This March, in response to the COVID-19 pandemic, state governments across the United States issued stay-at-home orders impacting businesses around the country and forever altering the workplace environment, including their lifeblood, cash flow. On March 27, 2020, the federal government passed the CARES Act to assist businesses with under 500 employees with payroll, utilities, mortgage interest, and rent in the form of the Paycheck Protection Program (PPP). While this program offered hope and much-needed assistance, many businesses continue to look for additional solutions to help increase cash flow for reinvestment in their companies.
Although states are beginning the process of reopening, generating cash flow will be a critical part of the recovery process. Whether it is needed to continue operations, keep doors open, or better position your firm (should a resurge occur), looking for additional cash flow opportunities should be top of mind. We have all been impacted as a result of this pandemic. And now that we have had this experience, it’s even more necessary than ever before to anticipate disruption, and how we can prepare our firms today for the future.
In this blog, we will highlight one of the most fundamental cash flow generators for AE firms, the Research and Development Tax Credit.
Research & Development Tax Credit – Cash in Your Pocket
One of the most underutilized tax credits is also potentially one of the most lucrative ones. The Research and Development (R&D) Tax Credit is an opportunity to look at both your prior and future activities. This credit can then generate tax refunds to reinvest for any of the company’s needs, including payroll, daily operations, business development, and more. The R&D Tax credit provides both federal and state credits that may be applied to the prior three years (ex. 2017, 2018, 2019), some states have a lookback period of four years (ex. 2016, 2017, 2018, 2019). The credit averages around $0.08 on every dollar spent on qualified research activities generated from employee wages. The option to look at prior years is a fantastic way to generate short term cash flow for your firm.
Differences Between the R&D Credit and PPP
In 2015, the PATH Act allowed the Research and Development Tax Credit to be applied to payroll tax liabilities for start-up entities and to offset income taxes for more established companies. Different from the Paycheck Protection Program (PPP), the Research and Development Credit can offset taxes, dollar for dollar, and is not a loan.
The PPP is a highly beneficial opportunity for small businesses, offering low-cost borrowing and the potential for significant forgiveness. However, the PPP proceeds may only be used for payroll and related costs, rent, mortgage interest, and utilities. This leaves businesses still needing additional funds to cover operating costs, new workplace equipment, and cash to invest in their future. Alleviate these costs with the R&D Tax Credit.
As we look at the future, we predict the workplace will look much different, leaving many companies with uncertainty and the need for change. But change often requires funding, which is where the Research and Development Tax Credit can significantly benefit your firm.
The Good News
We are witnessing a new perspective on the future right before our eyes. A future where we should be anticipating disruption – focused on technology and providing a safe work environment. This future will require businesses to invest and adapt in ways they never have before. Originally the R&D Tax Credit was passed to increase innovation in the United States, and after the worldwide shut down caused by COVID-19, innovation will be vital to lead us into a “new normal.” The term innovation may include automating production processes, migrating to virtual platforms, safety requirements including sanitation, adjustments in workplace layouts, cleaning processes, and workplace functionalities. The good news is that your business will likely respond innovatively to these circumstances, qualifying you for the R&D tax credit. As we mentioned earlier, the R&D tax credit can look at the past, but it can also look at future activities.
Additionally, the current crisis has made us realize that the U.S. needs to become less dependent on foreign production for many key supply chains. We predict this reality will lead U.S. companies to further invest in new products and innovation. But don’t assume that the credit is limited to a particular industry or size of business. The Research & Development Tax credit is readily available for many industries, including architecture, engineering, and environmental. Firms creating new products or internal processes to expand the company’s operations, functions, or efficiencies are prime candidates to utilize the credit.
Plus, the R&D Tax Credit only requires an improved product or process to be new to the taxpayer, which provides even more options for qualification.
The goal for the country is to bring people back to work, but the reality is that work is going to be different. By utilizing the R&D tax credit for both past and future activities, you’ll be able to generate new cash flow keeping your business thriving well into the future.
Stambaugh Ness’s Research and Development Tax Credit team regularly works with Architectural & Engineering firms nationally to capture these compelling tax savings. Join us for our upcoming webinar, Cash Flow Boosting Strategies for Your AE Firm for a more in-depth look at how you can leverage the credit for some significant benefits.
Nicki Boelens | R&D Tax Credit Consultant
Nicki performs Research & Development (R&D) Tax Credit Studies for clients with a specialized focus in the Architectural and Engineering industry. She is highly skilled in the development of cost benefit estimates and managing R&D projects including performance of the study and the generation of related reports and deliverables.