What is an R&D tax credit? Is it different from the Payroll tax credit?

The Credit for Increasing Research Activities, also known as “R&D credit” or “Research tax credit”, was created in 1981 under the Economic Recovery Tax Act with the intention to promote high-wage technology job growth and to accelerate technology advancement in the United States. Since then, the credit had expired and renewed numerous times, but it was finally made permanent by the 2015 PATH Act. The 2015 PATH Act also provides certain small businesses who operate in a loss to benefit from the R&D credit by allowing them to claim the R&D credit against the Employer’s portion of the FICA; thus, it is also called the Payroll R&D credit.

Why should I pay attention to it?

We often see large companies use the R&D tax credit as a way to lower their effective tax rate. In the recent years, we also see many emerging companies rely on the R&D tax benefits to prolong the burn-rate, and to demonstrate how effectively these companies are managing investors’ funds.

However, the R&D credit has a long-standing history of being challenged by the tax authorities and a very controversial tax area because the tax rules leave room for different interpretations by different parties. Therefore, the R&D credit is a highly uncertain tax position. A tax position that continues to attract the tax authorities’ attention and scrutiny. In fact, so much so that the IRS issued a Chief Counsel memorandum on October 15, 2021 (IR-2021-203) with additional requirements for R&D credits claim on an amended return.

While taxpayers face many huddles in sustaining the credit, it doesn’t mean that taxpayers should be shied away from the credit. If a company plans to claim the credit, it should carefully examine its facts and retain its evidence. Also, it is better to be prepared by putting together sufficient documentation to support the claim sooner rather than later. Do not wait until there is an audit, your chance of a successful audit may depend upon it.

How do I know if my company is qualified and where do I start?

Good news is that you don’t have to do it alone! Over the past two decades, I have helped companies of all sizes quantify, document, and defend their research tax credits. When it comes to claiming the Research tax credit, there is no one-size fits all, I use a pragmatic approach to assess your company’s specific facts and design a credit study that fits your organization’s needs.

Want to know more about your credit eligibility or how much your benefits potentially could be? Schedule for your free consultation today.

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