The $250,000 Tax Credit You Could Be Using for Your Business
The federal R&D tax credit allows qualified small businesses to claim up to $250,000 per fiscal year.
175,000 -- that's the current number of pages in the Code of Federal Regulation. For small businesses, regulatory burdens can be one of your biggest challenges. From overtime rules to state licensing requirements to pay data reports, navigating these requirements can be a real time suck and you might be worried about the negative effects on your business.
Related: Time to Send Out 1099s: What to Know
But, it's not all red tape. Positive regulations do exist, and they can help put your business at a competitive advantage. Take the federal R&D tax credit, for example, which allows qualified small businesses to claim up to $250,000 per fiscal year -- applying it against Social Security taxes to help offset costs for research and development. It launched in 1981, but over the past 30-plus years has been regularly updated to be more inclusive. In 2017, it became possible to apply the credit against payroll taxes for up to five years, rather than just income taxes, making it available to a huge number of small businesses that were eligible before.
It may seem too good to be true, but in this case it really isn't. Here's what you need to know:
Check your eligibility.
In order to qualify for the credit, your business generally needs to have less than $5 million of gross receipts over a five-year, or less, period, as well as qualified research and development costs. While technology, health and manufacturing make up a majority of R&D credit claimed, any industry can qualify if you're actively developing new products or processes.
Conduct an audit of R&D expenses.
The next step is to go out and get a credit study. Contact your accountant, or source one, to determine if you qualify and what research and development costs can be applied. Since this tax credit is new, there is a large range of accounting firms that are charging for their credit study services. While you want to select a reputable firm, avoid rates that exceed 20 percent of the total credit amount.
Have your 2016 income tax returns handy.
Once the audit is complete, the accountant will file Form 6765, Credit for Increasing Research Activities, with the business's annual income tax return. It's important to note that the credit a company claims this fiscal year is based on R&D costs for last fiscal year, so anyone wanting to claim the credit to reduce payroll taxes now needs to conduct the R&D audit and file Form 6765 with their 2016 income tax returns. But, the good news is, the IRS is allowing a special exception for 2016, so if you missed reporting this on your 2016 return, you can still conduct the audit and file an amended return by Dec. 31, 2017.
Reap the rewards.
After filing Form 6765, you can then begin claiming the credit with your next quarterly payroll tax filing -- just make sure it's included on your quarterly Form 941 with a completed Form 8974 attached. Some payroll providers will do this for you automatically. The IRS will then issue you a refund, which you can expect to receive 30-90 days after each quarter, but Gusto is launching the option to include the credit on your payroll instantly, so you get to keep money on each payroll you run rather than waiting for refund checks.
While nearly $9 billion in R&D credits were claimed in 2010, another $4 billion in R&D credits were left unclaimed. Don't miss out on bringing substantial dollars to you bottom line. Get smart, get support and get started!
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