It’s wise for business owners to familiarize themselves with R&D tax credits. These tax allowances can result in big savings for businesses that spend money on research and development.
What you’ll learn
What you’ll learn
This article is authored by OnPay, a top-rated payroll provider for small businesses with more than 30 years of experience in payroll, taxes, and small business compliance.
Key takeaways
- Immediate savings: Small businesses can now deduct R&D costs right away, instead of spreading them over 5 years, creating instant cash flow benefits
- Retroactive relief: Companies with less than $31 million in revenue can go back and claim R&D expenses from 2022-2024 via amended tax returns
- Payroll tax offset: Businesses can use R&D credits to reduce payroll taxes, thereby freeing up money to facilitate investment and growth
This guide explains the nature of R&D credits, outlines changes recently enacted by the “One Big Beautiful Bill,” and sheds light on the things business owners interested in claiming these allowances should know. Read on to bolster your knowledge base.
What are R&D tax credits?
R&D tax credits are tax allowances from the government that are designed to encourage businesses to innovate. If your business spends money on qualified research and development, you can reduce how much you owe in taxes.
These credits work for businesses of all sizes. Even small companies trying new things or improving what they already do can qualify. The key is that your work/expenditures must reflect an effort to drive some sort of improvement or advancement.
Qualifying endeavors are as follows:
- Creating new products or making existing ones better
- Improving how you make things (your processes)
- Building new software or apps
The main benefits of R&D tax credits are as follows:
- You pay less in taxes
- More cash stays in your business
- You can use those savings to invest in and grow your company
The “One Big Beautiful Bill”: What is it?
The “One Big Beautiful Bill” is a new law that makes it easier for small businesses to claim R&D tax credits. Accounting and legal experts are still unpacking everything that’s in the bill, but it’s clear that the changes are good news for business owners. Research and development (R&D) expenses can now be deducted more quickly and, in some cases, retroactively.
Small businesses with $31 million or less in yearly sales can claim R&D costs going back to January 1, 2022. Larger businesses do not have this option, but, like small businesses, they can deduct prospective R&D expenses over 1 – 2 years instead of waiting five years.
Read on for more context on the changes enacted by the bill.
Key changes to R&D tax credits
The key R&D related changes enacted by the “One Big Beautiful Bill” are as follows:
More activities now qualify. The government expanded what counts as research and development. More types of innovative work now qualify for credits.
The paperwork is simpler. The application process is now easier. There’s less paperwork, which saves small businesses time and money.
The credits help with payroll taxes. Some businesses can now use R&D credits to reduce their payroll taxes. This doubles your savings – lower income taxes and lower payroll costs.
Credits last longer. You can now carry unused R&D credits forward for more years. So, if you can’t use all your credits this year, you can claim them in future years.
The rules are clearer. The government streamlined its guidelines, making it clearer which types of research and development activities qualify for the credit. This helps businesses plan more effectively and avoid tax filing errors.
Who can benefit now?
The old R&D tax credit rules were fairly stringent and excluded a myriad of businesses from qualifying for the tax break. The new bill has relaxed the qualifications, which should let many more businesses claim R&D tax credits.
The types of companies that can now benefit from the allowance are as follows:
- Startups working on research and development
- Small businesses in technology or manufacturing
- Companies improving their processes or creating new products
By making it easier to qualify, the new bill helps businesses in many different industries. If you’re working on anything innovative, check to see if you qualify.
What activities and expenses count?
The new bill clearly explains what qualifies for R&D tax credits. This makes it easier for businesses to assess their activities and pinpoint qualifying work/expenditures.
Activities that qualify include work involving technical improvements. At a high level, this includes making products better, improving how you make things, and developing new software.
Examples of the types of expenses you can claim are as follows:
- Employee wages for R&D work
- Materials and supplies used in development
- Fees paid to outside contractors for R&D projects
- Testing new product designs or improving existing ones
- Developing internal-use software
- Engineering or technical problem-solving
“The bill encourages businesses to keep good records of their R&D work. Good documentation helps you prove that your activities qualify and can lead to bigger tax savings.”
— Thomas Brock, CFA, CPA
How to claim R&D tax credits: Step-by-step
Getting R&D tax credits doesn’t have to be complicated. As outlined below, you can claim an R&D tax credit by following 5 simple steps.
Step 1: Identify your qualifying activities. Look at your business, and identify projects that involve research, development, or innovation.
Step 2: Calculate your costs. Add up all the money you spent on qualifying activities. Include employee wages, supplies, and contractor fees.
Step 3: Keep good records. Document everything about your R&D projects. Keep records of what you were trying to accomplish, how you did the work, and what you spent.
Step 4: Fill out tax forms. Complete IRS Form 6765; submit it with your tax return.
Step 5: Get professional help. Work with a tax professional who has experience with R&D credits. They can help make sure you get all the credits you deserve.
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Tips for maximizing your benefits
To get the most from R&D tax credits, plan ahead. Look at all your current and future projects to see what might qualify.
Consider hiring a tax professional who specializes in R&D credits. They understand the complex rules and can help you maximize the value of your credits. They can also help you stay abreast of tax code changes, which are inevitable. Incidentally, the money you spend on professional help usually pays for itself in tax savings.
Key Strategies to Embrace
- Review all projects for eligibility
- Plan your R&D work with taxes in mind
- Work with experienced tax professionals
- Stay updated on law changes
Timing could be right for an R&D deep dive
Now is a great time to look into R&D tax credits. The new bill makes the process simpler and more rewarding than ever before. Small businesses should move quickly to take advantage of these opportunities.
Don’t wait – start reviewing your business activities today to see how much you could save. If you have any questions, be sure to consult with your CPA or bookkeeper to flesh things out and make sure you’re taking the necessary steps to maximize your potential tax savings.
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This article is authored by OnPay, a top-rated payroll provider for small businesses with more than 30 years of experience in payroll, taxes, and small business compliance.