Every year, the U.S. government allocates billions of dollars to thousands of companies that develop new or improve existing technologies, products, materials, and processes through the Research & Experimentation Tax Credit (R&D Tax Credit) program.
In the past, the R&D Tax Credit program would periodically expire and require renewal by Congress. Companies that wanted to include this credit in their long-term financial planning couldn’t always rely on its availability. In 2015, Congress made the R&D tax credit permanent through the Protecting Americans from Tax Hikes (PATH) Act and introduced key changes so more types of companies could benefit.
Yet, we meet companies every day that assume they don’t qualify because of common misconceptions. Here are the 10 most widespread R&D tax credit myths—debunked:
Myth #1: The R&D tax credit is a grant for R&D.
The R&D tax credit isn’t a grant or a voucher. It’s a tax credit you claim when you file your business or personal taxes. It’s a cost recovery program. You can claim the credit after you’ve incurred R&D expenses—such as U.S. salaries, subcontractor costs, and materials used.
Myth #2: The R&D tax credit won’t benefit my company because we’re not profitable.
Using the federal R&D tax credit to reduce your tax bill is just one way to benefit from the program.
Startups can apply the credits to offset up to $250,000 per year in FICA payroll taxes if they’re pre-revenue or had less than $5 million in gross receipts for the tax year and no gross receipts for more than five years prior. This delivers an immediate boost to your bottom line. For example, if you’re claiming R&D tax credits for fiscal year 2016, you shouldn’t have had gross receipts before 2012 and you shouldn’t have more than $5 million in gross receipts in 2016.
Companies with less than $50 million in average revenue over the past three years can use the credit to offset their Alternative Minimum Tax (AMT) liability.
If your company doesn’t fit into those categories, you can carry forward the credit for up to 20 years (or carry it back one year if you had profits).
In addition, some state R&D credit programs offer refundable credits.
Myth #3: The R&D tax credit doesn’t reduce state taxes.
Many states offer their own R&D tax credit programs, usually with eligibility criteria similar to the federal program. Some states offer refundable credits, while others allow you to carry credits forward.
Myth #4: The R&D tax credit is only for companies doing groundbreaking innovation.
The R&D tax credit is available to companies that are developing new products or improving existing ones, materials, technologies, or processes. Your work doesn’t have to be revolutionary. The regulations define research as activities that follow a systematic process to overcome technological uncertainty, based on the information your company has at the start of the project.
Myth #5: The R&D tax credit is for increasing research, but our R&D spending hasn’t gone up.
While the R&D credit does require an increase in research spending, your current-year spend is compared to a base amount—50% of your average spend over the previous three years. Even if your R&D spending is decreasing, your company could still qualify for the credit.
Myth #6: R&D tax credit-eligible projects must be done in research labs.
Many believe the R&D tax credit only applies to traditional research in scientific labs. In reality, it also covers applied science—something many companies do every day to create new or improve existing materials, devices, products, or processes.
Myth #7: This program is only for the high-tech sector.
While the R&D tax credit is popular in high-tech, it’s also available to companies in manufacturing, oil and gas, agriculture, biotech, and more.
Here are some examples of R&D tax credit-eligible projects in these industries:
Increasing manufacturing speed while maintaining consistent quality.
Modifying existing equipment to perform a new function it wasn’t originally designed for.
Overcoming hardware limitations to achieve ambitious performance targets or a lighter footprint.
Myth #8: Only successful projects can be claimed.
Not true! The regulations clearly state that success isn’t required to qualify.
In fact, the key to a strong R&D tax credit claim is showing that you faced technical challenges. If your project didn’t succeed, that actually demonstrates there was real uncertainty and technical hurdles to overcome. As long as you faced technological uncertainty and followed a systematic process to address it, the outcome—success or failure—doesn’t matter.
Myth #9: I need a formal time tracking system to document my work.
If you’re concerned about your time-tracking system, rest assured—there are other ways to methodically estimate the time spent on an R&D project, especially if you’re claiming the credit for the first time.
You can still use dated journals, emails, photos of whiteboard strategy sessions, and version control to document your time and technical challenges.
Myth #10: My accountant must prepare my R&D tax credit claim.
While your accountant does need to include the R&D tax credit claim schedules in your corporate tax return, they don’t have to prepare the claim itself. You have options.
In our experience, engineers are often better equipped to prepare R&D tax credit claims. Successful claims focus on the technological uncertainty and the systematic experimentation process. Many accountants don’t have the technical background to fully understand the work performed.
If you have questions or want more details about the R&D tax credit program, feel free to reach out to us. Our team combines engineers, accountants, and artificial intelligence to prepare and maximize your R&D tax credit claims.
In the meantime, we’ve summarized everything you need to know about the R&D tax credit program in this easy-to-understand infographic.
