The Research and Development Tax Credit
How Both The CARES Act and the Tax Credit Can Get Cash Back into Your Business!
As most everyone is aware, Congress has enacted the largest emergency aid package in U.S. history. Known as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), This legislation provides much-needed aid to individuals and businesses hurt by the struggling economy. Small businesses can apply for low-interest loans that cover up to two-and-a-half months of payroll expenses, including salaries, sick leave, and other compensation benefits. If an employer continues to pay workers through June, the amount of the loans that went toward eligible costs would be forgiven. That means they’d essentially be grants to small businesses.
A business will have to make a “good faith certification” that the money will go toward retaining workers, maintaining payroll, or paying necessary expenses like rent. Recently it has been determined that that loans with an original principal amount of less than $2 million will be deemed to have made the required certification in good faith. Loans greater than $2 Million face challenges in order to thoroughly document that loans have been made in good faith. No matter the size of the loan, this is a wonderful avenue to pursue in order to get cash back into your business.
Another wonderful avenue, to get cash back into your business, is the Research & Development Tax Credit. This credit has been around since 1981, and has gone through many changes. In order to qualify, a business has to be performing activities that are new or improved to itself, not to the world, so a patent, which was basically necessary years ago, is no longer the case. This credit has gone through many changes recently, and if you are a start-up, and if you did not qualify in the past, now may be the best time ever to see if you can now qualify.
The R&D tax credit is a dollar for dollar savings against income tax, and the credit can be claimed for the current tax year, and the prior three tax years, so if you claim a credit in 2019 for $100,000, this could potentially be a $400,000 credit. Many states also offer some form of the R&D tax credit as well, so a business can benefit at both the state and federal level.
To make it even better, via the CARES Act, any losses can now be carried back 5 years to generate refunds and remove taxable income limitation allowing NOLs to fully offset income in current taxable years. This allows for recent losses to be carried back against taxable income that was taxed at a hight rate.
Every business should be exploring ways to get cash back into the business, and now there are two very powerful options to explore. The CARES Act can provide either grants or loans, and the R&D tax credit can provide an immediate offset to current taxes owed, or can generate a refund due to the loss carry back provision of the Act.
Jill Mazur, CPA
Engineered Tax Services
949-350-6369 / [email protected]