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Top Five Misconceptions About Claiming the R&D Tax Credit

October 18, 2021


Jonathan Cardella

Strike Summary

  • There are certain restrictions when taking advantage of both Sections 174 deduction/capitalization and Section 41, which can be seen in Section 280C.
  • Businesses that choose to elect Section 280C for their federal taxes could also lower their state taxes as well.
  • Taxpayers that want to use Section 280C must plan ahead because it can only be used on an originally filed return.
  • The recent passage of the Tax Cuts and Jobs Act may have have affected whether a taxpayer should use Section 280C in their tax strategy.

Work with Strike to navigate tax changes with ease.

Schedule a MeetingBook a Consultation

With a combined 40+ years of experience in the research and development (R&D) tax credit industry, we’ve heard every reason out there for companies NOT to claim the credit. But we’re still constantly surprised. After all, companies are choosing not to take advantage of the most lucrative and beneficial tax credit available to U.S.-based companies—to the tune of hundreds of thousands of dollars in lost capital every year.

This credit has been around since 1981 and was made a permanent fixture in the tax code in 2015. It is consistently used by large corporations to reduce their tax liability and give them a competitive advantage. Don’t take our word for it. The tax professionals at the American Institute of Certified Public Accountants (AICPA) also wonder why more businesses don’t claim the R&D tax credit

Here we dispel the top five misconceptions pertaining to the R&D tax credit in the hope of converting the doubters.

1. My CPA knows taxes—they would tell me if I qualified for the R&D tax credit.

CPAs do know taxes, but most of them have a lot on their plate. Add in the fact that the R&D tax credit makes up a very small portion of the U.S. tax code, and you would be surprised at how many CPAs are a) unaware of its existence, and b) unsure of what it takes to qualify.

Don’t assume that just because your CPA isn’t claiming the credit for your company that it means you aren’t eligible. It could mean that he or she doesn’t have the bandwidth, they are unfamiliar with the credit, or are unsure what qualifies as development or improvement as defined by the IRS. Which is much broader than you think. Leading us to point two.

2. My company doesn’t do any R&D. 

We heard this most recently from the owner of a precision machine shop that specializes in designing and manufacturing custom dies for injection molding. When approached as to whether they were claiming the R&D tax credit, his response was “But we don’t do any R&D.” Incorrect. There is a long list of qualifying activities for companies in all sectors of manufacturing.

As long as you are solving a problem that involves a process of experimentation (you don’t know the best way to do it when you start), it most likely qualifies as an R&D project. Importantly, it doesn’t have to be new to the world, just new to your company.

We have compiled a list of qualifying activities by industry to give you a better understanding of what constitutes R&D in the eyes of the IRS, and have a detailed description on how to know if your company’s activities qualify.

3. My company is in losses and doesn’t have any tax liability. The R&D tax credit won’t benefit us.

This is a common one we hear, and like the others presented here, it’s absolutely not true. If your company is in losses but has qualifying R&D activities (looking at you, startups and small businesses), you most likely qualify for the Payroll Tax offset. This stipulation within the R&D tax credit can reduce your payroll tax liability up to $250,000 per year.

See our payroll tax offset page for a complete explanation of how this works. Needless to say, this can be a substantial business tax benefit to qualified small businesses just starting out.

4. Compiling the information for the claim takes too much time. 

This is a major blocker for companies to commit to filing their R&D tax credit claim. We understand that you and your people are busy. What decision-makers may not understand is that much of the required documentation is already available in your company’s payroll or other employee- and task-tracking software. Platforms such as Paychex, ADP, and Gusto interface with R&D tax credit preparers’ systems to provide the bulk of the needed information.

Our fulfillment team estimates that on average, it takes only 5 to 10 hours (depending on the complexity of your claim) to complete all the necessary fact-finding and documentation needed to submit a credible and substantiated claim with the IRS.

5. Claiming the R&D tax credit will increase my chance of an audit.

This is one that we hear pretty often. There is a lot of data out there supporting the fact that if done correctly, the R&D tax credit filing does not increase audit risk. Period. Taking the R&D tax credit on a timely-filed return, including extension, does not increase your company’s audit risk.

According to the IRS, only a fraction (0.9% of corporate tax returns and 0.2% of S corps and partnerships) are randomly selected for audit. A return can be selected for audit based on a number of reasons—there is nothing in the IRS guidelines that specifically targets companies claiming the R&D tax credit.

That being said, it’s important to make sure your documentation is complete and correct. The experts at Strike Tax Advisory take the guesswork out of your claim. Our R&D tax experts leave no stone unturned with respect to qualifying your activities, and as opposed to your CPA, this is all they do. And in the unlikely event of an audit, Strike is with you every step of the way with 100% audit protection.

Contact Strike today to take the first step to claim what your competitors are already taking advantage of.

Work with Strike to navigate tax changes with ease.

Schedule a MeetingBook a Consultation

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