How Big Businesses Slash Taxes With R&D Credit -- and How Yours Can, Too A look at how small businesses can take advantage of the research and development tax credit to cut their taxes and improve their bottom lines.
By Dean Zerbe Edited by Dan Bova
Opinions expressed by BIZ Experiences contributors are their own.
Boeing saved $145 million in taxes thanks to the R&D tax credit. Texas Instruments saved $87 million, and Mattel saved $4 million.
The recent announcements of first quarter profits by scores of companies has served to underline how big companies take full advantage of the research and development (R&D) tax credit to significantly cut their taxes and improve their bottom lines.
Analysis by the Wall Street Journal underscores that when it comes to cutting taxes, the R&D tax credit is the tent pole for many companies. For example, Caterpillar reduced its tax rate from 30 percent to 21.8 percent, with a tax savings of $87 million from the R&D tax credit.
While the big companies are cutting their taxes by using the R&D tax credit, too many small and medium businesses are just sitting and watching the parade go by. The No. 1 reason that these business owners don't take advantage of the R&D tax credit is self-censorship. These business owners subscribe to an incorrect and outdated view of what activities are eligible for the credit.
Related: BIZ Experiencess Could Benefit from New Research and Development Tax Credit
The R&D tax credit is not just for putting a man on the moon and curing cancer; it's for making improved office equipment (Xerox: $19 million in savings), software (Google: over $300 million in savings) and radios (Raytheon: $31 million in savings). And yes, with Mattel and its $4 million in savings, toys as well. Other businesses that are good possibilities for the R&D tax credit are not only manufacturing and software, but also architecture, engineering and some construction.
If you were surprised to learn that Barbie could get the R&D tax credit, then maybe it's time to rethink whether your company could be eligible as well for the biggest tax credit for business -- approximately $10 billion dollars a year.
The key to bear in mind is that the R&D tax credit is about rewarding applied science, taking the tools of science and engineering and addressing the task at hand. In addition, the fact that a company is contracted to provide a product doesn't mean that they are prevented from taking the R&D tax credit. Small and medium companies across the country that have contracts with the prime (think of a parts manufacturer for a car or airplane company) or with the government are eligible in the vast majority of cases.
The R&D tax credit is not only about rewarding companies that seek to create a new product (including when the company's efforts fail) or improving an existing one. It's also rewarding a company if they are making changes in how they make a product. For example, changes to make the manufacturing process cheaper, greener, cleaner and quicker are all possibilities for the R&D tax credit.
The good news is that the R&D tax credit can not only help your bottom line with your federal taxes, it can also help business with their state taxes. More than 40 states now have an R&D tax credit -- with Texas being the most recent -- and the tax savings at the state level can be significant.
The bad news is that they are not giving the R&D tax credit away. You have to ask for it. And the reality is we find that only one out of 20 small and medium companies that are eligible for the R&D tax credit, apply for it. Companies in the Fortune 500 are benefitting from the R&D tax credit. Isn't it time your business did as well?
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