Inflation Reduction Act Doubles R&D Tax Credit

The Inflation Reduction Act was one of the largest spending bills in recent history, aiming to improve U.S. economic competitiveness, innovation, and industrial productivity. And one of the most important provisions? To increase the R&D Tax Credit so eligible companies could get even more money from their R&D efforts. In other words, the more R&D you do, the higher the tax credit you can receive.

Here's what you need to know about Inflation Reduction Act and its effect on the R&D tax credit.

What is the Inflation Reduction Act?

The Inflation Reduction Act is a 10-year plan passed by Congress in 2022 to lower costs for families, combat the climate crisis, reduce the deficit, and ask the largest corporations to pay their fair share. In addition, the act changed several tax laws and provided funds to improve services and technologies to make tax filing easier.

This includes new and reinstated tax laws affecting individuals and businesses, including several credits and deductions. Among these are deductions for clean vehicles, energy credits, and an increase to the R&D tax credit.

How Does The Inflation Reduction Act Affect R&D Tax Credit?

As a part of the Inflation Reduction Act, the R&D Tax Credit increases the maximum cap a startup can receive for their R&D efforts beginning in the 2023 tax year. So instead of maxing out at $250,000, a business can now receive up to $500,000.

Since the R&D Tax Credit can be applied towards payroll taxes, this new legislation means that startups that meet the maximum will be able to reduce their payroll taxes by half a million dollars!

Even unprofitable startups can take this incentive and reduce their burn rate. The reasoning behind expanding this tax credit was simple: the Biden administration wants to encourage startups to pursue more innovation, research, and experimental expenditures.

"Expanding this tax cut will help more small businesses and startups advance their current efforts and create the technology of the future," said New Hampshire Senator Maggie Hassan, one of the lawmakers who helped double the tax credit.

How to Claim this New Larger R&D Tax Credit/Who is Eligible for the Larger R&D Tax Credit

To take advantage of the larger tax credit, qualifying companies must have $5 million or less in revenue and, at most, five years of generating gross receipts, including the current year. Startups can take advantage of the payroll tax offset every year for five years (then you can use it against Federal Income Tax), so if you receive the full tax benefit each year, you can save up to $2.5 million. And, of course, you need to prove R&D expenses. The more R&D you do, the higher credit you can receive.

Applying for this larger tax credit is the same process as before. You still have to use the four-part test to apply for these credits.

As a reminder, here's what you need to prove to qualify for R&D Tax Credit:

• Qualified purpose: Are you creating or improving a business or product?
• Experimentation: Are you identifying and evaluating alternatives, performing trial and error experiments, and testing results?
• Elimination of uncertainty: Are you using an iterative process to try and eliminate the uncertainty of your project?
• Technological in nature: Can you show that your activities are based in either the hard sciences or computer sciences?

Additional Industry Specific R&D Tax Credit Q&A – 

Which Industries Are Eligible Under The Inflation Reduction Act?

Under the Inflation Reduction Act, a diverse range of industries stand to benefit. This includes renewable energy sectors such as solar and wind power, which are supported through tax credits and incentives for clean energy development. The electric vehicle industry is also a significant beneficiary, especially with consumer tax credits for EV purchases. Healthcare gains attention with measures for prescription drug pricing and health insurance subsidies.

Industries involved in energy-efficient home improvements and green technology manufacturing, like battery technology and sustainable materials, are also included. Additionally, sectors like AI, SaaS, carbon capture, sustainable agriculture, and eco-friendly public transportation systems are poised to receive support and incentives under the Act.

Check Your Eligibility

A common myth around R&D Tax Credits is that many businesses don't think they qualify. In reality, that's not the case, especially if you work with a CPA or R&D Tax Credit professional like TaxTaker.

We make applying for an R&D tax credit easy with our intuitive tech and the white glove service you deserve. Our vetted experts can work with your CPA to get you access to quick and easy funding with zero-risk pricing. Connect your payroll, tell us about your projects, and get your money—it's that simple!

Let your R&D efforts benefit you. Learn how we can help you take advantage of the larger tax credit today.