Companies have experienced a roller coaster of a year this year and we’re not even at the halfway point. For some, business may have been booming only to grind to a halt once stay-at-home orders were initiated, and social distancing guidelines were implemented. PPP loans were accessible to help companies weather the storm as they tried to keep some level of normalcy. To say there’s been a wave of emotions would be an understatement.
In a recent survey conducted by Bloomberg Tax & Associates, they polled corporate tax professionals before and after the coronavirus outbreak and their focus for their clients after the pandemic are to increase cash management and to reduce cash payments and effective tax rates. The research tax credit is one of a few credits remaining that reduces effective tax rates.
As things are slowly returning back to “normal”, businesses are still exploring all possible avenues to regain their strength. There’s never been a better time to explore the impact the research tax credit can have on your bottom line.
INCREASE IN CASH FLOW
For companies that qualify for the research tax credit and have been profitable, exploring the research tax credit could result in cash back in your pocket.
Sound too good to be true? Don’t count your company out. It’s worth it to invest a little time to see if you qualify. Many companies don’t believe they are eligible, but, in fact, are.
For companies that haven’t taken advantage of the credit because they were told they didn’t qualify, seek out the council of a specialist to ensure that is actually the case. For example, government contractors in particular have been misinformed about the credit because the code states “funded research is excluded,” and they have been advised to exclude their government contracts under the assumption that they are considered “funded research”. That couldn’t be further from the truth. That’s why it’s important to reach out to an expert that will share the correct information to help you make the best decision for your company.
Systems integrators are another group of companies that have been traditionally told they don’t qualify for the credit. In the vast majority of projects worked on by systems integrators, the activities performed meet the necessary qualifications for inclusion. Having an expert take a deeper dive into their projects could uncover impactful dollars.
If you’ve claimed the credit through the help of a provider that uses an accounting-based methodology, seeking the counsel of an alternative-based methodology such as an engineering-based approach has the potential to yield a 30-50% increase in credits.
The coronavirus has made the world feel more financially uncertain. Adding an unexpected source of cash flow can help your company breathe a little easier and feel more confident navigating the rest of 2020.
PAYROLL TAX OFFSET
The CARES Act allows companies to defer their payroll taxes from March 27, 2020 through the end of the year with 50% of the deferral to be paid by the end of 2021 and the remaining 50% by the end of 2022.
For companies that fit a specific criteria, the research tax credit can be used to offset payroll tax. Businesses with less than $5 million in current year gross receipts can use the research credit to offset payroll tax for the first five years they generate receipts. They can also use up to $250,000 annually of their research credit (up to five years) to offset payroll tax liability. (This election must be made on an original, timely-filed tax return).
What’s important to note about the payroll offset option is that it becomes eligible for use the quarter after you file your taxes.
Why is this important? You could create a powerful tax strategy in which you defer your payroll taxes based on our current environment, and then use the payroll offset option through the research tax credit to take the sting out when your payroll tax comes due.
At the end of the day, just because someone said you don’t qualify doesn’t mean that’s the end of the story. Take the time to make sure you’re getting the right advice.
Talk with an expert about your specific situation. The end result may be that the research tax credit doesn’t make sense to pursue, and that’s ok. But many companies have gotten bad information about their eligibility, and Hull & Knarr wants to ensure every eligible company knows about this great option.
Companies are turning over every stone to search for any help they can find. Those who qualify for the R&D credit may have found something that will make a real impact on their business’ future.
About: John, Business Development Specialist, has a finance degree from Miami University. He lives in Indianapolis with his wife and four kids. When not spending time with his family, you can usually find him on a golf course.