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5 Common Misconceptions About The R&D Tax Credit

By Neo.Tax Team 

5 min read

What’s holding you back from filing for R&D Tax Credits? 

With all the misconceptions around research and development tax credits, it’s no wonder that most small to mid-sized business owners don’t file–and it definitely doesn’t help how complicated it seems the IRS makes almost everything. 

Before you completely write off the R&D credit, here are some common misconceptions about R&D Tax Credit that we had to set true. 

Misconceptions #1: Scientific advantages or breakthrough medical technology are the only ‌businesses that qualify for R&D Tax Credits

Changes to the R&D Tax Credit expanded what types of companies qualify. These changes mean not only lab sciences are qualified, but also applied sciences. Applied sciences include areas like:

  • engineering, 
  • computer science, 
  • technology, 
  • agricultural science and,
  • food science, to name a few. 

Don’t feel left out. Whether your company is in manufacturing, technology, agriculture, or even hospitality and catering, you could qualify for R&D Tax Credits. 

Still skeptical? Here’s a quick and easy quiz to help you figure out if your business is sitting on a sweet, sweet R&D credit here

Misconceptions #2: Only companies with substantial profits and tax liability can claim R&D Tax Credits 

Wrong again! 

The 2015 PATH Act, also known as the Protecting Americans From Tax Hikes Act, cemented R&D Tax Credits as a permanent part of the tax code. PATH also created a provision for startups and small businesses. 

This provision allows small businesses to elect to use their R&D credit toward payroll taxes and claim up to $250,000 a year for up to 5 years of R&D expenses. 

Not to mention qualified small businesses can carry forward their credit for payroll tax deductions to use in another year. For SMBs, carry forward refers to the application of tax credits to future tax years. 

Thank you PATH Act. 

Misconceptions #3: Any small to mid-sized business that claims R&D credits will face an audit 

Just when you thought the IRS was picking on the little guy, here we come to bust that myth! 

Yes, there is a chance that claiming your R&D Tax Credit might trigger an audit. However, claiming your R&D credit does not mean your company will get audited–and most definitely should not stop you from claiming your R&D credit. 

When you're filing for your R&D credit, make sure your business is using a trustworthy source to prepare your credit, such as complaint automated software, that provides you with the almighty study to accompany your Form 6765. This study will outline all your qualified R&D expenses to make sure you’re covered in case of an audit.

Hot Tip: When you decide on software or an accountant for your R&D credit preparation, always ask if they will provide a study. 

Don’t know what to look for in R&D software? Check out our post to help you find the best R&D software for your company. 

Misconceptions #4: If you haven’t been in business long enough, you can’t claim R&D credits 

No…not quite. 

Once again, we have to give it up for the PATH Act. The Act ushered in a new era for businesses by extending the credit to startups and qualified small businesses. BPA (Before the PATH Act), businesses could only claim the credit if they were profitable. 

Now, companies with under $5 million dollars of revenue can claim their R&D credit and apply the credit toward payroll taxes for employees who were integral to the first 5 years of research and development projects. 

Hot Tip: The only requirement is that you have payroll tax ‌you are offsetting. If you are a startup using all consultants and they aren't on your books, then you are missing out. 

Misconceptions #5: Your industry disqualifies your business from R&D credits 

Yeah, not the case. 

If your business is conducting qualified research and development, then it really doesn't matter which industry your business is in, as long as your projects and expenses qualify for the R&D credit. 

The payroll-tax offset allows companies to receive a benefit for research activities, even if they aren’t profitable. In order to be eligible for the credit, there are a few qualifications that companies must meet, like: 

  • gross receipts for five years or fewer, and yes, interest income counts toward gross receipts;
  • less than $5 million in gross receipts in the year you’re electing to use the credit;
  • qualifying research activities and expenditures and,
  • payroll-tax liability.

Hot Tip: avoid the dreaded audit at all costs by making sure your company’s activities are qualified for the R&D Tax Credit using the 4-part test

Unsure if your startup qualifies? Here is a simple guide to figuring out if your company qualifies. 

Changes to R&D Tax Credits expanded the industries that can claim the credit. By including applied sciences like those used in manufacturing, agriculture, and technology instead of making the credit only available to strictly lab sciences–more companies than ever could be eligible for the R&D credit. 

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