Cash Instead of a Tax Credit? With R&D Credits, it’s Possible

Tech-savvy taxpayers have long taken advantage of federal and state incentives for activities that fit statutory definitions of “research and development.” Many of these individuals have experienced significant windfalls in the form of tax savings.

Suppose you are taking on financial risk to innovate new or improved products or processes using a process of experimentation that is fundamentally technological. In that case, you may be eligible for Research & Development tax credits.

However, many owners of research-intensive startups, or companies who are investing heavily in the future, have foregone these benefits with the understanding that there is no current benefit to incurring the expense of a tax credit “study” performed by tax specialty firms that typically charge a percentage of the tax credit as their fee. Additionally, Arizona-based taxpayers have enjoyed a very generous tax credit that often exceeds the federal credit amount and, unfortunately, far exceeds their tax liability.

However, a couple of programs exist to help the “little guy” take advantage of these incentives.

Arizona’s Game-Changing Refundable R&D Tax Credit

Since 2010, Arizona has offered a program allowing taxpayers to claim a CASH REFUND of 75% of their current year’s excess tax credits instead of carrying them forward. This program has impacted many of our clients, some of whom have claimed significant refunds for their Arizona-based research. 

Read more about it here: https://www.azcommerce.com/incentives/research-development

A few things to note about this program:

  • Refunds are awarded via an application process.  Applications are accepted by the Arizona Commerce Authority beginning on the first business day of the year.  For 2021, this falls on January 4.
  • Refunds are awarded on a first-come, first-served basis.  Only $5,000,000 is allocated to these refunds, so they go quickly!
  • Tax credit claims must be based on actual figures, not estimates.

BeachFleischman has helped its clients claim millions of dollars in tax credit refunds through this program.

Federal Payroll Tax Credits

With the PATH Act (December 2015), the federal government now permits taxpayers to claim either a refund of employer FICA taxes or an offset to future employer taxes for “qualified businesses” that are eligible for R&D tax credits.

Qualified businesses have the following characteristics:

  • <$5,000,000 in gross receipts for the year of the claim.
  • Have been in business for less than five years (can’t have had revenue for any year before the fifth preceding tax year).
  • Can be a corporation, partnership, LLC, or sole proprietor

The annual amount claimed can’t exceed $250,000 and is limited to the R&D credit generated for the year.

The credits will be claimed on the normal quarterly payroll Form 941. Still, a taxpayer isn’t eligible to claim the credits until a tax return for the taxable year has been filed (e.g., a 2020 income tax return must be filed before the taxpayer is eligible to claim an R&D credit offset to employer FICA taxes).

Please contact BeachFleischman today to schedule a complimentary consultation to determine if you are eligible to claim credits, as well as receive an estimate of the tax credits you may be able to claim!

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