Political rhetoric and campaign promises aside, most experts agree that small businesses are the engine that can pull the U.S. economy out of the doldrums.  Despite the disappointing employment numbers released in recent months, small businesses are hiring. So called “early stage” small businesses, those in the first three and a half years of existence, are adding staff at a rate that outpaces many more-established businesses. And one in seven early stage small businesses anticipate adding 20 new employees over the next five years.

As politicians wrangle over new programs designed to improve the business climate, most qualified small to midsized businesses fail to take advantage of the existing federal Research and Development Tax Credit, commonly referred to as the R&D tax credit. For many businesses, the credit can significantly reduce their federal tax burden, thereby making them more competitive.  In order to qualify for the credit, a business must be involved in an enterprise that improves the design of a product, service or process, and that the business is creating new jobs here in the U.S.

The R&D tax credit was originally introduced as part of the Economic Recovery Tax Act of 1981 and has been extended numerous times since then. Most SMBs, however, fail to take advantage of the credit because they are simply unaware of its existence. It is estimated that less than 10 percent of qualifying SMBs are aware of the credit. In many cases, SMBs that are aware of the credit fail to take advantage of it because they believe their businesses do not meet the qualifications.

The credit can also be claimed retroactively. In most cases, the federal government allows qualifying SMBs to claim the credit for up to three prior years, plus the current year.

One common misconception is that the credit is only available to businesses involved in the sciences and technology. In fact, any business that enhances a product or process is eligible for the estimated $9 billion in credits the federal government estimates are available annually.

Reference:

Rick Lazio. “Small Business Growth and the Underutilized R&D Tax Credit”  Fox Business Finance & Accounting. 7/12/12 http://smallbusiness.foxbusiness.com/finance-accounting/2012/07/11/small-business-growth-and-underutilized-rd-tax-credit/#ixzz20dmzKd7T