Do not think of research and development in the classic sense of people in white coats tinkering with test tubes and beakers. Nowadays, in our technology driven world, think of research and development as improving products, developing better internal processes and techniques, software development and of course new products or inventions.
Why is this important? Well first off, you can get a direct credit off of your corporate income taxes for a percentage of your development costs. What if I do not have corporate income taxes because I am generating losses? Here is there is an opportunity for start ups with losses. You can apply those credits against the employer share of payroll tax liabilities.
Research and development costs include any payroll, outside contractors, software tools, direct supplies and even some of your legal costs directly associated with the project.
What do I need to do to get the credit? The key part of the process is to document the process, product, etc. you are working on . Then capture the costs. Credits will be denied if there is no clear documentation. Also remember you do not have to succeed at the project but had clear documentation and that would include how you measured success or failure.
The actual pathway for claiming a credit involves filing Form 6765 with your tax return. The credit can be offset against the tax liability on the Form 1120. If you do not have an income tax offset then you can apply that credit to your employer payroll tax liability for the first quarter following the quarter you filed your federal return. This is done by attaching a Form 8974 to the Quarterly Form 941.
One last point is that of double dipping. You cannot use the same payroll you used to get a PPP loan or an ERTC credit under the various Covid relief packages.
Written by John M Matras CPA
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