How to Maximize a R&D Credit

Save on your taxes with a R&D Credit

Insight from Fondo*

In my research with this week's ad partner, Fondo, I learned about the R&D (Research and Development) tax credit. Think of the credit as a handy way for businesses to save a chunk of change on their taxes.

You get about 13 cents for every dollar spent on creating new products, improving the old ones, or whipping up some nifty software.

I'm super embarrassed that I didn't know about this credit beforehand. I would've saved thousands.

At first glance, the R&D tax credit can seem like a maze (or you weren't even aware it exists like me)!

Let's break this down.

If you want to snag this credit, you've got to keep tabs on your expenses and show solid proof like payroll records and receipts for R&D spendings.

There's a form called Form 6765 on the IRS (Internal Revenue Service) website that guides you on how to do this.

This credit can significantly lower what you owe in taxes. And if you are the smaller guys or new startups, it's even sweeter because it can reduce what their AMT (Alternative Minimum Tax).

Plus, a recent tweak in the law means these small businesses can also use the credit to lighten their payroll tax load.

Deciding how much you can save involves a bit of number-crunching. You have two ways to calculate the credit. Be sure to use Form 6765 as the guidebook for picking the path that packs the most punch.

This credit covers all research costs, whether that's salaries, supplies, or getting external brainpower on board. But remember, the research has to be done stateside and fall into the science or tech category.

Now, despite the R&D tax credit being around for a while, some myths make you think you don't qualify. Here are 5 common myths:

1. "We don't pay federal income taxes, so no credit for us." 

   Some start-ups and small businesses believe they can't get the R&D tax credit because they aren't paying federal income taxes. But, these businesses can use the R&D credit to lower their payroll taxes (the taxes taken out of employees' wages) by up to $1.25 million (or $250,000 annually for five years).
   
   To be eligible, a business must make less than $5 million a year and have been making money or earning interest for no more than five years. The credit is claimed when they do their taxes and can be used to reduce payroll taxes in the next quarter.
   

2.  "We're not a tech or science firm, so we don't qualify." 

   All kinds of businesses do R&D in different ways, like cooking up new recipes in kitchens, trying out things on farms, or making materials on factory floors. R&D can happen in many places.
   

3. "We don't have scientists or engineers, so we're out." 

   Any company that does research or tries out new things can qualify, no matter what kind of jobs the people doing the work have.
   

4. "We're not inventing the next big thing, so we don't qualify." 

   Companies sometimes think they need to invent something totally new to qualify for the credit. But the credit is also for businesses that make their products, processes, or software better or different, not just brand new.
   

5. "AMT issues mean we can't benefit." 

   In the past, the AMT made it hard for some businesses to get the full benefit of the R&D credit.
   
   But since 2016, individuals and small businesses that pay AMT can also use the R&D credit to lower their AMT or regular taxes, which means they can now take full advantage of the credit.

Keep this in mind, and who knows, it might come in handy for your own ventures.