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How Far Back Can You Claim R&D Tax Credits?

Aug 19, 2020

Amending Prior Tax Credits

Congratulations! You’ve decided to consider the benefits of the Research and Development (R&D) Tax Credit for your business.

R&D Tax Credits come from activities related to making or improving products or processes and are widely claimed by manufacturers and software developers with annual revenue of $5M or more. Not claiming the R&D credit puts you at a significant competitive disadvantage as your competitors are likely claiming the credit and re-investing their tax savings back into their business to be more competitive, grow faster, and be more profitable. That is exactly what Congress intended when it signed the R&D Tax Credit into law in 1981.

One question we often hear is, “How far back can I claim R&D Tax Credits?” This article answers that as well as provides tips on how to get started.

Time Frame for Amending Prior Tax Returns

OK, this is pretty straightforward. Filed federal tax returns can be amended for up to three years of the original filing date.

Similarly, state returns, in most cases, can be amended up to three years of the original filing date. But it’s best practice to review your state guidelines; for instance, California’s window for amending a return is up to four years.

Interestingly, the 2020 CARES Act has increased the significance of R&D Tax Credits. It provides provisions to offset previously paid income taxes and reduce future tax liability to sustain ongoing operations.

The CARES Act extends the window in which businesses can carry back 2020 losses up to five years and receive refund checks for previously paid taxes. Your 2020 R&D Tax Credit can also be carried back one year (to 2019) as well as forward 20 years (as has been the case).
In summary, the CARES Act incentivizes looking into R&D Tax Credits as a way to sustain businesses over the course of the COVID-19 pandemic by giving businesses tax refunds for previously paid taxes.

Getting Started with Amending Tax Returns

You may be surprised by how many activities qualify for the R&D Tax Credit.

Do you make or improve a product or process? Do you do that for yourself or a customer? Well, those activities qualify for the R&D Tax Credit.

Start by examining these 9 manufacturing activities that all qualify for the R&D Tax Credit.

  • Sales Time (determining requirements, quoting, etc.)
  • Design Meetings (collaboration among staff, etc.)
  • Flat Blank Layouts (design modifications, etc.)
  • Tool Making (design, build, tryout, etc.)
  • Engineering Process (new equipment, shop redesign, etc.)
  • Proof of Concept (process documentation, etc.)
  • Trial Production Run (first run of a product, etc.)
  • Quality Approval (PPAP, ISIR, etc.)
  • Shipping (package design, etc.)

And software companies can enjoy the savings, too! Most activities performed during the software development lifecycle typically qualify for the R&D credit.

Claiming Your R&D Tax Credit

Your CPA is likely aware of the R&D Tax Credit, but it’s doubtful they know enough about the details of the credit and your specific activities that do and don’t qualify for the credit.

Often, companies find the most effective approach is to work with a specialty R&D Tax Credit firm. R&D Tax Credit professionals partner with you and your CPA to assess your specific situation and determine the value of your tax credits.

Whichever you choose — and even if you don’t currently have a tax liability — it’s smart to establish best practices moving forward. Any R&D Tax Credits incurred during “no usability” years can be carried forward to offset tax on taxable income down the road. Credits not usable in 2020 can be carried back one year to offset taxes paid in 2019 and carried forward for up to 20 years.

Your three biggest takeaways from this article should be these:

1. If you are making or improving a product or a process either for yourself or for your customer and you have gross revenue over $5M, you should consult a specialty R&D Tax Credit firm.

2. Whether you are profitable in 2020 or not, you can claim the R&D Tax Credit for 2017-2019 to offset taxes paid in those years, and your 2020 R&D Tax Credit can be used to offset taxes paid in 2019 as well as carried forward for 20 years to offset future taxable income.

3. Independent of the R&D Tax Credit, if you have losses in 2020, you can carry back those losses for up to five years and receive refund checks for taxes previously paid.

The potential tax savings possibilities are there if you’re willing to look. Who knows? Maybe your tax savings will be used to fuel your company’s next big project.

So, take the time to go back and amend previously submitted returns. Your company can earn thousands of dollars per hour spent pursuing these credits.

Get R&D Tax Credit guidance. Reach out to Black Line Group today for a complimentary consultation. And, if you’re wondering if you’re receiving full value from the R&D Tax Credit, review our guide: Manufacturing R&D Tax Credit Guidance.

Find out How Big Your Credit Could Be