Innovation fuels the technology industry, making it a natural fit for R&D tax credits.
As the breadth and depth of the start-up ecosystem in the United States has grown, the number of companies that could benefit from tax policy favoring continued investment in start-ups has also increased. However, improperly calculating and claiming R&D credits can have consequences in the form of penalties and fines.
But first, what is the R&D tax credit?
The R&D tax credit is a dollar-for-dollar tax savings that directly reduces a company’s tax liability. There’s no expense or credit limit a company can claim each year. If the company can’t use the R&D credit immediately or completely, they can generally carry them over to prior or future years.
In addition, a company can typically amend previously filed tax returns to claim the R&D credit retrospectively, providing an avenue to recoup previously paid taxes. New companies may also be eligible to apply the R&D tax credit against their payroll tax during their start-up years.
To help break down this complex topic, here’s a list of common questions technology companies often ask about the R&D credit.
How Much Can a Company Save with R&D Tax Credits?
There’s no limit, but several factors can impact savings—and because there’s such a wide variety of qualified expenses within the technology industry, it’s difficult to give an exact estimate of potential savings.
Depending on a company’s size and the types of activities performed, typical savings can range anywhere from $50,000 to $5 million through the R&D tax credit.
The amount saved stems from the amount of expenses determined eligible for the credit, not the revenue a company generates. Generally, the amount of credit can be approximately 5%–15% of a company’s R&D expenses during a given year. Typically, the more a company spends to innovate, the more they can potentially save.
The R&D credit is available both at the federal and state level, with nearly 40 states offering an R&D credit to offset tax liability. For example, companies that perform research activities in Texas, which is a hotbed of technological innovation, could potentially generate credits on the higher end of the expected range.