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The R&D Tax Credit Explained for Small Business

Research and development tax credits are often overlooked by entrepreneurs, who assume they must have on-site laboratories or breakthrough research to claim the credits. Others fear they’ll face complex tax calculations or trigger an IRS audit. But small and midsize businesses that employ engineers or outsource product testing can claim R&D credits, says Sean Haggard, a CPA with Florida accounting firm Kaufman Rossin. The credits have become more attractive for small companies in recent years because they’ve been simplified, can be transferred in an acquisition, and can be taken retroactively, he says. And they are particularly good for startups, since R&D costs incurred in years when a company has no income can be carried forward to offset taxes on future profits. Haggard spoke recently to Smart Answers columnist Karen E. Klein; edited excerpts of their conversation follow.

Q: What is the research and development tax credit?