Congress Extends Popular R&D Tax Credit

In a boon for entrepreneurs and the technology industry, Congress’ last-minute, “fiscal cliff” compromise included an extension of the much-loved research and development tax credit retroactive to January 1, 2012.

“We can’t keep cutting things like basic research and new technology and still expect to succeed in a 21st-century economy,” President Obama said after Congress passed the American Taxpayer Relief Act.

You don’t need to have a lab and a team of scientists to claim the R&D tax credit, which was created in 1981 to encourage companies to innovate, invest in research and hire workers to perform R&D. Small and medium-size businesses developing new or improved products, or companies that outsource product testing  are eligible, says Sean Haggard, CPA, a tax manager in Kaufman, Rossin’s Boca Raton office.

The R&D tax credit has generally been extended every year, and in recent years, it has become more attractive for smaller companies. There are three main reasons for its increase in popularity: 1) the credit is simpler now; 2) it can be transferred in an acquisition; and it can be taken retroactively. This tax credit presents a unique opportunity for startups because R&D costs incurred in the early years of a business when the company has no income can be carried forward 20 years  to offset taxes on future profits, Haggard says.

However, as he told Bloomberg Businessweek, 80% of R&D tax credits currently go to companies with $250 million or more in gross receipts mainly to the fact that smaller companies believe they do not qualify or believe the credit is too complicated.  The retroactive extension of this tax credit to January 1, 2012 is a good sign that there’s always room for more innovation and the government is willing to subsidize it.