2020 and Beyond: Many Possibilities for Claiming R&D Tax Credits to Create a Cash Infusion

The paradigm shift brought on by the COVID-19 crisis appears to have brought about unintended, but potentially tax-beneficial consequences as businesses pivoted to:

• Creating Personal Protective Equipment (PPE);
• Creating/investing in new technologies and security features to accommodate remote working; and
• Changing their business models:
  • Telemedicine;
  • Brick and mortar firms requiring a digital presence;
  • Educators looking to remote-educate the masses; and
  • Many others…

These investment dollars oftentimes could qualify for R&D tax credits. For many small and mid-sized businesses, the R&D tax credit is a cash infusion to be re-invested immediately, as it is a dollar-for-dollar credit against taxes you currently owe or taxes previously paid.

While unintended, the COVID-19 crisis brings about a unique opportunity for businesses who might otherwise not normally qualify for the R&D tax credit to benefit from one of the most lucrative tax credits in the Internal Revenue Code.  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.

As the world continues to grapple with this new normal, companies should reflect on the activities they performed during 2020 (as well as those activities being planned for beyond 2020) and evaluate if any are now currently eligible for R&D tax credit consideration.  Tax credits that can help support and stimulate product and process innovation will no doubt be needed for the foreseeable future. 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.