As your business prepares for another year of tax filing, of course you want to make sure you're taking advantage of any and all tax benefits to which you're entitled. At the same time, many business owners unknowingly end up leaving money on the table—often by not claiming credits for fear of triggering an audit. Also, regular changes to the tax code can make claiming tax incentives complicated.
If you've invested any money in innovation in the past year, a tax incentive your business won't want to overlook is known as the research and development (R&D) credit.
Understanding the R&D Tax Credit for Businesses
Specifically, the R&D credit is a federal tax credit offered to businesses as a means of offsetting their tax burdens based on qualified research and development expenses. This credit, which is available across a wide range of industries, offers a dollar-for-dollar reduction of tax liability for expenses related to:
- Research activities
- Prototype development
- Manufacturing process improvement
- Testing of new technologies
- Other qualified innovations
For businesses of all sizes (including startups), the R&D tax credit can be a great way to reduce the amount of taxes owed.
Benefits of Claiming the R&D Credit
If your business isn't already claiming the R&D credit for qualified expenses, there are many reasons to start doing so.
Reclaim Lost R&D Deductions
Under the 2017 Tax Cuts and Jobs Act (TCJA)'s Section 174, businesses were able to immediately deduct their research and development expenses until this provision expired in 2021. For businesses that used to rely on this deduction but can no longer claim it, taking advantage of the R&D credit is especially important when it comes to offsetting expenses and reducing the total amount of business taxes owed.
Free Up Cash Flow
Looking for ways to free up cash flow within your business? Claiming eligible expenses as part of the R&D credit can be a great way to do so. More specifically, this credit can offer some financial relief that businesses can use to continue their innovation, research and growth. This can be done by claiming relevant payroll tax deductions that may otherwise restrict cash flow, helping businesses run more smoothly and have access to the funding needed to thrive.
Potential for Refundable Credits
In addition to the federal R&D credit, some states also offer their own versions of this credit that may even be refundable. If your business is looking to claim the federal R&D credit, be sure to look into potential refundable credit options in the state where your business operates to further maximize your tax incentives.
Debunking Common Myths About the R&D Tax Credit
Despite the R&D credit being fairly accessible and easy to claim, for businesses that qualify. However, many businesses don't claim the credit, leaving money on the table. Why? All too often, business owners and decision-makers worry that claiming this credit will trigger an audit—but so long as your expenses meet the qualifying criteria, this doesn't have to be the case.
Likewise, some businesses pass on claiming this credit because they believe only profitable businesses benefit. In reality, even if your business hasn't reached a level of profitability yet (and thus has little to no tax liability), it could still take advantage of the R&D credit and carry it to future tax years. In fact, the R&D credit can be rolled over for up to 20 years.
Finally, some businesses miss out on the benefits afforded by this credit because the research and innovation they do doesn't occur in a “traditional” laboratory setting. What they may not realize is that everyday innovations and research outside the lab setting can qualify for this credit, making it important to review the list of criteria and keep detailed documentation for expenses claimed.
How Might New Legislation Affect the R&D Tax Credit?
The recent passing of the Trump administration's One Big Beautiful Bill Act (OBBBA) may also impact businesses claiming R&D tax benefits. Specifically, under this new Act, Section 174 of the Internal Revenue Code has been updated to no longer require domestic businesses to amortize their R&D expenses, beginning with the 2025 tax year. Previously, domestic businesses were required to amortize over a period of five years. Likewise, domestic businesses now have the option to choose a catchup deduction for any capitalized R&D expenses from previous years.
This change may help domestic businesses free up additional cash flow, which may help operations. However, it is worth noting that this change applies only to domestic business, and foreign businesses are still required to amortize R&D expenses over a longer period; 15 years. In this sense, domestic businesses gain a notable tax advantage under OBBBA.
Don't Miss Out on Valuable Tax Incentives
Regardless of the size of your business or even the industry in which you operate, you won't want to miss out on this valuable tax incentive if you have qualifying R&D expenses. The key, as with most tax benefits, is to keep detailed records and documentation for all expenses you're claiming. This way, you can report these expenses accurately and file your return with confidence.
If you're still not sure whether your business expenses qualify for the R&D credit, remember that you can always reach out to us for further guidance.
If you have any questions or would like additional information, please contact our tax department.