As most companies encounter technical challenges related to developing new or improved products and services they find themselves forced to constantly innovate in order to maintain competitive advantage. Innovation however is inherently risky as it requires a substantial commitment of resources. As with any risk, some undertakings are successful while most fail with no return on investment. The majority of companies see the burden of overcoming technical hurdles as just part of what they do.
Fortunately the federal government and many states, currently provide powerful economic incentives to reward companies for undertaking these inherently risky initiatives and alleviate some of the financial strain companies face when trying to innovate.
Under the federal R&D tax credit, the US government gives funds back to companies who spend money on developing new products and services. These financial incentives are in place to reward U.S. companies for increasing their investment in R&D and are intended to foster innovation and the technological advancement of US companies. The ultimate purpose of these policies though, is creating jobs and increasing US global competitiveness.
Therefore NO state wants to be seen as being business unfriendly - so over the past thirty years, research and development (R&D) tax credits have become one of the most popular tools to boost a state's technology economy. Companies of all sizes who qualify for the federal R&D tax credit can benefit significantly. Up to 70% of all US states now offer specific state research and development tax credits.
While more than 14,000 U.S. companies claim federal Research & Development credits annually, less than 26% of the companies that qualify actually apply for them.
The evidence indicates that states generally adopt R&D tax credits out of a desire to promote economic development, particularly when the state's economy is suffering from high unemployment rates. R&D tax incentives however are most effective in states that already have a significant level of research activity. States typically tailor these tax credits to fit their specific needs whether that means attracting larger or smaller firms. Unfortunately many states offering R&D credits often find themselves in a zero sum game competition with one another to attract companies. Either way - when states make available gaudy amounts tax dollars in the name of competition, savy businessess have a lot to win.
The R&D tax credit is taken as an income tax credit and applied dollar-for-dollar to offset your company's payroll tax liability. Federal and state tax codes present a number of valuable incentives that can greatly optimize your tax position and improve your cash flow. Enlist experts to claim not only the R&D tax credits but all the other state and local tax opportunities available to you.
The most recent IRS data shows that R&D tax credit claims are nearing $12 billion annually. The Joint Committee on Taxation estimates that more than half of that total goes to the manufacturing industry and while upwards of 14,000 US companies claim federal R&D credits annually, less than 26% of companies that qualify for credits actually apply for them.
Unfortunately, the process for filing can be intimidating and time-consuming, requiring deep knowledge of the US tax code which changes from year to year. It turns out that even the companies who know about the R&D tax credits fail to pursue them due to complexity and lack of in-house expertise. The companies who enlist the help of certified public accountants are not much luckier either as may CPAs shy away from offering this service to their clients who may qualify for fear of not relaying the correct information.
To help your company see these these elusive tax benefits - it takes a firm with deep expertise in tax law who has the discipline and gumption to collect and pour over all the financial records needed to calculate your R&D tax deductions.