Misunderstandings about R&D tax credits often cause businesses to miss out on valuable savings. This guide clears up misconceptions and explains what may qualify.
7 Common Misconceptions About R&D Tax Credits
1. Only Scientists or Labs Can Claim R&D Credits
- Reality: R&D credits apply to industries beyond labs, including software, manufacturing, and construction.
- Example: A construction firm developing a new eco-friendly concrete mix may qualify under process improvement.
2. Routine Improvements Don’t Qualify
- Reality: Incremental improvements can qualify if they involve a process of experimentation.
- Example: A manufacturer improving assembly line efficiency through automation could qualify.
3. Only Successful Projects Are Eligible
- Reality: Projects that fail but involve systematic research and development qualify.
- Example: A failed attempt to create a new medical device still meets IRS criteria if it involved experimentation.
4. R&D Credits Are Only for New Products
- Reality: Process improvements, software updates, and internal tools may qualify.
- Example: A software company optimizing database performance could claim eligible costs.
5. Startups or Pre-Revenue Companies Can’t Claim R&D Credits
- Reality: Startups can use the credits to offset payroll taxes under the PATH Act.
- Example: A pre-revenue biotech firm developing gene therapies can apply the credits to payroll tax liabilities.
6. R&D Credits Are Only for Large Corporations
- Reality: Small and mid-sized companies frequently benefit from the credits.
- Example: A small SaaS startup developing a new app feature can qualify for R&D credits.
7. R&D Tax Credits Are Too Risky or Complicated
- Reality: With proper documentation, claiming R&D tax credits is low-risk and beneficial.
- Tip: Maintain detailed records of experiments, outcomes, and expenses.
What Qualifies for R&D Tax Credits?
You can read more about what activities qualify in accordance to the IRS 4-Part Test and What Expenses Can Be Considered for the Research & Development Tax Credit.
Understanding these misconceptions can help your business leverage R&D tax credits more effectively. For expert guidance and a personalized assessment, Contact us today.
