The R&D tax credit is important for businesses of all sizes. Many entrepreneurs aren’t well informed about these credits and hesitate to claim them. Ignoring R&D tax credits can cause you to miss opportunities that bottleneck your business’ growth.
This post explores some of the most common myths and misconceptions about R&D tax credits and debunks them.
Small business owners can enjoy benefits like tax savings and reinvest the money for more success.
Some Common Misconceptions
R&D tax credits can be helpful for many different industries. Thus, these credits are more accessible than many business owners believe.
Misconception One: My Startup Won’t Qualify for R&D Tax Credits
The R&D tax credit does not only apply to purely scientific domains. Your startup can use these credits even if it deals in food, beverages, clothing, software products, or cosmetics. The first step to qualifying for R&D credits is not to assume you don’t qualify. Explore and consider whether these credits can help you.
Misconception Two: The Effort Isn’t Worth It
Many business owners believe that the process may be complicated and not worth it. However, that is far from the truth. Tax credits can give you a significant financial advantage in your field as they reduce your tax liability.
According to the Tax Foundation, businesses claimed $11.8 billion in federal R&D tax credits in 2020 alone. Since 1981, this credit has been established and expanded in 2015 through the PATH Act, an invaluable tool for businesses of all sizes to integrate into their annual tax planning.
Misconception Three: Claims With R&D Tax Credits Are Tiring
Many small business owners believe making claims would expend a lot of resources. However, that is not true. Claiming R&D tax credits is quite simple if you deal with an experienced provider or platform.
Various software solutions can also help you manage and organize your documentation. A good R&D tax credit platform can also help streamline things so there are no surprises whenever the IRS audits your business.
Misconception Four: Documentation is Needed For Credit Claims
Some business owners believe they must present full documentation to claim their tax credits. This is simply not true.
According to the IRS, acceptable evidence includes payroll registers, project lists and notes, time-tracking data, design drawings/blueprints, and general ledgers/trial balances.
Even verbal statements from employees can prove claims made under this category. Although comprehensive information would be more desirable, do not give up your eligibility due to weak or incomplete documentation.
Misconception Five: R&D Credits Are Only Relevant For Research
R&D credits are not limited to startups focusing only on research and development. These credits apply to a wide range of industries where a company has dedicated resources to innovate or improve products and processes.
Whether Research & Development is your primary focus or a smaller part of your business, you may still qualify for valuable tax credits.
Misconception Six: My Company Doesn’t Pay Federal Income Tax
You can still get some value from your R&D tax credits even if you don’t pay federal income taxes, as is often the case with startups.
Small companies with receipts below five million dollars can claim payroll tax credits. Don’t be afraid to save money for your young business because it will be profitable later.
Misconception Seven: My Employees Don’t Have Degrees in Engineering or Science
Employees are not required to have degrees in engineering or science to qualify for the R&D tax credit. Research activities do not depend on employee background; they include even third-party contractors meeting eligible activity criteria. Focus on what the work involves, not who’s doing it.
Misconception Eight: AMT Restricts R&D Credits
In particular, the alternative minimum tax (AMT) restricts certain businesses’ ability to use R&D credits. However, as of 2016, changes have allowed corporations to offset regular taxes and AMT using this type of credit.
Misconception Nine: My Company is Not Innovative Enough
Do not underestimate your organization’s innovation. R&D tax credits are not just for pioneering industry-first achievements.
If you are developing or improving new products, processes, or techniques for your company, you may be eligible for these valuable credits. Chase innovation at any scale and find out if you qualify for R&D tax credits.
Conclusion: Using R&D Credits For Your Success
Throughout this piece, we debunked several misconceptions about R&D tax credits. Many small businesses and startups do not know how much accessible and useful tax credits can be. Under current law, firms can fully deduct R&D costs from their taxable income in the year they are incurred.
Such myths could hinder your ability to claim success for your business. Using the R&D tax credit, you will realize substantial financial returns that can be channeled into your business’s growth and development. A company’s success can largely depend on the support it receives from R&D tax credits.
