IRS problems aren't as complicated as they look once you see the structure. I'm attorney Darrin Mish. I've represented taxpayers before the IRS for three decades \u2014 in Florida, Colorado, Texas, and internationally. Here's the plain-English breakdown.<\/p>\n
If you are a small business owner, you should take advantage of the R&D tax incentive open to you. \u00a0Many small business owners mistakenly assume that they are not eligible for this tax benefit because they do not have a large laboratory filled with research personnel doing R&D. \u00a0But even if you outsource your product testing or employ engineers to do your technical work, you may qualify for this tax credit.
\nGenerally, if your business is in industries like biotechnology, software development, technology services, software-based services etc, you should qualify for the R&D tax credit. \u00a0Doing any form of research and developing a product you intend to patent would generally qualify you also.
\nHere\u2019s the good news \u2013 the rules have recently been simplified. \u00a0In fact, if you acquire a small business, the tax credits can be transferable and be applied retroactively. \u00a0This is good news especially to new businesses because it means the credit incurred for R&D expenses in the initial years when there is little or no income can be carried forward to offset taxes on future profits. \u00a0Here\u2019s the kicker \u2013 the time you have to carry forward your R&D tax credit is a whopping 20 years!
\nThe simplification of this tax credit came in the form of the Alternative Simplified Credit (ASC) process when it was introduced in 2007. \u00a0The ASC allows small to medium sized business owners to calculate the R&D tax credit based on their prior 3 years research expenditure. \u00a0However, if you are a new business owner and have not been in business for 3 years, you can utilize 6% of your qualified research expenses to offset any tax liability you may have. \u00a0If you are not taxable yet because your business has not started making profit as a startup, you can claim the credit prospectively and carry it forward into a year when you do owe taxes (up to 20 years into the future).
\nIf you are not new in business, you need to calculate 50% of your R&D expenses for the preceding 3 tax years. \u00a0The amount of tax credit you\u2019re entitled to is based on what you spend exceeding this amount. \u00a0Say if you spent an average of $20,000 per year the last 3 years, 50% of that would be $10,000. \u00a0So if you spent $22,000 in R&D this year, then your tax credit would be 14% of $12,000 (i.e the amount $22,000 exceeds $10,000) which works out to be $1,680. \u00a0The 14% rate applies to the tax years 2011 and 2012.<\/p>\n