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What is the R&D Tax Credit? Here’s a Quick Breakdown

Learn how you can leverage the Federal R&D Tax Credit to grow your business with confidence, and how a certified PEO can help your business claim the credit against payroll taxes.

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Feb 28, 20233 minutes

If you’re looking for a way to subsidize some of your company’s costs, applying for a Federal Research and Development (R&D) Tax Credit may be an option — even if you’re a small business.

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In this post, we’ve rounded up some common questions about the credit, and asked the professionals at Aprio and Boast to help demystify the process.

What is the R&D Tax Credit?

The Federal Research and Development (R&D) tax credit is an income tax credit that may be claimed by companies that have expenditures related to the research and development of new processes and products (among other things).

In 2015, Congress enacted the Protecting Americans From Tax Hikes (PATH) law, which improved accessibility to R&D tax credits for small businesses. Under PATH, eligible small businesses with less than $5 million in gross receipts may be allowed to offset the credit against payroll taxes.

Who is eligible for the credit?

There are a few requirements a company must meet in order to qualify for the credit. That’s why it’s important to work with a tax advisor or an R&D tax expert to ensure you meet the requirements and you’re claiming the correct amount of credit.

When you’re preparing to submit your claim, your tax advisor should help you determine if your company’s projects meet each of the following requirements to be eligible for the credit:

  1. Improves a product or process

  2. Is technological in nature

  3. Aims to eliminate uncertainty

  4. Uses a process of experimentation

If your company’s research & development activity fulfills the above requirements, check with your tax advisor to see if you may apply the federal R&D tax credit against federal payroll tax obligations. To determine if your small business qualifies, it must meet all of the following requirements:

  • Must not be exempt from income tax under § 501

  • Must have less than $5M in gross receipts (including interest income) in the tax year claiming the credit

  • Must have $0 in gross receipts (including interest income) in the five-year period prior to the five-year tax period that includes the tax year for which you are applying the credit (e.g. for 2022, must have $0 gross receipts for tax years 2013-2017)

  • Must not have already claimed the R&D tax credit more than five times

How a Certified PEO Can Help

Justworks is an IRS Certified PEO. That comes with several benefits for our customers, including clarification of federal payroll tax liability, confidence in working with a PEO that is reputable, audited, and bonded, and a confirmation of tax credits — including the R&D tax credit.

Justworks may help customer’s apply their R&D tax credit against payroll taxes if their company is eligible.

If you believe your business is eligible and would like to claim the R&D tax credit, confirm the following with your tax advisor:

  • Company eligibility to claim the credit and apply it against payroll tax credits

  • Amount of credit your company can claim

  • Amount of credit that should be taken (if any) against income taxes vs. employer federal payroll taxes

Once you’ve gone through those steps, you can submit to Justworks a copy of the IRS Form 67654 that you’ve filed with the IRS and we will help handle the rest!

Where to Begin

Justworks has partnered with both Aprio and Boast to help small businesses connect with R&D tax experts so you can continue to grow with confidence. If you’re not sure where to begin, or you need help verifying your eligibility for these credits, connect with our partners at Aprio and Boast today.

Aprio performs hundreds of R&D tax credit studies each year, for companies performing R&D all over the country. These credits can provide your company with savings that can be reinvested into your business or used to improve your bottom line.

Boast is a fintech platform that automates the process to claim R&D tax credits. Boast specializes in helping founders reduce the burden and pain of tax credit claim preparation, and maximize claim size. By accessing your eligible tax incentives, you can invest more quickly and grow more rapidly.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.