If you’re reading this, you might be feeling uncertain about R&D tax credits. Maybe you’ve heard that they’re only for big tech companies or that the process is too complicated. It’s easy to get discouraged when there’s so much conflicting information out there. You’re not alone in wondering whether it’s worth the effort to explore this potential benefit for your business.
To help clear up these common misconceptions, we’ve consulted with experts from FI Group, a company specializing in R&D tax credits. They’ve agreed to share their knowledge and insights, ensuring that you get the most accurate and practical information. This article will walk you through the myths that often prevent businesses like yours from claiming R&D tax credits and provide clear answers to help you make an informed decision
Myth #1: “Only Tech or Science Companies Qualify”
One of the most common misconceptions about R&D tax credits is the belief that only companies in tech or scientific fields are eligible. You might think that if your business doesn’t have a team of engineers or researchers in lab coats, then there is no chance to qualify. However, that’s not true.
The reality is that R&D tax credits are available to companies across a wide range of industries. Whether you’re developing new software, improving your manufacturing process, or even working on new food and beverage products, you could be eligible for these credits. Businesses in sectors like cosmetics, architecture, and even fashion have successfully claimed R&D tax credits.
The key is whether your company is working to improve products, processes, or technology. If you’re solving problems, experimenting with new methods, or refining existing systems, there’s a strong chance you qualify. Don’t let the term “R&D” mislead you into thinking it only applies to high-tech or scientific projects.
Myth #2: “The Process is Too Complicated”
To be true, this is a fair point. Claiming R&D tax credits isn’t a walk in the park, but at the same time, it is not overly complex and time-consuming as some people think. You might be worried that gathering the necessary paperwork, understanding the rules, and filing the claim will take too many resources.
The truth is that while the process does require some documentation, it’s far more manageable than many businesses realize. You don’t need to have a full-time team dedicated to handling it. In fact, many companies successfully claim R&D credits by simply organizing existing documents, such as payroll records, project notes, and financial statements. Today, automated software (which we highly recommend using) can simplify the process further by collecting your information and generating the necessary reports.
Partnering with an experienced provider can also make a big difference. They can guide you through the process step by step, ensuring you don’t miss any important details and reducing the workload on your end. With the right support, you can confidently submit your claim without worrying about navigating it all on your own.
Myth #3: Our Business Doesn’t Make Enough Profit to Benefit
It’s easy to assume that R&D tax credits are only useful if your company is turning a large profit, but that’s not the case. Even if your business isn’t currently generating significant income — or any income at all — you can still benefit from these credits.
For startups and smaller businesses, there are options that allow you to apply R&D tax credits against payroll taxes. If your company has less than $5 million in gross receipts and no revenue older than five years, you can offset up to $500,000 of your payroll tax liability each year. This means that even if you’re not paying income tax, you can still claim valuable tax relief.
Additionally, if your company is not profitable yet, unused R&D credits can be carried forward for up to 20 years. This allows you to claim the credit now and use it when your business becomes profitable in the future.
Myth #4: “We Don’t Track R&D Expenses, So We Can’t Claim the Credit”
Many businesses believe that without formal time tracking systems or detailed documentation of R&D activities, they can’t claim the R&D tax credit. This is a common concern, but it’s not as limiting as it seems.
The IRS doesn’t require a rigid set of documents to claim the credit. While having thorough documentation helps, there are many acceptable ways to prove your R&D activities. Common documentation includes payroll records, project notes, design drawings, or even email communication related to your R&D work. If your employees don’t use time-tracking software, you can still estimate the amount of time spent on qualifying activities based on other records.
Myth #5: “Claiming R&D Credits Will Trigger an IRS Audit”
It’s understandable to worry that claiming R&D tax credits could lead to an IRS audit. This concern prevents many businesses from pursuing the credits they are entitled to. However, the reality is that claiming R&D tax credits doesn’t automatically raise a red flag with the IRS.
While it’s true that the IRS can audit any tax claim, the audit rate for R&D tax credits is relatively low, especially for smaller claims. In fact, most businesses that claim less than $60,000 in credits are unlikely to be audited. Additionally, if you have proper documentation and follow the IRS guidelines, there’s little reason to fear an audit.
Myth #6: “R&D Must Be Something Entirely New”
R&D tax credits apply not only to groundbreaking innovations or brand-new products. You are wrong if you think that unless your company is inventing something revolutionary, there is no chance to claim the funds.
Your R&D efforts don’t have to be new to the world; they just need to be new to your company. If you’re improving an existing product, process, or technique, you can still qualify for the credit. For example, improving a manufacturing process to make it more efficient or modifying a software program to meet customer needs can be considered as eligible R&D activities.
The important factor is whether you’re working to overcome technical challenges or improve how something works. It doesn’t matter if others in your industry are doing something similar —what matters is that you’re pushing the boundaries of your own business’s capabilities.
