Many businesses believe that navigating tax laws—new and old—can be tricky at best, painful and expensive at worst. But the U.S. Treasury just introduced new regulations (TD 9666) that potentially open the vast wallets of the federal government to qualifying small and medium-sized businesses (SMBs).
Specifically, the regulation allows innovative SMBs to apply the Research and Development Alternative Simplified Credit (ASC) to amended returns for up to the last three years. This could translate into tens or even hundreds of thousands of dollars in tax credits that small firms can divert into hiring, product development and overall growth.
Previously, many SMBs would explore the option of pursuing tax credits but, due to the cost and complexity of the process, they would quickly abandon the notion. However, owners could potentially recoup hundreds of thousands of dollars from the last three years by simply following these five steps:
1. Don’t assume you don’t qualify. The list of types of businesses that qualify is immense (ranging from construction to brewing beer) and it’s easy to find just by perusing the list.
2. Determine if you qualify by checking the four following requirements:
• Permitted Purpose: Expenditures spent on something that is new or improved, delivers a competitive business function, or increases performance, reliability and quality.
• Elimination of uncertainty: Research such as determining whether a business should target a new market or create a new product.
• Process of experimentation: Evaluations that must be conducted.
• Technological in nature: Experiments must include theories of physical or biological sciences, engineering, or computer science.
3. Understand the nature of your expenditures. Many research expenditures are related to labor, though other costs such as supplies, materials and research are included, as well. Be cognizant of caveats within the law that offer full credit for full-time employees, but only 65 percent credit for contract service providers.
4. Make your books and records shiny, spotless and manageable. Books and records must be incredibly clean to support your claim. It should come as no surprise that if the government is willing to give you substantial money back, an audit will be included. The best books and records dictate that financial information is up-to-date, accurate and accessible. I recommend my clients use cloud-based financial solutions for small businesses. With data in the cloud, you and your accountant can easily and quickly access information in real-time with a secure browser and integrate the data into tax credit documents and forms that can save you money.
5. Run the numbers. Once the data is ready, it’s time to run the numbers and thank God for the software that does it. There are two ways to crunch the numbers: The first is for regular R&D tax credit for future tax returns, and the second is the ASC, which can be used for amended tax returns for up to three years prior.
If you’re unsure, an accounting professional can help you determine if this process is worth your while. And don’t forget to check out tax credits in your state, as well. Between state and federal regulations, technology that eases the process, and professionals who are tax law savvy, SMBs could enjoy significant financial windfalls this year.
Bruce A. Phillips, CPA is a Platinum Xero accounting partner and managing partner of Harshman, Phillips & Company in Atlanta, Ga.