The R&D Tax Credit: The Nicest Thing I've Ever Seen The IRS Do
By Louisa Else, Tax Practice Leader
There are a lot of negative feelings surrounding taxes, and much of them warranted. For individuals, many tax breaks are phased out as your income increases (which logically is when you need those deductions the most, one would think)! For businesses, certain deductions are limited or can only be taken if you have the income to offset them, and then carryforwards get created that you might not see the benefit of for years to come.
At Fine Point, we work with many businesses who are just getting started, using their own funds or funds raised from angel investors to develop products that are going to change our world. Doing this means a lot of money going out the door and probably no sales coming in yet to replace those funds! Because of this, one tax credit we see so many of our clients qualify for is the Research and Development credit.
Most tax credits are only useful if you have a profit, and therefore taxes due, to offset those credits against. In the case of those same clients I just mentioned, that would mean those credits did nothing to help them right now - because they haven't generated any income yet. However, the R&D credit is the one exception to that. I often say that this credit and this election are the most beneficial tax item I have ever seen - if the business is pre-revenue, or in the first 5 years of having sales, they can elect to take that R&D tax credit off of their income tax return and carry it over to their payroll taxes instead. This means that, as long as the company has payroll, they can see immediate refunds of their payroll taxes coming back to them quarterly until the credit is used up, rather than waiting years until the have started to be profitable and now have income tax to offset with credits (at which point, there will also be those years of net operating losses available to take against some of the taxable income as well).
At Fine Point, our tax team is in constant communication with our controller teams for all the returns we prepare, making sure that we're taking advantage of this great credit whenever there is opportunity. Don't hesitate to reach out to us if you think that you may qualify for this credit or if you have questions on what the requirements are.