Recent Changes in R&D Tax Credit Legislation: What Businesses Need to Know

Research and development (R&D) tax credits serve an essential purpose: they incentivize businesses to invest in innovation. That innovation helps drive economic growth while keeping businesses competitive in today's evolving marketplace. Staying on top of changes is imperative to maximize those R&D credits and claim all eligible expenses.

So, what do businesses need to know about the recent changes to R&D tax credit legislation? Let's dive in.

Activity Expansion

One of the most significant changes in recent research and development tax credit legislation is the expansion of eligible activities. The definition of activities that qualify for credits has been broadened and now includes a broader range of innovation-related endeavors. From software development and process improvement to prototype creation, businesses in many more industry sectors may now qualify for R&D tax credits.

Enhanced Accessibility for Startups

Are you running or assisting a startup? Then, you may be eligible for advantageous tax credits thanks to new, higher revenue thresholds. Higher thresholds mean more startups can take advantage of R&D tax credits, and recent legislative changes mean startups can now utilize these tax credits to offset federal employer payroll taxes.

That change provides valuable cash flow benefits to reinvest in growth and development initiatives, all because the importance of fostering innovation among small businesses has been recognized.

A Focus on Collaboration

True to the main objective of promoting innovation, recent changes offer an added layer of incentives for collaboration. Businesses collaborating with external partners, like research institutions and universities, to conduct R&D activities may qualify for enhanced tax credits if they retain substantially of the rights to the research and have the economic risk of loss during the R&D phases. This provision encourages partnerships and knowledge-sharing to help drive technological advancements.

Changes at the State Level

Changes at the state level continue to evolve as well with nearly 40 states now offering the credit. These state R&D tax credit programs have similar missions of incentivizing innovation while driving economic growth within their jurisdictions. State-level changes include increased credit rates, expanded eligibility criteria, and streamlined application processes.

Because changes and credits can vary from state to state, working with a reputable tax professional experienced in your state's R&D incentives is essential. Doing so will ensure you're maximizing your benefits and staying compliant with changing requirements.

Stricter Contemporaneous Documentation Requirements

While the above changes offer enhanced benefits for businesses, this next one makes record-keeping and compliance a crucial part of the process. More strict documentation requirements have been introduced, emphasizing the importance of maintaining detailed records of qualifying activities, expenses, and project documentation. If you plan on taking advantage of R&D tax credits and don't already have robust record-keeping practices and documentation processes, it's time to develop them!

Maximize Your Tax Credits With Help From Veritax Advisors

Our tax advisory firm specializes in research and development tax credits.  We stay on top of all legislative changes so you don’t have to! If you’re a business or tax preparer looking to maximize your tax incentives, schedule a complimentary consultation today. We look forward to leveraging R&D tax credits and positioning your business for long-term success.