While unintended, the COVID-19 crisis brings about a unique opportunity for businesses who might otherwise not normally qualify for the Research and Development (R&D) tax credit to benefit from one of the most lucrative tax credits offered by the IRS.
In this new world of technological and economic hurdles, companies are finding innovative ways to conduct business and do their part to assist their communities and the healthcare industry in the wake of the COVID-19 outbreak. Companies are pushing pause on their traditional product offerings in order to respond to the exceptional challenges posed by the pandemic to develop many of the items in dire need right now such as personal protective equipment (face masks, face shields, etc.), disinfectant products, healthcare products, and the like. These redirected efforts as companies repurpose production lines and create products in order to fight COVID-19 may bring about activities that potentially qualify for the R&D tax credit.
Through the R&D tax credit, companies can offset their tax liability based on a percentage of qualified annual research expenditures that exceed a base amount. Recent Congressional legislation also enables qualified small businesses, even in a taxable loss position, to benefit from the R&D tax credit by applying the credit against quarterly payroll taxes. In addition to the federal credit, many states offer additional R&D tax credits, with parameters that closely mirror the federal program. Applying for federal and state R&D programs enable taxpayers to double-dip on their R&D tax credit benefits, which maximizes their return on investment.
As the world continues to grapple with this new normal, companies should reflect on the activities they performed during 2020 and evaluate if any are now currently eligible for tax credit consideration. Tax credits that can help support and stimulate product and process innovation will no doubt be needed for many months to come. It is also important to point out that the R&D tax credit is not strictly designed for any one industry and is in fact designed to apply to a wide range of taxpayers across various trades.