Tuesday, October 3, 2023 |
Fall 2023BY DERICK VAN NESS, TAX & WEALTH STRATEGIST, BIG LIFE FINANCIAL.
AS A SHOP OWNER, YOU MAY HAVE HEARD WHISPERS of the research & development (R&D) credits in the past few years. Still, if you're like most other owners, you may have assumed that the credits are only for guys in white lab coats or computer nerds creating software you'll never understand. However, if you used those assumptions to determine that your business won't qualify for R&D, you'd be wrong.
R&D CREDITS WERE CREATED FOR THE AUTO INDUSTRY
The R&D credits were created in 1981 to help American auto manufacturers compete with foreign competitors. Initially, the credits were mostly limited to large, high-tech companies. Still, several significant changes in the past 40 years have made it very likely your auto shop can now claim these coveted credits.
Specifically, in 2001, the elimination of the "Discovery Rule" dramatically expanded what qualifies for R&D, and the creation of the alternative simplified credit (ASC) in 2006 made claiming the credit much easier for small businesses. These modifications, plus the R&D credits becoming a permanent part of the tax code in 2015 (Section 41), have allowed the cost and complexity of the credits to become manageable for small businesses like auto shops.
HOW THE CREDITS WORK
Credits are based on qualified research expenses (QREs) and used to offset income taxes, so you must have a tax liability to claim the credits in the current or past year. The good news is that credits can be carried forward up to 20 years, so even if you don't have a current tax liability, you'll likely be able to claim them eventually. It's also worth noting that you can still claim credits for the past three tax filing years with a simple amendment. This will allow you to recapture taxes paid to the IRS in the past!
HOW TO DETERMINE IF YOUR SHOP QUALIFIES
Suppose your shop is continuing to test, evaluate, and improve your technology, procedures, or processes and looking to improve your efficiency and outcomes for your clients. In that case, you are in an ideal position to make an R&D claim. On a high level, the credits are created when you spend money to improve a product or process based on science using engineering, computer science, biology, or physical science — and shops do a LOT of that activity.
Examples of what might qualify your shop:
- Testing new diagnostic or alignment systems, equipment, or technology.
- Using software to analyze or estimate car damages or access dealer databases.
- Developing new procedures to repair new features of vehicles like lane assist, automatic braking, and automatic parking systems. • Creating and adjusting custom parts, interiors, or features in vehicles.
- And so much more...
The reality is that the auto repair industry is changing at a rapid pace, and if you want to keep up, you need to continue to try new approaches to solve ever-evolving client needs. All that change is likely forcing you to spend money to get better and improve in all areas of your business, and that's what the credits are about!
At the time of this article, R&D credits are still a specialty, so most tax professionals are only vaguely aware of the R&D credits work for the automotive industry. This means most shops engage specialty R&D credit professionals to help them claim the credits they've earned.
The R&D credit is still one of the most lucrative incentives available for small businesses, and thanks to the changes over the past two decades, claiming the credit is pretty straightforward. Even better, in some cases, you can get a free estimate of your credits before deciding if it's worth pursuing.
If you'd like more information or to talk with someone about the R&D credits that might apply to your shop, you can contact the Big Life Financial team at: www.BigLifeFinancial.com.
Derick Van Ness is passionate about helping shop owners keep more of the money they make and be smarter with it. He specializes in little- known tax and financial strategies tailored to small business owners.