RD Tax Credits: A Complete Guide to the Tax Break That Every Business Should Take Advantage Of

No firm likes to pay more taxes than necessary, but that is precisely what occurs when a qualified entity fails to claim the RD tax credits

Why are businesses missing out on a big tax savings opportunity? 

It all boils down to the truth that research and development tax credits may be a difficult subject to manage. Without any kind of technical expertise, firms may have difficulty determining their qualification for the credit or estimating the magnitude of anticipated benefits. Of course, some businesses are simply ignorant of the credit. 

That is why we created this guide: to answer these concerns by describing the fundamentals in simple language as to what the R&D tax credit is as well as how it is computed to how it may be claimed. 

Definition of RD Tax Credits

The research and development credit is a tax credit meant to incentivize research efforts aimed at developing or enhancing goods, processes, or software. It was created by the federal government in 1981 and was subsequently put into effect by Congress in 2015 as part of the PATH Act. 

The governing regulations for the R&D Tax Credits are provided in the Internal Revenue Code Section 41. Basically, the credit is accessible for certain types of research costs, referred to as Qualifying Research Activities. Organizations throughout all industries who make an attempt to innovate or enhance using scientific principles may be eligible – the awards are obviously not reserved for giant firms with extensive R&D teams.

How can a business take advantage of R&D tax credits?

In terms of the advantages of claiming RD Tax credits, this will vary mostly on the kind of business that you are engaging. If you are running a profit-making enterprise, then you can have a dollar-for-dollar reduction in your federal tax liability as an effect of your R&D tac credits. Moreover, they may be used to reduce the incidence of the Alternative Minimum Tax (AMT) on qualifying small companies or ESBs. Simply put, ESBs are enterprises having gross receipts of less than $50 million during the prior three years. 

A Qualifying Small Business or QSB, on the contrary, may utilize all or portion of its credits to offset payroll tax payments, limited to a total of $250,000. QSBs are frequently start-ups with fewer than five years of operation and below $5 million in gross revenue in the present fiscal year. Without lowering headcount or wages, the payroll tax offset efficiently reduces staff expenses. This also means that your business does not need to have a positive bottom line for you to qualify in claiming this tax credit.  

If you still have unutilized credits, you need not worry because this can still be carried over for twenty years and you can apply this to your subsequent tax years. This carry-forward function is critical for preserving cash flow during periods of limited accessible money. 

Research and development credits also free up resources for other purposes. In practice, businesses generally receive back between 5 and 10 cents on each dollar spent on qualifying costs. 

What is The Method of Calculating R&D Tax Credits?

In terms of computing your R&D tax credit eligibility, it can be quite challenging mainly because you will be having two available options which are the Regular Research Credit or the Alternative Simplified Credit. 

Using either technique, Form 6765 or the form named “Credit for Increasing Research Activities” provides a set of procedures for calculating your possible tax credits. You have the choice of calculating your credits with both techniques and then use the method that will give you the optimal result for your business. 

The Regular Research Credit is equal to 20% of all eligible expenditures over a set base amount in the current year. This base number may need sophisticated and extensive calculations, depending on your business’s stage of development. 

The Alternative Simplified Credit is generally equal to 14% of the difference of current-year qualifying expenditures as well as 50% of the average acceptable expenditures for the prior three years. 

Regardless of the technique you pick, you have the choice of getting a reduced credit. This reduces your R&D tax credits but avoids an adverse reduction to your taxable income. Additionally, it may ease the processing of state tax returns.

Procedure in Claiming RD Tax Credits

A widespread misunderstanding that discourages firms from seeking R&D tax credits would be that the process is excessively time-consuming. While some conscious preparation is required, the critical component is having the appropriate documentation, which frequently includes data that firms currently maintain. 

Typically, valuable data include the following: 

  • Tax and payroll data; 
  • Test material such as project records, laboratory reports, design documents, mockups, and patent applications; and 
  • Reports tracking time, costs, and other project accounting information. 

It is critical to begin documenting as soon as feasible. If you wait until tax filing season to tackle any gaps, it could become more time demanding to close them. 

How can I go through the 6765 form?

The primary objective of Form 6765 is to assist taxpayers in calculating and claiming R&D tax credits. Also, this will let them know how your RD tax credits are going to be spent such as whether you are going to offset your tax credits against your payroll tax liability, your federal income tax liability, or if you want to carry it over to future fiscal years.

Below is a much closer look at the Form 6765 sections:

  • In Sections A and B, this provides how you work out your tax credits
    Sections A and B give a number of instructions that will assist you in calculating your tax credits. Fill Section A if you’re claiming Regular Research Credit and Section B if you’re claiming Alternative Simplified Credit. At the ending of both parts, there is an option for a decreased credit. 
  • In section C, you will provide your current year tax credit
    Section C provides links to additional forms and schedules for reporting your projected credit for the current year.
  • In Section D, it will provide you with the option to offset tax credits to your payroll tax liabilities
    Lastly, Section D allows a Qualified Small Business to elect to use all or a portion of its R&D credits toward its payroll tax payments, up to the value of $250,000.


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