What is the R&D Tax Credit Value Proposition?
There are numerous advantageous benefits to claiming the R&D tax credit on your tax returns including:
- Receive up to 20 cents of Federal-level and state-level R&D tax credits (assuming just one state filer) for every qualified dollar;
- Create a dollar-for-dollar reduction in your federal and state income tax liability;
- Increase earnings-per-share and adjusted EBITA results;
- Permanent reduction in your effective tax rate and improve cash flow position; and
- Carry forward the unused credit up to 20 years as a Deferred Tax Asset on your Balance Sheet.
R&D Update 2023
The American Innovation and Jobs Act
Senators Maggie Hassan (D-NH) and Todd Young (R-IN)
Background: The tax code promotes innovation by encouraging new and established businesses to invest in scientific research and the development of new technologies. Companies investing in R&D can either deduct their research expenses or claim the R&D tax credit.
- R&D deduction: Currently, companies can choose to immediately deduct the full value of their R&D investments when they file taxes each year. However, due to a change made by the 2017 tax law, companies will soon be required to spread the deduction over a 5- year period. This change is effective in 2022.
- R&D credit: Many new and small businesses use the “refundable” R&D tax credit because they are not yet profitable enough to have income tax liability. Without income tax liability, businesses get no benefit from a non-refundable tax credit. The refundable R&D tax credit allows startups to claim the credit against their payroll taxes.
The Problem: The impending change to R&D deductions will reduce incentives to make long- term R&D investments. Further, current caps and restrictions on the refundable R&D tax credit limit its availability and usefulness for many new and small businesses. Both of these factors limit support for innovative companies and reduce job growth in R&D-intensive fields.
The Solution: The American Innovation and Jobs Act will restore immediate deductions of R&D investments and will expand the refundable R&D tax credit for startups by raising outdated credit caps. These changes will increase incentives for new and established businesses to invest in R&D and create jobs.
The American Innovation and Jobs Act will:
- Restore incentives for long-term R&D investment by ensuring that companies can continue to fully deduct R&D expenses each year by repealing the change made by the 2017 tax law to section 174 of the tax code
- Expand support for innovative startups by:
- Immediately doubling the cap on the refundable R&D tax credit from $250,000 to $500,000, and ultimately raising it to $750,000 over ten years
- Expanding the credit for startups that covers R&D from 14 percent to 20 percent
- Expand the number of startups eligible to use the refundable R&D credit by:
- Increasing the eligibility threshold from $5 million to $15 million in gross receipts
- Increasing the period during which startups can claim the credit from 5 years to 8 years after beginning to generate at least $25,000 in revenue
The American Innovation and Jobs Act is endorsed by the National Association of Manufacturers R&D Coalition.
- California based Aerospace & Defense Company with qualified R&D spend of $ 6,500,000 successfully claimed combined Federal-Level and CA-Level R&D tax Credits of just over $ 1,3000,000 with a no-change letter from both the IRS and CA after examination;
- Texas based end-to-end Software Development company with qualified R&D spend of $ 1,200,000 successfully claimed Federal-Level and TX-level R&D tax credits of nearly $ 240,000 with a no-change letter from the IRS after examination;
- Massachusetts based Life Sciences- Biotechnology company with qualified R&D spend of $ 21,000,000 successful claimed Federal-Level and MA-Level R&D tax credits of over $ 3,000,000;
- New York based Food Science / Bio-Flavoring company with qualified R&D spend of $ 850,000 successfully claimed a Federal-Level of approximately $ 85,000;
- Pennsylvania based Medical Device company with qualified R&D spend of $ 4,000,000 successfully claimed a Federal-Level and PA-level R&D tax credits of approximately $ 600,000;
- Indiana based Designer/Developer/Manufacturer company with qualified R&D spend of $ 1,750,000 successfully claimed a Federal-Level and IN-level R&D tax credits of over $ 250,000;
- Georgia based Chemicals company with qualified R&D spend of $ 2,300,000 successfully claimed a Federal-Level and GA-level R&D tax credits of nearly $ 345,000 ;