Staying innovative and advancing within your field is essential to competing successfully in the world of global businesses. It is especially important for small businesses to keep up-to-date and to develop new and innovative ideas so they can compete with other small businesses and large corporations on the global level. The Scientific Research & Experimental Development (SR&ED) tax credit program is a program developed by the Canadian government in order to help empower small businesses throughout Canada. There are many benefits to the SR&ED tax credit that businesses can enjoy.
The specific benefits of the SR&ED tax credit can vary slightly depending upon the business and the industry that you are in. However, almost any small business- including those that don’t normally work within traditional stereotypical research fields- could potentially benefit from the tax credit.
Some of the advantages of the tax credit include the following:
- Businesses that engage in qualifying research and development can obtain a full tax deduction for expenditures in the year that those expenditures are incurred. It is possible to obtain this tax deduction even if the expenses are capital expenses. Being able to obtain a tax credit significantly reduces the actual cost of performing certain types of research and development. This can improve the return in your research investment and can give you the financial freedom to be more creative and to think outside the box in innovation.
- Businesses can pool qualifying expenses used for research and development. Because you can now pool your qualifying expenditures, you can carry over any deductions that you do not currently need. This means you have the flexibility of choosing between getting an immediate tax credit or carry over the credit to later years. Your company can better budget its funds, again lowering your overall costs of research and development and lowering the payoff you need to get a good return on your investment dollars.
While these two benefits are important, for many businesses, the single best tax benefit of SR&ED expenses is the fact that there are generous investment tax credits (ITCs) available.
ITCs can reduce the amount of income taxes that you pay dollar for dollar, significantly lowering the effective cost of your qualifying research and development expenses. ITCs can be obtained as cash refunds, which means that you can get money back from the government even if the amount of credits that you have exceeds the amount of money that you owe in income taxes.
The ITC rate is also very generous for taxpayers. In most cases, the rate for the ITC is 20 percent, which is a great rate for businesses in-and-of-itself. However, in certain cases, a business can get an even more favorable deal if the business is eligible for an enhanced 25 percent tax credit. Eligibility for this enhanced credit depends upon your previous year’s tax liability, among other factors.
Both the availability of the ITC and the other tax benefits of the SR&ED tax credit have become very clear to businesses interested in getting a little help with their research and development costs. Fortunately, if you are interested in seeing if your business can qualify for this favorable tax treatment, there are organizations out there that will help.