The Research and Development (R&D) Tax Credit is a top incentive for Companies to substantially reduce their federal and state income tax liabilities. Taxpayers with qualifying research may expense these costs immediately and receive an income tax credit simultaneously. Expansions and modifications to the tax rules related to the R&D Tax Credit have paved the way for more businesses to take advantage of this credit than ever before.
While the time to make the election to claim a refundable FICA payroll tax credit has passed for taxpayers with a December 31, 2019 calendar year, there are things taxpayers can do now before year-end to position themselves to maximize their R&D tax credits for the next calendar year. We recommend the following:
- Taxpayers should seek consultation prior to filing the PayCheck Protection Program (PPP) loan forgiveness applications in order to identify potential cost allocation methods to mitigate credit impact. Per Rev. Rul. 2020-27, if expenditures are paid for with PPP funds and have reasonable expectation of forgiveness, a taxpayer is not able to claim a deduction for tax purposes for the same expenditures. This may result in a significant decrease in tax deductible R&D expenditures and in turn decrease R&D tax credits. There is also a safe harbor per Rev. Proc. 2020-51 for PPP borrowers whose loan forgiveness has been partially or fully denied. It is essential to determine the correct accounting treatment and when to apply for loan forgiveness in order to maximize the R&D tax credit.
- Take note of some of the more commonly overlooked areas that might be perceived as not qualifying for R&D tax credits, but actually do qualify:
- Improvements to existing products (Not just brand new products);
- New or improved manufacturing processes;
- Prototype or pilot model costs;
- Individuals participating in the development process that are outside of the core R&D group (i.e. Marketing or sales team, High level executives, etc.);
- Qualification of iCloud lease expenses (common for SaaS companies);
- Cannabis industry qualifications
- Being proactive in organization and collection of data to ensure a more efficient R&D service process. This will allow your team to stay focused on your business during the annual deliverable preparation and be prepared for an audit of the credit.
- Choosing the right service provider. Year end is a great time to evaluate if your current service providers are meeting expectations and are maximizing cost savings for your Company. Make sure the fees you are paying are fair (many are tied to the percentage of credits claimed despite the amount of work not warranting this cost), the correct amount of time is being spent on your R&D engagement, and that the provider has the expertise, knowledge and approach needed for your specific industry to put a solid audit-ready deliverable together to strongly defend your claim.
Dana R. Borys, An Accountancy Corporation is a boutique tax consulting, compliance, and representation firm working with start-up/emerging growth companies in the cannabis industry. Building connections beyond the code.