The R&D Tax Credit is one of the most beneficial tax credits available to software and technology companies. Made permanent with the passage of the Protecting Americans from Tax Hikes Act of 2015, this non-refundable credit is available to businesses of all sizes and is designed to encourage the development of innovative and enhanced products, processes, and software in the United States. As both a federal and a Georgia credit, the R&D Tax Credit is one of the largest business tax incentives provided by the U.S. and state government.
The R&D Tax Credit is calculated at 20 percent of the excess of an eligible taxpayer’s qualified research expenses over a base amount. Qualified research expenses are comprised of all internal or contract research expenses paid or incurred by a taxpayer in carrying on trade or business. These expenses include (but are not limited to) salaries and wages, supply cost and technology costs (i.e., technology research). In order to qualify as a qualified research expense, the research activities have to be conducted on U.S. soil and they must pass a four part test outlined in the Internal Revenue Code (IRC §41). The base amount is determined in reference to the total qualified research expenses for the previous three years. The R&D Tax Credit is incremental in nature – meaning that in order to realize greater benefits from the credit, a taxpayer must increase their research expenses over time.
The Georgia R&D Tax Credit is available to any business that increases its qualified research spending in the state. Just as the qualified research expenses have to be incurred on U.S. soil to be eligible for the federal R&D Tax Credit, the qualified research expenses have to be incurred in Georgia to be eligible for the Georgia R&D Tax Credit. Whereas the federal credit can be carried back one year and forward twenty years, the Georgia credit can be carried forward ten years and is able to offset 50% of net Georgia income tax liability.
Often times, taxpayers do not realize that the work that they are doing is innovative and qualifies for the R&D Tax Credit. The activity does need not be an “innovative” and have an industry-wide impact – as long as the R&D work is related to improving your businesses products or processes, it may be a qualified research and development expense. It is recommended that all business involved in some type of research and development activities have a feasibility study to determine the amount of the possible federal and state credits available to them. The credit can be taken for all open tax years. Thus, the tax benefits of conducting a research and development credit feasibility study and a R&D Tax Credit study could be tremendous and help to generate enormous tax savings over several years.
If you believe that your business is conducting some research and development activities eligible for either the federal or Georgia credit, HLB Gross Collins, P.C. can assist you. HLB Gross Collins, P.C. has been serving some of the Southeast’s most prominent software and technology companies for nearly 50 years. Our Technology Practice works closely with the clients to ensure that they are taking advantage of all available credits and savings opportunities.