How do Tax Credits Work?

How does an tax credit work?

The R&D tax credit is calculated based on qualifying research & development wages, supplies, and contractor expenses in a given tax year. There are a few ways to calculate and optimize the R&D credit. Once the credit is calculated, the qualifying R&D expenses and credit amount are claimed on IRS Form 6765, and the credit amount offsets tax liability as a dollar-for-dollar credit against taxes owed. The R&D credit is the most lucrative tax credit in the tax code, but requires know-how in both tax, accounting, and industry expertise. Endeavor Advisors’ services for capturing and substantiating R&D credits is an all-inclusive approach to maximizing and documenting the entire R&D credit process.

How do state R&D tax credits work?

Most state R&D credits mirror the federal credit to a large degree. Some state credits are refundable, and some states allot only a certain pool of funds for R&D credit claims. Some states have different carry forward schedules and calculation methodologies than the federal guidelines. We serve all states across the U.S. in qualifying, calculating, and reporting credits. Please see our specific state pages for specific information on each state’s credit.

How do federal R&D tax credits work?

Federal R&D credits are based largely on the codified language of Internal Revenue Code Section 41 and 174. Those sections allow taxpayers to qualify expenses that contribute to the R&D credit calculation. There are three methods to calculate the credit: 1) the regular credit calculation, 2) the start-up base calculation, and 3) the Alternative Simplified Credit. Once calculated, the credit is claimed on IRS Form 6765 and filed with the entity’s tax returns (1120, 1120-S, or 1065). The credit acts as a dollar-for-dollar offset to tax liability. The IRS also requires specific documentation and substantiation of R&D credits, which Endeavor Advisors specializes in producing for our clients.

What is the difference between a state tax credit and a federal tax credit?

While most states mirror the federal R&D credit in large part, many differ in certain aspects. Some only offer one calculation method, as opposed to all three. Some have slight variations in calculation methodology. Other states offer refundable credits, while still others offer limited pools of R&D funds that must be applied for by a certain deadline. Endeavor Advisors serves clients in every state, and we have experience claiming state credits in every state where they are available. Please see our state-specific pages for detailed information on your state.