Planning to Claim the R&D Tax Credit for 2020? Here’s What You Should Know

By Matthew Nistler, CPA, and Bradley Rod, CPA

As you prepare to file your 2020 income tax returns, it’s possible you could run into more questions than ever before. We are, after all, in unchartered territory. The Coronavirus Aid, Relief, and Economic Security (CARES) Act has, in addition to providing taxpayers with many benefits, stirred up plenty of confusion. Until recently, its impact on business’ ability to take advantage of the research and development (R&D) tax credit was unclear. Thankfully, the Consolidated Appropriations Act (CAA), which was signed into law in late December, offers much-needed clarification.

If you’re planning to claim the R&D credit for the tax year 2020, here’s what you should know.

Your Paycheck Protection Program loan status is a non-issue.

Earlier in 2020, the IRS said expenses paid by Paycheck Protection Program (PPP) loans that were later forgiven would not be deductible. The idea was to prevent businesses from receiving a double tax benefit. It also would have prevented businesses from using certain payroll expenses to calculate their R&D expenses. The CAA caused the IRS to reverse its position. Now, businesses can calculate their R&D credits as usual, even if they received PPP loan forgiveness.

Consider your options for the Employee Retention Credit.

The Employee Retention Credit (ERC) is a provision of the CARES Act. This refundable tax credit can be applied against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and prior to January 1, 2021. Per the CAA, employers may not receive a double tax benefit from both the ERC and R&D credit. (You may claim both credits, but you can’t use the same wages for both.)

So, does it make more sense for your business to leverage the ERC or R&D credit? Here are a few things to consider:

• The ERC puts money back into your pocket more quickly. Because the ERC is refundable based on your payroll tax return instead of your income tax return, you will receive the credit the following quarter (instead of the following year).
• The ERC offers a higher credit for a lower amount of wages.
• For most businesses, applying for the R&D credit is more complicated than applying for the ERC.

Although the ERC may look more advantageous on paper, it’s important to weigh the benefits of each credit. Ideally, you’ll want to make the best use of your wages where you can. This could mean claiming both credits against different wages.

Find the best balance for your business.

While a PPP loan won’t affect your ability to claim the R&D credit, the ERC is another story. Determining how—and if—to claim the two credits requires careful consideration of your specific tax situation. At AEM, we can help you calculate the benefits of each credit and find the best balance for your business.

If you have questions about claiming the R&D credit for 2020, contact us today.

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