What is R&D Tax Credit? How to Calculate and Claim it in 2022

Updated on December 22nd, 2021
What is R&D Tax Credit? How to Calculate and Claim it in 2022

Today, millions of businesses in the US can take advantage of their R&D tax credit. 

Irrespective of whether they're a start-up or a seasoned company, businesses in the United States can benefit from this type of tax return. In particular, companies that invest in technology. 

The problem is many companies still have no idea what R&D credit carryforward is, let alone how they could use it to their advantage. 

In this post, you’ll learn about R&D tax calculation and how you can claim it in 2022. It's time to take advantage of this tax incentive to help grow your business.

What is R&D Tax Credit?

R&D Tax credit is a non refundable amount that taxpayers subtract from their total taxable income when filing taxes. 

This credit appears in the Internal Revenue Code section 41 and is earmarked for businesses that have costs related to research and development. For example, software companies that invest in their technology.

Due to it being simple to understand, it is often called an alternative simplified credit.

Consequently, it acts as an incentive for businesses that conduct research activities in their respective niches to find innovative solutions to industry problems.

These activities also serve for the creation of improved products. 

This reinvented tax code has a ripple effect on the technical industry in the U.S as it creates more jobs in that field. 

This type of tax law has been around from as early as 1981. 

However, businesses were not inclined to use it as part of their long term budgeting plan because it wasn’t reliable. 

Before, this business tax was set to expire at intervals following which Congress would renew it. 

Because of the uncertainty surrounding the availability of the tax, it was seen as an unwanted risk to tax planning and a cause of tax liability.

However, in 2015 after the tax reform, R&D credits were made permanent under the Protecting Americans from Tax Hikes (PATH). 

In doing so, both medium and small businesses in the United States can also access it. If you're investing in technology in your business, then that means you can take advantage of it. One of the best companies to simplify this process is Boast Capital.

Benefits of R&D Tax Credit Carryforward

In comparison to when it was first rolled out, there are lots more attractive benefits to the revamped IRS R&D tax credit. 

These include: 

  • Social Security: This tax cancels out social security tax to enable medium and small businesses to derive some benefit for their research and development activities. 
  • Alternative Minimum Tax (AMT): You may be granted a tax cut on AMT if you meet specific eligibility requirements. 
  • Income taxes: Depending on your previous tax return statements, you may also offset income taxes. 

R&D Tax Credit 2022 & Small Businesses

Although businesses can access IRS R&D tax credits, there are a number of strict eligibility requirements that govern which ones get to claim them. 

Here are the three criteria that businesses need to adhere to in order to qualify for this tax credit: 

  1. The business must not be a tax exempt organization as per tax law regulations outlined in section 501. 
  2. It should also have gross receipts or revenue amounts that fall below $5M during the tax year. 
  3. The company cannot have gross receipts that surpass the end of their five year tax period. The end of that period is the tax year in which they are requesting that tax credit. 

While small businesses do derive benefit from this tax credit, larger benefits can also claim it under the same eligibility criteria established for small businesses.

R&D Tax Credit and Business Activity

In addition to the criteria mentioned above, your development activities must also be in line with other criteria. 

Otherwise, you can’t claim an R&D tax credit carryforward.

The State has a four-part test used to ensure that your contributions constitute qualified research activities within a specific area. 

Here’s a breakdown of each one: 

  1. Purpose: The contributions made must be related to the development of a new or improved product. 
  2. Clearance of Technology Uncertainty: Your business contributes to resolving doubts that may emerge in technology or hard sciences. 
  3. Procedure Used: The process of experimentation used in R&D activities must be founded on a solid and logical basis. 
  4. Field of Research: Qualified research activities or innovative findings must be linked to the fields of physical or biological science, computer science, or engineering. 

That said, there are some activities which do not count even if they meet the requirements specified above. 

For instance, the State discounts any research that you conduct outside the U.S and its territories, even if it's contract research.

Similarly, if your research and experimentation center around matter in the fields of humanities, social sciences, or the arts, the State will deem your business activity ineligible. 

R&D Tax Credit Calculation

Before you can calculate the amount you receive in R&D tax credit carryforward, you’ll need to ensure that your business is located in the U.S and pays tax.

Then, you’ll need to have the following figures on hand: 

  1. Total number of employees in your business
  2. Company’s revenue range 
  3. Annual net expenditure on R&D activities

These are some basic facts that you need to have in order to calculate this tax rate. 

With it, you can use an R&D tax credit calculator which will determine the exact amount you can claim under this tax.

That said, even if you don’t have the exact amounts for the tax code listed above, as long as you input some data in the fields, the calculator will generate results.

However, it is advisable that you use realistic figures for qualified research expenditure when using this tool. 

That way, you get a sense of what to expect in a practical setting.

How to Take Advantage of Your R&D Tax Credit

Knowing what is R&D Tax credit is only half the battle. 

If your business meets the criteria mentioned above, then the rest comes with being strategic in how you take advantage of this tax return.

After all, qualified research expenditure doesn't need to cost you more money than it should.

The best step is to incorporate software like Boast Capital to help you organize your R&D tax expenses to save your business money. Best of luck!