelling your next significant undertaking.
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