Increase Cash Flow Using the R&D Tax Credit

by: Smith and Howard

February 17, 2017

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New rules and a general reminder about a tax incentive that can increase cash flow for your business.


While research and development (R&D) sounds like high level scientific work, the new definition (for purposes of a tax incentive), is far from goggles and lab coats. For the tax credit, R&D includes expenses paid to develop a new product, update an existing product/app, or improve a process. This is a very broad definition that allows most companies (in any industry) to qualify for the incentive if they are paying salaries, contractors, and/or supplies. The activities that qualify for the R&D credit can apply to pretty much every industry/business (you do not have to be a start-up or technology company to qualify).

Prior to 2016, this incentive was overlooked by many companies because it typically did not immediately increase cash flow. Now, there are new rules in place that allow companies to take advantage of this incentive to increase their cash flows without having to adjust the way they operate.

How it can benefit you

If you have expenses that relate to R&D activities then you may qualify to convert those from a deduction to a credit.  One dollar of deduction multiplied by your tax rate equals the net cash effect. One dollar of credit equals one dollar of net cash, making it much more valuable to your business.

After the credit is calculated, you have two options for using it:

  1. Reduce any income tax owed (this is good if you are profitable or owe income tax), or
  2. If you have employees but aren’t profitable, you can reduce the amount of payroll tax that you pay (increase cash every pay period).

Luckily, you don’t need a crystal ball to decide between the two options; you can wait until the end of the year when you know how your business performed.

How you can take advantage of the credit

The best thing you can do to get started is to have a conversation with a CPA that is knowledgeable about your industry and R&D to see if you can take advantage of the incentive. They should be able to quickly determine whether or not you could receive a net cash benefit from the R&D incentive. This step is extremely important so that you can understand the potential cost/benefit before investing more than a few minutes of your time.

If you have any questions or want to discuss, please contact Debbie Torrance at 404-874-6244 or complete the form below.

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