Research and Development

Grow through R&D Tax Credits

Small business survival and growth requires adequate working capital. One overlooked source of cash for New Jersey manufacturers is the Research and Development (R&D) tax credit. This incentive helps companies to grow by reducing its tax liability for qualified R&D expenditures.

Many manufacturers don’t realize that a surprising amount of work that they conduct on a daily basis actually qualifies as R&D as defined in the Internal Revenue Code. In reality, the R&D tax credit is available for many daily tasks including:

  1. Developing and bringing a new product to the market, including the engineering and design phases, building prototypes and developing models.
  2. Researching for the purpose of discovering new knowledge or experimenting with new technology in the manufacturing process.
  3. Evaluating and designing product alternatives.
  4. Changing a product by using new materials to improve quality.
  5. Developing new production processes.
  6. Researching significantly reducing product “time-to-market” or creating more efficient designs.

Why Are Tax Credits So Valuable?

To understand why R&D tax credits are so valuable we need to understand the difference between tax deductions and tax credits:

  1.  Tax deductions reduce the amount of taxable income
  2. Tax credits directly reduce tax liability

Let’s use a simplified example to demonstrate the difference between the two:

  1. Assume a company has a 20% tax rate.
  2. A deduction of $200 reduces the corporate tax liability by $40 or twenty percent of the $200 deduction
  3. A tax credit reduces the tax liability dollar for dollar
  4. A tax credit of $200 reduces the corporate liability to zero. In this example, a tax credit is five times more valuable than a tax deduction.
Tax Deduction Tax Credit
Income $ 1,000.00 $ 1,000.00
R&D Deduction     200.00            –
Taxable Income    800.00 1,000.00
Tax Rate 20%      20%
Tax Liability    160.00     200.00
R&D Credit            –     200.00
Tax Due $     160.00 $           –

The R&D credit can provide a significant reduction to your tax liability, helping conserve working capital for vital projects It is the largest credit available to companies today.

How Tax Credits are Applied

This credit can be used in the current year and the three prior years if the years are still open. The R&D credit may also be carried forward for 20 years, so there is a strong probability all of the credit will be utilized. Recent changes in the tax law have also made the R&D credit available to offset other federal taxes. Even if your company is a start-up and is not profitable, you can use the credit to offset up to $250,000 of payroll taxes in selected circumstances. The R&D credit can also be used to offset alternative minimum tax for smaller companies. Both of these new provisions are major opportunities to conserve vital cash flow for growing companies

Complimentary R&D Tax Credit Pre-Qualification

Calculating the benefits of the R&D credit can be a complicated process. As with all tax issues, it is always best to contact a professional for help, and an R&D study is essential to securing this credit.

NJMEP has a proven track record of success helping manufacturers achieve R&D Tax Credits. Schedule a complimentary evaluation by calling us at (973) 998-9801 or click here to request a complimentary R&D Tax Credit Pre-Qualification assessment

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