With all the uncertainly going on today — a stock market in turmoil, shortages on our grocer's shelves, airline travel being curtailed — is now the time to address the research & development (R&D) tax credit?
Very simply, the answer is a resounding "Yes!"
How can we be so certain it's time to explore claiming the R&D tax credit, amid so much uncertainty? It's because all businesses should claim every credit and deduction to which they are entitled.
The R&D tax credit is a federal tax incentive meant to stimulate innovation, technical design and manufacturing within the U.S. As a result, the plastics industry can benefit greatly from this most powerful business incentive. Enacted in 1981, the credit was made permanent in 2015 and is also available in most states. Over the years, the credit has gone through many changes, making it available to most businesses with qualifying activities.
The R&D tax credit is a general business tax credit under Internal Revenue Code section 41 for companies that incur R&D costs in the United States.
So just what is a tax credit, and what makes it so powerful? A tax credit is a dollar-for-dollar savings against taxes owed. A tax credit is far more favorable than a tax deduction because it reduces the amount of taxes owed, whereas a deduction reduces the amount of taxable income.
Here's a reason why claiming the R&D tax credit is even better for the plastics industry: You do not have to be paying tax to claim the credit. You can claim the credit even if your business is posting a loss, since the credit can be carried forward for up to 20 years and back five years, due to changes made in the CARES Act. Of course, it may not make sense to claim a credit you cannot use, but if your business is going to be in a tax-paying situation in the near future, it may make sense to claim the credit, and then use it to offset future tax.
But wait, there's more: You can claim the credit not only for the current year's activities, but also for the prior open three tax years. In addition, many states match the time period for claiming the credit, which means the credit can add up fast for any business. For example, if a company claims a $100,000 federal R&D tax credit for the current tax year, it can claim $100,000 for four federal tax years and four state tax years for a whopping $800,000 tax credit total. If your business is in California, you can go back to four open tax years, and now your credit could be $900,000, based on this example!
Now back to the question, is now the time to claim the R&D tax credit? In our current state of the unknown, getting money back into a business is a top priority, and the R&D tax credit is the perfect tool for businesses to get cash back into daily operations. We have seen a huge uptick in the number of companies exploring the benefits of the R&D tax credit, and when it comes to claiming the credit, there's no time like the present.
Of course, you should discuss claiming the R&D tax credit with your most trusted advisor, your CPA, as you never want to find out that you have been leaving money on the table.
Jill Mazur is a certified public accountant and a director at Engineered Tax Services Inc. in Houston.