As a result of the economic meltdown and global pandemic, companies struggled to stay afloat, keep up with operational costs, adding to payroll, developed and innovated new product offerings for the changing market. This is why researching the most recent changes to the R&D Tax Credit program may be advantageous to your business.

As we move into a post-COVID world, businesses are now dealing with different challenges. The need for funding to stay in operations and maintain cash flow persists. However, the Federal and State Research & Development tax credit has come to revamp the current situation. 

Our previous article covered everything you need to know about R&D tax credits and the criteria for being eligible for the credit. 

Since then, there have been noticeable changes, which we will discuss. Here we will start with a breakdown: 

What is the R&D Tax Credit?

The R&D tax credit is a ‘dollar-to-dollar’ offset made available from the federal income tax liability. The credit was established in 1981 as a two-year incentive for businesses to promote innovation and sustained employment. However, the tax credit has remained in the tax code ever since – undergoing several reviews and extensions. 

The R&D tax credit is available to small and large businesses in the manufacturing and production industry. The tax credit is particularly preferable to a tax deduction. While tax deductions typically lower the amount of taxable income, a tax credit reduces the amount of taxes your business owes. 

Businesses mainly focused on developing new products, software, tech, formulas, and processes meant to improve the functionality and quality of everyday life can apply for the tax credit. 

The credit is available at the federal and state levels, with 40 states offering the credit to business owners. 

The provisions for the R&D tax credit are available under Section 41 of the Internal Revenue Code and apply to businesses generating expenses for R&D activities in the US. 

Businesses that qualify for the R&D tax credit include: 

  • Robotics and 3D printing 
  • Aerospace and defense companies
  • Life sciences
  • Cryptocurrency and online banking 
  • Manufacturing and production 
  • Bio-flavoring 
  • Engineering and Architectural firms
  • Software and electronics
  • Food sciences

Some Changes to the R&D Tax Credit

Within the 2017 Tax Cuts and Jobs Acts (TCJA), there is a provision to remove the ability to deduct R&D costs from the current tax year. This provision took effect in January 2022. Depending on their position on the filing rules, businesses will now have to amortize these R&D costs from that provision over 5 to 15 years  

If your business is a recipient of the R&D tax credit as part of your annual tax planning strategy, now is the time to review your operations. If Congress does not intervene, businesses will not implement their usual cost method to claim R&D tax credits. 

From the TCJA, businesses will have to claim their R&D credits over five years if the activities are done on US soil and 15 years if they are done on foreign soil. While there are mixed reactions to the news, there has been a standstill on the matter. 

Other changes to R&D tax credits made under the TCJA include an 80% limit of net operating loss (NOL) deductions and disallowing NOL carryovers. The CARES Act passed in 2020 temporarily and retroactively repealed the 80% limit.

How to Prepare Your Business for This Development

Your business should consider the following if the changes in the TCJA are fully implemented. 

Optimize Cashflow Planning

One of the best ways to prepare your business if you are a recipient of the R&D tax credit is to optimize your cash flow. Verify if the tax credit is still available in your state. For example, review Assembly Bill 85 (California business only), which removes the utilization of net operating losses for companies with taxable income of over $1 million. 

Consider FASB ASC Topic 740

Another way you can prepare your business is to consider the Financial Accounting Standards Board (FASB) ASC Topic 740. This provision requires companies to reveal their income tax risk. According to the generally accepted accounting principles (GAAP), this method recognizes your business’ income tax expenses for financial reporting.

Hire an Expense Reduction Specialist 

You can also hire an expense reduction consultant to help you keep your business afloat and improve your cash flow. Here at Expense To Profit, we are dedicated to improving your business operations while lowering your monthly expense. 

Over the years, we have helped small, and big businesses match emerging business trends, stand out from the competition, and retain top talents. 

Reach out to us to see how we can tailor specific strategies to improve your business long term. 

Published by Marc Freedman

Marc Freedman, CEO, Expense to Profits

Marc Freedman

CEO

Marc currently serves as our Chief Cost Evaluator, expertly advising our client management team on how to help you successfully achieve your business and financial growth goals. A respected mentor to all he consults with, he is an avid collaborator and contributor to the spend consultant community, guiding thought leaders to formulate, design, and install the best operational solutions available to their clients.