Last Updated on May 20, 2021 by MoneyVisual
Any government gives a business tax credit to encourage innovation. A tax incentive can go a long way in boosting your business. However, some companies are not aware they qualify for such grants.
Through the research and development (R & D) tax incentive, a company has access to a certain percentage of its expenses in the form of tax offset or cash benefit. The factors are the beneficial information you should know about the government grant.
The Directors Must Incorporate the Company Under particular State law
For a company to qualify for the tax credit, it must have registered under that country’s laws. Some companies’ characteristics include; has legal capacity, carrying out its business on its right, acquiring assets and properties, entering into contracts using its name, and suing and being sued. For instance, a company that is formed under overseas law and has an Australian resident for purposes of income tax qualifies too.
Finally, any company having been registered under a foreign law but meets particular circumstances can apply for the grant. The unique conditions are; residents of a country with a dual tax agreement, including a permanent contract definition.
Another unique situation is, engaging in business via the permanent establishment, as stated in the dual taxation agreement. However, those companies exempted include a limited corporate partnership, an entity free from paying income tax using its earnings, and a trust.
A Company That Is Involved in Innovation
Any company intending to claim the tax credits must be involved in innovation. For example, if your company is engaged in developing new processes or designs, you qualify for it. If your company enhances existing products or services, you also warrant the R&D tax incentive in Australia.
The fantastic thing is that your company can be part of any sector. For example, it could be in manufacturing, agriculture, engineering, or education. It is essential to know that research and development key activities are those whose outcomes cannot be predetermined. These experimental activities also should be conducted to come up with new knowledge.
It is vital to know that you can only claim a research and development tax rebate for expenses on activities performed only for your entity. Activities such as market research, research in arts, social sciences or humanities, developing computer software’s which will be used mainly by the developers, exploring in mineral and petroleum do not qualify for tax credit.
A Company Having Met Specific Turnover
Most governments give tax credits to companies having met certain turnover thresholds. First, are companies having a yearly turnover of at least twenty million dollars. These companies are eligible for 38.5% of their spending.
Second are companies having an annual turnover of fewer than twenty million dollars. They qualify for a tax credit of 43.5%.
Other governments, such as the New Zealand administration, gives a 15% tax rebate on money a company invests in legitimate research and development. Hence, different governments provide different rates. It is best to research the specific rates applicable to your country.
Your company can either be making a profit or losses when applying for research and development tax rebates. It can also request the R&D tax incentive in Australia as cash credit or as a future tax offset.
Items That Constitute Research Expenses
Not all expenses that your firm incurs will fall under the research and development costs. Thus, you should be observant when classifying these costs. The charges that qualify are; salaries paid for supervision, support, and technical staff, procurement expenses on materials related directly to research and development activities, and reduction in the value of research assets.
The salary expenses include wages, allowances, bonuses, overtime, and leave, including annual, sick, and long service. Given that your company may not be mainly dealing only with the specific development activities, some costs will not qualify.
Some of these ineligible expenses include; tender fees, trademarks, and patents in promoting a new product resulting from an R& D activity, audit fees, and directors’ fees. To be sure whether your expenses qualify, its best to seek professional advice from qualified tax consultants.
Benefits of Claiming the Tax Rebates
When your company is involved in the research and development activities, claiming the grant will be of great benefit. The potential benefits are improvement in the company cash flow, reduction in the tax rate, and an increase in earnings per share.
Also, there are several investors interested in teaming up with a research and development firm. As a startup, specializing in R & D activity can offer you an opportunity to avoid the challenges that hinder new businesses.
Since most governments are strict in claiming research and development tax credits, you should ensure to keep records of eligible R&D activities. Maintaining the records supports your credibility in case the authorities decide to investigate your claim further.
If you are looking for financing through research and development, it is best to partner with a reputable tax advisor. However, it’s best to know these three factors; your company directors must register it under particular state law and meet specific turnover requirements.
The company must carry out innovation activities. However, the critical factor is to ensure that your company is undertaking appropriate research and development activities.