Accessing Research and Development Credits

Many small business owners are not aware of a tax credit they can take advantage of: the Research & Development (R&D) Tax Credit. The purpose of this is to encourage innovation from small businesses by offsetting their costs of research and development. It was also implemented to help keep skilled workers in the U.S. Up to $1.25 million (or $250,000 each year for up to five years) in tax credits can be claimed by companies.

Who Can Use R&D Credits?

Generally, R&D credits may be extended to any business that develops or designs new products or processes, enhances existing products or processes, or develops or improves upon existing prototypes and software. From there, entrepreneurs must show that their businesses conducted operations described in the qualifications in addition to the amount of costs incurred in research and development. A good starting point is to gather payroll records, expense reports, project notes, and other supporting documentation. 

Some examples of good candidates for research and development credits include:

  • Professional services, such as architecture and engineering
  • Software and technology companies
  • Manufacturing and fabrication companies pursuing new products and processes, or refining current products and processes
  • Auto, chemical, food science, and other companies whose products and services include science 

Offsetting AMT or FICA

Beginning in 2016, small businesses are now able to take advantage of R&D Tax Credits and offset their tax liabilities under the federal Alternative Minimum Tax. Only businesses with less than $50 million worth of gross receipts averaged over the last three years are able to do this, however. Additionally, small businesses with less than $5 million in annual gross receipts and with no more than five years of annual gross receipts may use the R&D Tax Credit against the Federal Insurance Contributions Act (FICA) portion of payroll taxes. Up to $250,000 per year for five years may be claimed by qualified small businesses. 


There is a misconception that only highly technical and scientific companies are eligible for the R&D Tax Credit. The truth is that in recent years, restrictions have been loosened to allow businesses from many different fields to take advantage of the credit. 

Are you a small business owner in California and looking under every rock for tax savings? Get in touch with Attorney Tyler Q. Dahl today to discuss your options. Attorney Dahl is one of fewer than 100 attorneys in the U.S. who is also a Certified Tax Coach. Call the firm at 916-545-2790 or reach us through our website here.

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