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Cash Flow from R&D Tax Credits

By Max Vignola, CCSP –  Director of Tax and R&D Services

Key Takeaways 

  • Your research and development (R&D) activities can be a substantial source of tax savings and improved cash flow during these challenging times.
  • Companies in a wide range of activities can qualify for the credit—you don’t need to employ technicians in lab coats.
  • Less than half of eligible companies have claimed the R&D credit. Why leave money on the table?
  • R&D Tax Credit can be claimed for the current tax year, as well as for the three open previous tax years–currently 2018, 2017, and 2016.

The Covid-19 pandemic has brought countless uncertainties and economic changes. Many businesses will likely experience lower revenue, greater tax liability and restricted cash flow in tax year 2020. Bedford has long recognized the importance of cash flow for taxpayers and is continuously looking for strategies and incentives that help companies retain their hard-earned cash.

We have found the Research and Development (R&D) Tax Credit to be one of the most effective strategies. For companies performing “qualifying” activities, there is no better time to utilize the R&D Tax Credit as a source of dollar for dollar reduction of tax liability. The R&D credit is both a federal credit and a credit in some states, offering a combined tax benefit ranging from approximately 6 percent to 26 percent for each qualifying dollar. Even better, more companies than you might think are eligible.

Who qualifies?
A common misconception is that the R&D Tax Credit can only be claimed by companies employing scientists in lab coats. Not so. Banks, engineering firms, manufacturers, retailers and many others have successfully claimed the credit. The key is to prove you have an element of scientific or technological uncertainty in your activities.

In fact, the R&D credit is available to a wide range of tax paying companies engaged in the development of any new or improved product, process, computer software, technique, formula, or invention, which is to be held for sale, lease, license, or use in the taxpayer’s trade or business.

While more and more companies are taking advantage of the R&D Tax credit each year, less than half of eligible companies claim it. It’s simply a matter of awareness and having the right partner to guide you through the process.

You’re not too late
Many businesses do not realize the R&D Tax credit can be claimed not only for the current tax year (2019), but for the three open previous tax years as well–currently 2018, 2017 and 2016. This can be a significant opportunity for businesses looking to increase cash flow, thanks to the dollar for dollar reduction of current years tax liability and the refund of overpaid taxes for amended open tax years.

The R&D credit is not a onetime benefit; it was made permanent as part of the PATH Act of 2015. The R&D credit is available annually for companies that continue to invest in the aforementioned qualifying activities. To see if you qualify, contact your Bedford representative or email taxcredits@bedfordteam.com.

Max has over 11 years of professional tax experience in both the public and private sectors. His primary focus at Bedford Cost Segregation is to lead the Research and Development Tax Credit division. Max works with clients to educate them on the benefits of the R&D Tax Credit and develop an action plan for qualifying companies.