While many businesses know about R&D tax credits, not many know the process of actually earning them. Below are a few FAQ’s that we’ve been able to answer for clients over the years.
A research & development study is a document that records your business expenses that qualify for the Federal R&D Credit. The R&D Credit is a federal income tax credit that allows companies to get cash back for innovative R&D completed in the U.S. A study can be thought of as cheap insurance for your R&D credit claim in case the IRS ever performs an audit, saving you from having to pay back the credit plus penalties.
Claiming an R&D tax credit doesn’t require a study; however you’ll want a study performed in order to defend against an IRS audit. This will save you money and a headache in the future after claiming.
Any costs you incur when working on new products or releases can qualify as R&D credit however the product must be of significant innovation and carry some market risk for your company to develop. If a product has already been released, bug fixes and updates on existing released software are typically not eligible for R&D credit.
Let’s say you spend $500K on R&D development. The first bite of the apple is your tax deduction of $500K – this increases your taxable loss which is nice, but there is no immediate benefit until you are profitable and can offset those profits with your accumulated losses. The second bite is big, though. You can take that same $500K and throw it into the R&D Credit equation, which typically results in a 7% to 10% credit. What this means: The IRS sends you a check for $35K to $50K.
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