If you’re an accountant, like me, then you’re probably familiar with the federal research and development tax credit. The concept isn’t tough to understand: The federal government wants to reward companies that are doing innovative things that employ people. The calculation? That’s a little more complex, of course.
The R&D tax credit has survived many threats to its existence since it was introduced in 1981. Although it’s always been the kind of thing associated with technology companies, the credit has recently been benefiting some very non-tech firms.
According to research data provided by HR technology and payroll firm Gusto, the top recipients of the credit remain the usual suspects: software publishers, design and related service firms, and scientific research organizations. Those industries, and a few others, received almost half of all the federal R&D tax credits claimed by Gusto’s clients.
But other industries are starting to take advantage of the tax benefit. Print media, travel services, restaurants, specialty food stores and furniture makers also got in on the fun over the past year — claiming about $700,000 of the $32 million in credits realized by Gusto’s 60,000 clients.
What kind of research could these companies be doing that qualifies for such a credit? It doesn’t take much: new merchandise, prototypes, samples, demonstration items.
The credit is available for any business that is putting resources toward improving products or developing new ones. It’s calculated using a formula that includes wages, supplies, overheads, contracted expenses and other payments made toward qualified research.
As Gusto’s research shows, more non-tech businesses are starting to realize that just because they’re not developing software doesn’t mean they’re not innovating. They’re adding up the costs they’re incurring for things such as testing new foods, improving a process for providing a service or developing a new product and realizing that these costs qualify as research.
Thanks to changes made in 2017, smaller companies are also realizing that the credit — up to $250,000 — can be used to not only offset federal income taxes but also liabilities owed to the federal government for payroll taxes.
Given what we’ve seen already from Gusto’s data, I expect to see more small businesses in many nontechnical industries waking up to the benefit of the R&D tax credit in the years to come.