The Research & Development Tax Credit
What does this have to do with the CARES ACT?
The Research & Development Tax Credit is a permanent federal tax incentive for innovation, technical design, and manufacturing within the US. It is an incentive available to US businesses that use US labor that meet the following four part test:
- Permitted Purpose – The activity must relate to a new or improved business component which relates to function, performance, reliability, or quality, and computer software is included.
- Elimination of Uncertainly – The activity must be intended to discover information to eliminate uncertainly concerning the capability, method or design for developing or improving a product or process.
- Process of experimentation – The taxpayer must engage in an evaluative process that is capable of identifying and evaluating more than one alternative to achieve a result. This may include modeling, simulation or or a systematic trial and error methodology.
- Technological in Nature – The activity performed must fundamentally rely on principles of Physical or Biological Science, Engineering, Computer Science.
But just what does the R&D tax credit have to do with the CARES Act?
If a company is performing activities that meet the four part test, they may be able to benefit from one of the most powerful tax incentives available today, the Research & Development Tax Credit. If you are not claiming the credit, and have qualifying activities, chances are you are leaving money on the table.
The R&D tax credit is available for the current tax year, which lets assume is the 2019 tax year, and you can also claim the credit for the prior three tax years, which would be 2018, 2017, and 2016. Depending on when you filed your 2016 taxes, you could be in danger of not being able to claim this tax year, so now would be a great time to discuss this with your most trusted advisor, your CPA.
But just what does the R&D tax credit have to do with the CARES Act?
The CARES Act now permits a losses from taxable years 2018, 2019, and 2020 to be carried back 5 years prior to generate refunds and removes taxable income limitation allowing NOLs to fully offset income in current taxable years. This can go back as far as 2013!
This a a wonderful provision of the CARES Act because this allows for recent losses to be carried back against taxable income that was taxed at a higher tax rate. Businesses can file an amended tax return a get a cash refund against taxes paid in prior years.
Now may be the best time ever to explore claiming the R&D tax credit as it is a wonderful way for you to get money back into your business for activities which you have already performed. Chances are you in discussions with your CPA trying to get through the new provisions of the CARES Act, and your CPA can help you decide if now is the right time to benefit from one of the most powerful tax incentives, the Research & Development Tax Credit.
Jill Mazur, CPA
Director
Engineered Tax Services
949-350-6369 / JMazur@EngineeredTaxServices.com
