4 Things You Should Know About The R and D Tax Credit

This blog was originally published to JBowmanAccountant.org.

The Research and Development Tax Credit benefits almost any business, no matter the size, age, or industry. Since 1981, this incentive has offered reimbursement for innovative and highly-technical businesses. Here are four things you should know about the R&D Tax Credit.

It is available for many industries

From aerospace organizations to wineries and vineyards, several industries can reap the benefits of an R&D Tax Credit. Organizations within these industries must pass a four-part test to affirm that their research activities qualify for an R&D Tax Credit. The four parts of the test are:

  1. Technological in Nature – “Activities must fundamentally rely on the principles of physical or biological science, engineering, or computer science.”
  2. Permitted Purpose – “Activities must be performed in an attempt to improve performance, reliability, or quality of a new or existing business component.”
  3. Eliminate Uncertainty – “Activities intended to discover information that could eliminate technical uncertainty concerning the development or improvement of a product.”
  4. Experimentation – “All of the activities must include a process of experimentation including testing, modeling, simulating, systematic trial and error.”

It covers a variety of expenses

With all of the activity that goes on in a given business, it can be difficult to track your direct and indirect R&D expenses. However, taking note of those expenses is essential for receiving the appropriate tax benefits. As a rule, the major expenses that qualify are salaries and supplies and materials. For salaries, employees who work in R&D or directly manage those in R&D are covered. Supplies and materials covers anything from nails to computers.

It offers unique benefits to smaller companies

If your small company has gross receipts for five years or less that average less than $5 million, your company may be eligible for an R&D Tax Credit. This is the case even if your company does not owe any taxes, and the covered amount can reach up to $250,000 of a payroll offset. If your small business does not have credit for offsetting payroll taxes in a given quarter, you can carry that credit into a different quarter. However, to do this, you must not exceed the $250,000 limit.

It undergoes regular updates

The R&D Tax Credit does not behave exactly as it did over a quarter of a century ago. As industries and economies evolve, the R&D Tax Credit does, too. In particular, the removal of the Discovery Rule in 2003 redefined research activities as those that would be “new to the taxpayer” rather than “new to the world.” More recently, the Protecting American from Tax Hikes (PATH) Act ensured that small, mid-size, and startup businesses could benefit from R&D Tax Credits.

John J. Bowman, Jr. is an accountant and tax professional based out of Pittsburgh, Pennsylvania. Follow him on Twitter for more blog updates!

Tax Filing Tips for Married Couples

If you got married on or before December 31 of last year, then you and your spouse will have to do your taxes a little bit differently this year. Keep reading to learn some of the top ways that getting married affects your taxes.

Filing Status

Now that you’re married you can no longer file with a single status. You either have to choose Married Filing Jointly or Married Filing Separately. For the majority of married couples, Married Filing Jointly is more beneficial than Married Filing Separately. The latter status usually gives you access to more beneficial deductions and credits.

Tax Bracket

Your tax bracket determines the tax rate that you will be responsible for. It’s likely that your tax bracket will change now that you’re no longer filing as single. Couples who file jointly often face a higher tax bracket since their incomes are combined.

Exemptions and Standard Deduction

Married couples get to claim two exemptions instead of the one that single individuals get to claim. The standard deduction is highest for married couples who file jointly. This year the standard deduction is $12,600 for joint filers and $6,300 for married couples who file separately.  The standard deduction is subtracted from your income that you are taxed on. Therefore, the higher the standard deduction the better.

W-4

After getting married it’s usually a good idea to change your W-4. Whenever you start a new job you are required to fill out Form W-4. The form tells your employer who how tax to withhold. Changing your status to married might lessen the amount of taxes you have to pay. The IRS provides a helpful withholding calculator that you can use to determine whether you should fill out a new W-4.

First Home

A number of married couples buy their first home as a result of their combined incomes. The mortgage interest that you pay can be deducted from your taxes if it is itemized. If the two of you already own a home, lived in it for two years, and sell it while married, you can exclude up to $500,000 of the money you made on the sale. Read this article to learn more.

Standard Deduction or Itemizing?

Depending on your financial situation it might be better to itemize rather than claim the standard deduction. Most married couples who own a home find it more beneficial to itemize since itemization allows deductions for mortgage interest. Every married couple’s situation is different, so it might be a good idea to speak with a tax professional when deciding on which option you should choose. To learn more take a look at this article.

Tax Refund Boosting Hacks

Tax season will be here before you know it. It’s time to start thinking about the ways you can get the most out of your return. Taxes can be tricky to navigate. There are a lot of factors that go into your return, some of which automated tax software won’t be able to pick up on. Before you file your taxes, take a look at the following items to see if you can take advantage of the unique benefits they offer.

Use Tax Deductions!

Many people shy away from tax deductions. Most of the time it’s only because they don’t understand them or didn’t know they qualified. You can deduct charitable donations and unreimbursed work expenses. There is even a deduction available if you’ve moved over 50 miles for a new job. You can claim all the moving, storage, and travel expenses associated with your move. Save all work expense and charitable donation receipts throughout the year so you can receive the right deduction and have the proof to back it up.

File Early

Filing early does not have a direct effect on the amount of money you get back. It does, however, expedite the refund process. You may even save yourself some money if you use part of your refund to pay off debt from the holidays. The sooner you pay down the debt, the less interest you have to pay.

Retirement Contribution Benefits

If you contribute to an IRA account, try your best to max out your contribution before the end of the year. You can receive a tax deduction for as much as your maximum contribution allotment. You may even be lucky enough to reap the benefits of a rare “double dip.” If you qualify for a saver’s credit, you’ll receive an additional deduction on top of retirement contribution deduction.

Dependents

Did you know that family members are not the only ones you can claim as dependents? If you have taken in and supported a friend for the entire year, you could receive a dependent exemption. There are some caveats to this rule. In order to qualify, non-relatives must reside within your home, but relatives do not. In either situation, you must provide for over half of their support. Finally, the dependent must also not make more than $4,000 in taxable income. If you think you may be able to claim dependents, it will not hurt to look into!