Developing new products and services is one of the key ways to expand and grow your freelance business—and it’s also an activity that can benefit you from a tax perspective, thanks to the federal and state Research and Development (R&D) Tax Credit programs. It is estimated that the R&D tax credit and other related tax breaks save U.S. businesses more than $12 billion annually. Read on to learn how your freelance business can get its share of these cash incentives.
First, the Basics of the R&D Tax Credit
R&D tax credits provide cash incentives for companies conducting R&D in the United States. The purpose of these incentives is to encourage research and development in a wide variety of industries and for businesses of all sizes. The government has recently expanded its list of eligible industries—including software development, IT, engineering and many others—which means more businesses can benefit from these tax credits.
The credit is equal to a certain percentage of a business’ qualified research expense (QRE) in excess of a base amount. There are many QREs than are eligible, including the salaries of employees and supervisors who are conducting research, supplies and, if applicable, research services that are contracted out.
Another key point about the R & D Tax Credit is that you don’t have to split atoms in a research lab to be eligible for it. You simply need to invest resources (your time and/or money) toward the advancement and improvement of products and processes.
Starting in 2016, qualified small businesses had the option to elect to claim up to $250,000 for research activities as a payroll tax credit in the form of a refund. In addition, the government recently updated R&D tax credit regulations so that eligible taxpayers can now retroactively claim the credit on all open tax years, which currently includes returns for 2014, 2015, and 2016.
Yes, Your Small Freelance Business or Startup May Qualify
You don’t need to run a global conglomerate to qualify. In fact, R&D tax credits are widely available for small freelance businesses and startups. In fact, as long as your business is engaged in qualifying research and development activities such as designing, developing or improving products, processes, techniques, formulas, inventions, software, or any number of other items, you may meet the IRS eligibility requirements which include:
You Also Need to Meet the IRS Four-Part Test
Your R&D tax credit eligibility also requires that your product or process development work meets this IRS four-part test:
Don’t Forget to Check State and Local Credits
Another pointer: Many states offer R&D tax credits beyond those offered by the federal government, so you should take a look at what is offered in the state(s) where you do business. For example, New York State created the Excelsior Jobs Program which provides several refundable tax credits, including those related to research and development tax. New York's R&D tax credit allows taxpayers to claim up to 50 percent their federal R&D tax credit amount that relates to R&D expenditures in the state (with a 3 percent cap).
Federal and state filing requirements vary for R&D tax credits, so you may benefit from working with a CPA to ensure that you have looked at all of your eligible QREs and that you have the required documentation in hand to maximize your tax credit opportunities.
Get Ready to Claim Your Share of Available R&D Tax Credits!
Given the significant funds available in the form of R& D tax credits, it is worth exploring if your business qualifies for them—so you can claim your share of the estimated $12 billion available!
Jonathan Medows is a certified public accountant licensed in New York, New Jersey, Maryland, and Pennsylvania. He is also a recognized expert in taxation for freelancers and the self-employed—often tapped for his expert knowledge and perspective on self-employment taxation by national and regional publications such as The New York Post, BusinessWeek, Forbes taxation blog, WebCPA, CPA Practice Advisor, and others. You can read some of Jonathan’s press coverage here.
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