Small businesses that are considering conducting research and development activities should carefully examine the potential benefits of R&D tax credits. These benefits can include reducing income taxes, claiming valuable deductions and carrying forward any unused credit amounts to future years.
Moreover, by taking full advantage of available R&D tax credits, small businesses can realize significant cost savings and improve their competitive edge.
Read on to learn more about the key benefits of research and development for small businesses!
1. Your Business Can Gain a Competitive Advantage
R&D activities allow your small business to create new or improved products and services. This is a great thing as it can help your organization to stay ahead of your competitors.
Through R&D, you can develop innovative offerings that meet customer needs better than what’s currently available. New products give your business an edge by being first-to-market with unique solutions.
R&D can also lead to patented inventions or trade secrets for your company. This intellectual property protects your innovations from being copied, further strengthening your competitive position.
To sum up, investing in R&D lets your small business stand out with new products that your competitors can’t easily copy. This gives you a competitive edge, which means more sales and loyal customers.
2. Increase Your Revenue
A successful R&D leads to new or improved products and services that customers want. Selling these new products brings more money for your company.
Your R&D investments also make your business more attractive to investors. Showing that you’re open to innovation lets investors know that your business is working to create new income streams and grow its market share. This can help you get more funding to expand operations and pursue future R&D projects.
If you’re strategic with your R&D, your small business can really boost its profits in two ways. First, you can bring new products to market that generate income. Second, you can get investment capital to fuel growth. Both of these ways can increase your revenue.
3. Lower Your Taxes
R&D tax credits can help you reduce your federal and state tax bills. These credits aren’t just for big companies. Small businesses like yours can benefit too by claiming credits for qualifying R&D expenditures.
What expenses qualify?
- Costs related to developing new or improved products, processes, techniques, formulas, or software.
- Qualifying costs can include employee wages, supply costs, contractor expenses, and more.
However, there are strict criteria for claiming R&D activities and expenditures. Your small business must follow the requirements set by tax authorities to take advantage of the credits.
By thoroughly documenting eligible R&D work and expenses, you can reduce your overall tax burden. The credits free up capital that you can reinvest into further growing your business through innovation.
Examples of Claiming R&D Tax Credit for SMEs
We thought it would be much easier for you to understand how all of this works by providing some examples. The names of the companies are for illustrative purposes only.
Manufacturing Company Example
“BRZ Manufacturing” invested in developing a new aluminum alloy that was lighter and more durable than existing options. Their R&D expenditures related to experimenting with different metalworking techniques and testing prototypes qualified for federal and state R&D tax credits. BRZ was able to claim over $200,000 in credits, reducing their tax burden. The credits freed up capital to purchase new equipment for producing the innovative alloy.
Software Company Example
“SecTech” is a small software company that works on developing data security solutions. As they built enhanced encryption protocols, their R&D costs included software developers’ salaries, cloud computing expenses, and testing costs. SecTech carefully documented all qualifying activities and expenses to claim over $75,000 in R&D tax credits. This provided them with funds to reinvest in further advancing their data protection technology.
Further reading:
Manufacturing and software aren’t the only industries that can claim R&D. If you want to find more examples, then check our post “R&D Tax credit examples for different industries“.
Find Out If Your Company Qualifies for an R&D Tax Credit, Today!
FI Group has over 1,400 highly qualified employees committed to serving all companies. We would love to help you start your tax and credit journey for your investments and new business.
Contact us today to learn more about our services and see if your company qualifies for an R&D tax credit; we look forward to hearing from you!
