Small businesses often face challenges when it comes to funding research and development (R&D) initiatives. Additionally, many small businesses don’t realize that R&D credits are available to them to help finance these initiatives nor do they know that their activities may qualify.
These credits can provide a significant financial boost to small businesses, allowing them to invest in new technologies and processes that can help grow their business.
So how can tax professionals provide value add service to their small business clients through R&D tax credit conversations?
Research and development tax credits are available to businesses that invest in qualifying R&D activities. These activities can include developing new products or processes, improving existing products or processes and conducting research to solve technical problems. The tax credit is designed to incentivize businesses to invest in R&D by providing a reduction in the amount of taxes owed to the government.
The first step for small businesses interested in taking advantage of research and development tax credits is to determine whether their activities qualify. To be eligible, the R&D activities must meet certain criteria. They must be technological in nature, involve the development of new or improved products or processes, and involve a level of uncertainty that can only be resolved through scientific or technical experimentation.
Once a small business has determined that their R&D activities qualify, they can begin the process of claiming the tax credit. This typically involves documenting the R&D activities and calculating the associated costs. Small businesses can claim a tax credit of up to 14% of their qualifying R&D expenses, which can include wages, supplies and contract research expenses.
One of the benefits of research and development tax credits is that they can be used to offset both current and future tax liabilities. For small businesses that are not yet profitable, the tax credit can be carried forward to future tax years or even applied to their payroll tax liabilities.
Small businesses that are eligible for the tax credit can elect to apply up to $250,000 of the credit against their payroll taxes. This can provide a significant boost to cash flow, allowing small businesses to reinvest in their R&D initiatives.
As with any deduction or credit, small businesses should keep detailed records of their R&D activities and associated expenses. This documentation will be critical in supporting any claims for the tax credit. Small businesses should also consider engaging with a third-party consultant that specializes in R&D tax credits.
These consultants can provide additional expertise and help small businesses identify all eligible activities and expenses.
R&D credit calculation specialists can be an often-overlooked referral source for tax professionals. These experts will take your clients’ documentation, help them to calculate their credit, and provide all necessary forms and documents back to be ready for filing. Most R&D specialty firms will charge your client a percentage of their credit with minimal to no fees up front, making your job as the preparer easier while still adding significant value to your client.
Tax professionals who want to help boost their small business clients should consider mentioning R&D credits to clients whose business activities may apply. You can also provide a general description of costs and activities that qualify and allow clients to contact you for more information.
Educating clients on overlooked tax credit opportunities is an efficient way to provide a higher quality service resulting in happier clients when they experience tax savings from a tax strategy they didn’t feel that they had to bring to you.