Your business likely has a team or division focused on innovation and advancement within your industry. Who comprises that team?
You might be asking, why should I include my CPA when creating a new product?
Because your operational cash flow could be positively affected.
While a CPA's role in R&D may be easy to overlook, their presence throughout your process could save you big during tax time. We detail how a Research and Development (R&D) tax credit benefits companies that embrace innovative technologies and plan for success-enhancing measures.
Rewarding Innovation & Encouraging Growth
The R&D Tax Credit is Congress’s way of encouraging companies to embrace changing technology, using it to improve their products and processes. Initially created as a temporary program, the government sought to incentivize private industry to prioritize R&D as a strategic tool to advance their economies.
The PATH Act of 2015 permanently extended the R&D tax credit and expanded its provisions, making it the United States’ primary means for rewarding business for investment in research.
How Big Are The Tax Savings?
Because a tax credit is a dollar-for-dollar reduction against tax, it can make a huge difference in maximizing cash flow.
The credit is a percentage of Qualified Research Expenses (“QREs”) – i.e., the spending that you can attribute to qualified R&D projects.
The three categories of QREs include wages, supplies, and contractors. The percentage varies but tends to be about 10% of QREs. The tax savings tends to range from about $1,000 to $500,000 per year for non-public companies.
Do I Need A Patent?
While getting a patent is not required, it is a strong indicator that you should claim the R&D Tax Credit. It means that your project most likely had the characteristics needed to qualify as an R&D project, and that the spending is likely high enough to create a large credit.
How Do I Get Started?
The R&D Credit can be complex, with many options to consider along the way, so it pays to have a professional guide you through the process. If your CPA doesn’t calculate the credits themselves, they may direct you to an outside consultant that specializes in the credit. No matter what consultant you use, you should be aware of all alternatives at any juncture in the calculations, and the level of risk associated with each option.
For more information, check out my podcast on the topic.
Note: This article uses information adapted from an original article for Thompson Patent Law. A link to this article may be accessed here.
