Are your small business clients eligible for Research and Development tax credits?
Eligibility for R&D credits became more widely available after the 2015 Protecting Americans From Tax Hikes Act (PATH), but many small businesses are still uninformed about their own eligibility. Here at Gusto, we want you and your clients to know about any tax breaks and benefits available for small businesses, especially during financially difficult times.
Gusto recently partnered with CPA Academy and Clarus R+D, delivering an exceptional webinar all about R&D tax credits and how you can be sure of your client’s eligibility. You can watch the full webinar here.
The webinar featured the tax expertise of Jaclyn Anku, Partner Education Manager at Gusto, Monika Diehl, Vice President of Operations at Clarus R+D, and Jeff Haskett, President of Clarus R+D. In addition to this article, you can also check out Part Two of this series to learn about claiming R&D credits.
In this post, you’ll learn all about how people advisors help small businesses receive R&D tax credits, the history of R&D tax credits, who qualifies for R&D tax credits, and how Gusto’s People Advisory services can support you and your clients during difficult times. You’re going to learn a lot of valuable information that will help you and your clients, so let’s get started!
The history of research and development tax credits
R&D tax credits have been around since the early 1980s. Jeff Haskett observed that much of the history of R&D credits has involved supporting big manufacturers:
“Our country is and always will be driven by innovation, but innovation is expensive. So it’s always been popular for the U.S. government to support it because it’s a key driver for job growth. But [the] government can also be slow to change, and that’s a problem. Historically, this has been a big boy’s game. 87% of the credits have gone to companies over $100 million in revenue, and over 60% went to manufacturing because that’s where a lot of America’s post-war innovation was focused.”– Jeff Haskett
R&D tax credits largely supported manufacturing until the 1990s. In the 90s, the internet shifted the way the public and the government viewed venture capital, and the government started providing R&D tax credits for smaller businesses. However, many small companies still didn’t qualify for an R&D tax credit because they didn’t pay income tax:
“The reason was you could only take this credit against an income tax obligation, and many startups didn’t pay income tax because they were pre-revenue. So they lacked a way to turn it into cash. … But in 2015, the PATH Act was passed. It did a lot of things, but some were particularly good for SMBs concerning the R&D tax credit. This tax credit was permanently extended. And it made it so if your business met certain criteria, you could offset other taxes, namely payroll tax or AMT.”– Jeff Haskett
The Protecting Americans from Tax Hikes Act of 2015 enabled more small businesses to benefit from R&D tax credits. R&D tax credits are even more readily available since the beginning of COVID-19 because the government saw it as an opportunity to stimulate the economy:
“What we’re seeing now with COVID is that the government has finally learned that these programs are very effective tools for economic stimulus and job creation. … The number of claimants has drastically increased. It’s safe to assume that many of your clients not only qualify but now also have a direct path to receiving their benefit.”– Jeff Haskett
Your clients are more likely to receive an R&D tax credit now more than ever. It’s crucial for you and your firm to use Gusto People Advisory so that you don’t miss R&D tax credits that could greatly benefit your clients!
Who qualifies for R&D tax credits?
Eligibility for R&D tax credits has expanded, so it’s crucial for you to know if your clients qualify. Jeff Haskett observed that small businesses need to know their eligibility for R&D tax credits more than ever because of the pandemic:
“The sad fact is that many of these credits do get missed, and it doesn’t have to be that way. … With all the COVID uncertainty, [the] bottom-line impact is even more important now for hard-working business owners. … We love Gusto’s People Advisory model, and [we’re] in line with its goal to put tools in the hands of CPAs who want to serve as strategic advisors for their clients.”– Jeff Haskett
Now more than ever, it’s essential that you’re able to get your clients all available tax credits that they may qualify for. Monika Diehl from Clarus R+D explained your clients can use the R&D tax credit against their payroll taxes.
“This is going to be a qualified small business, and it’s going to be a business that has less than five million in receipts of the credit year and is within their first five years of having any receipts. So this is really something that’s aimed at startup companies. … And so a qualified small business can claim up to $250,000 in R&D credits against their payroll taxes each year. And that’s going to offset the employer’s portion of social security tax. So where a business actually continues to meet the requirements of a qualified small business, they can be eligible to make the selection against payroll taxes for up to five years.”– Monika Diehl
Qualified small businesses can offset their payroll taxes with R&D tax credits. In addition to receiving a credit against payroll taxes, your qualified clients can also offset their alternative minimum tax (AMT) using R&D tax credits. Monika outlined the types of businesses eligible for offsetting their AMT:
“An eligible small business is going to be a business that has average annual gross receipts of 50 million or less in the three years prior to the credit year. And an eligible small business has the ability to utilize the R&D credit against their AMT tax as well as regular taxes starting with the 2016 tax year.”– Monika Diehl
So what kinds of businesses actually qualify for R&D tax credits? Typically, one might think that it only involves research-based science industries, such as medical and pharmaceuticals, but many other industries can qualify as well:
“You may not expect to see businesses or industries like apparel, maybe cosmetics, food and beverage. … Those industries, you may not initially think are going to be your R&D-type industries, but these are businesses that are going through iterations and developing new products.”– Monika Diehl
Businesses that are innovating and developing new products can qualify for R&D tax credits. If your client develops new products or new technologies, such as an app, they may qualify without even realizing it. Through Gusto, you’ll be able to keep your clients informed about their R&D eligibility, and you’ll be able to transfer funds automatically if they qualify.
Learn more about R&D tax credits and how Gusto’s People Advisory program can help you
2020 was a challenging year for small businesses. The shutdown caused by the pandemic and the proceeding economic fallout resulted in many businesses closing. As we continue working through this unprecedented crisis, it’s essential that we help our clients receive as much funding as possible. This is where Gusto’s People Advisory program comes in. Jaclyn Anku explained the benefits that accountants can offer their clients through People Advisory certification:
“People advisors combine financial expertise with people-focused guidance to advise clients on building a great place to work. People advisory is a brand new category of advisory. It’s a consultative service that for the first time focuses on serving business owners and their teams.”– Jaclyn Anku
And even after the pandemic is over, your clients will still need People Advisory services in order to make the best decisions for their business. Empowered by Gusto’s People Advisory Certification program, you can assist your clients with various people-based services, including payroll, benefits, and HR. Partnered with Clarus R+D, our People Advisory Program will also help you get your clients R&D tax credits if they’re eligible.
If you’re ready to help your clients with R&D tax credits and people advisory services, sign up for Gusto’s People Advisory Certification program. By joining Gusto’s People Advisory program, we’ll automatically assess your client’s eligibility for R&D tax credits, and if they qualify, you can then schedule an appointment with Clarus R+D through Gusto. Once the tax credit comes through, we then process it in real-time so that your clients automatically receive the funds during payroll. If you want to learn more about Gusto’s People Advisory, click here.