The Credit for Increasing Research Activities (Research credit or R&D credit) is a federal incentive program enacted to encourage companies to conduct research and development activities in the United States. Many states offer similar incentives.
In addition to credits earned on the most recent tax year’s return, taxpayers can claim prior year credits by amending previously filed returns or updating carryforwards if they cannot use them.
R&D Tax Credit Benefits
The R&D credit provides a dollar-for-dollar offset to tax liabilities (income and, in the case of Qualified small businesses, payroll taxes). If taxpayers cannot use credits in the year earned, they can carry the benefit back one year and forward twenty, creating a deferred tax asset. State benefits can include income tax offsets, sales and use tax reductions, and, in some instances, refundable credits.
Early-stage companies typically generate significant R&D expenses and operate at a tax loss during this period. So, what are the benefits of claiming R&D credits during this period?
- Qualified small businesses can elect to use their credit to offset payroll taxes
- Qualified small businesses generally have less than $5M in gross revenues, and the tax year in which the credit is claimed is within a 5-year window, starting with the first tax year the company had its first revenue.
- Carryforward/carryback—credits not used in the credit year are carried back one year and forward twenty years, generating a deferred tax asset.
- Demonstrates to potential investors and purchasers that the company is fiscally prudent.
