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Does Your Business Qualify for the Research Tax Credit?
Article Highlights:
- Computation Method
- Regular Method
- Simplified Method
- Qualified Research
- The Credit
- General Business Credit
- AMT
- Payroll Tax Election
Calculated on the basis of increases in research activities and expenditures, the purpose of the credit is to reward businesses that pursue innovation by continually increasing investment in research activities. Even so, an alternative simplified method allows taxpayers to claim research credits if research costs remain the same or even decline compared with prior years.
Computation Methods – There are two methods used to compute the credit: the regular method that provides for a 20% research credit or the simplified method, which is easier to document but results in a reduced credit of 14% of eligible expenses.
- Regular Method - Under the regular research credit method, the credit equals 20% of qualified research expenditures for a tax year over a base amount established by the business entity in 1984–1988, or a later period for companies that started subsequent to that period of time. This method may be best for companies that can document a low base amount.
- Simplified Method - Under the alternative simplified method, the credit equals 14% of qualified research expenses over 50% of the average annual qualified research expenses in the three preceding tax years. If the taxpayer has no qualified research expenses in any of the three preceding tax years, the alternative simplified method credit may be 6% of the tax year’s qualified research expenses. This method may be the best choice for taxpayers with incomplete records from the mid-1980s, those complicated by mergers and acquisitions, taxpayers with a high base amount from that period or smaller business entities.
- A new or improved function,
- Performance, or
- Reliability or quality.
- Developing new or improved products, processes or formulas;
- Developing prototypes or models; developing or applying for patents;
- Certification testing; developing new technology;
- Environmental testing; developing or improving software technologies;
- Building or improving manufacturing facilities; and streamlining internal processes.
No Double Dipping – The business expense that created the credit must be reduced by the amount of the credit.
Payroll Tax Election – In the case of a qualified small business, one with gross receipts of less than $5 million may elect to claim a portion of its research credit, not to exceed $250,000, against the employer’s share of the employees’ FICA withholding requirement (the 6.2 percent payroll tax). To be eligible for the payroll tax credit, the business may not have had gross receipts in any tax year preceding the five-tax-year period that ends with the tax year of the election.
If you would like more details related to this credit or would like to discuss whether your company qualifies for this credit, please do not hesitate to call.
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Offices in Flemington, NJ and Califon, NJ
Our Mission: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we are on a mission to redefine the tax experience for individuals and small businesses. With a focus on personalized service, strategic planning, and expert guidance, we aim to empower our clients to succeed financially with confidence and ease.
Expertise in Action: With a wealth of experience and a team of dedicated professionals, we specialize in individual and small business tax preparation. While we excel in all areas of taxation, our passion lies in serving the unique needs of small business owners in New Jersey. We understand that small business taxation requires specialized knowledge and attention to detail, which is why we go above and beyond to ensure our clients receive the guidance and support they deserve.
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Why Choose Us?: What sets us apart from other New Jersey tax firms is our commitment to excellence and innovation in the field of taxation. We don't just prepare tax returns; we provide strategic insights, proactive planning, and actionable advice to help our clients achieve their financial goals. With a team of two CPAs, an EA, and an ERO, we have the expertise and resources to deliver exceptional service and results.
Your Success is Our Priority: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we measure our success by the success of our clients. We are dedicated to building long-lasting relationships, providing unparalleled service, and helping our clients thrive in today's ever-changing tax landscape.
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