Most tech companies in Florida, in their pre-revenue days, overlook the importance of R&D tax credits, which means Research and Development. However, by doing so, they essentially rip themselves off the benefits this credit can offer, especially in the starting stages of the business.
The R&D tax credit was designed to encourage companies to do research by offering them financial incentives. Using this particular tax credit, companies can reduce their payroll taxes instead of their income taxes. But this is not even a concern for pre-revenue companies.
By saving money on payroll taxes, you can invest that into somewhere else, perhaps to grow your companies and fund your research. With the help of a CPA in Sarasota, Florida, you can get to know about all the tax credits you qualify for.
About the R&D tax credit in brief
The Research and Development tax credit is a financial incentive by the government to encourage companies to spend money on new ideas and innovations. Think of it as a special reward for doing something that will benefit the entire mankind.
Companies qualify for R&D tax credits when they spend money on certain activities. During tax season, it significantly reduces the amount of income tax they have to pay. The end goal is to boost the country’s economy by creating new and helpful products, improving processes, and developing innovative technologies.
Four-part qualification test
According to the law, a company in Florida must complete a four-part test in order to receive a 10% relaxation on project-qualifying expenses. These are as follows:
- Permitted Purpose: The research must be undertaken with a fixed purpose, such as to improve a product, reliability, performance, quality, etc.
- Technological in nature: The project must be technological in nature, meaning relying on hard sciences, such as engineering, biological sciences, physical sciences, etc.
- Technological uncertainty: Before starting the research project, there must be some technological uncertainty about how to achieve its goal.
- Process of experimentation: The company must show that it used a series of systematic methods to figure out the technological uncertainties. This means that they tried various experiments to figure out a design that could be used commercially.
These four tests ensure that the Research and Development tax credits only go to the companies that push boundaries and contribute to innovation in their respective fields.
Which business costs qualify for the R&D tax credits?
The business costs that qualify for the Research and Development tax credits in Florida are known as QREs or Qualified Research Expenditures. These include:
- Tangible supplies: Any material that your company has to buy in order to conduct the research process comes under this category.
For example, if your company is developing new software, all the computer parts required for the process would qualify as QREs. However, long-term equipment, such as subscription fees and general office supplies, do not qualify.
- Leased computers and cloud services: For innovative research in the tech industry, leasing computers and buying cloud storage services are necessary. All of these qualify as QREs.
- Third-party consultants: Many businesses require consultants before they can begin their projects. If your R&D-qualified project requires the same, they can be included as QREs.
- Employee wages: Salaries paid to employees who work on the R&D-qualified project are also included in the QREs. It is important to track the time these employees spend on R&D-related tasks and calculate the portion of their wages that qualifies.
By claiming R&D tax credits, you can potentially lower your tax liabilities, which will free up more funds for further R&D investment and growth.
Need the help of a tax expert?
Understanding Research and Development tax credits and calculating them when doing your taxes is important to save money. As a business owner, you may not know everything about the subject. This is why it helps to have an experienced CPA onboard. Hire an accountant in Florida today!
