How to Get Your Share of the $20 Billion Federal R&D Tax Credit

Did you know that the federal government has set aside a massive $20 billion to fuel independent research and development in 2024? The R&D tax credit is a business tax incentive channeling those funds to support a range of innovative activities, and companies in the plastics industry are especially well-positioned to benefit. Regrettably, many businesses miss out on these substantial tax savings simply because they aren't aware of the program or how broadly it applies.

Knowledge is power — and in this case, knowledge is money. Let's explore what the R&D tax credit entails, how to determine if your company is eligible, and the steps involved in securing this lucrative tax incentive.

R&D tax credit overview.

The R&D tax credit was introduced in 1981 as a temporary measure to stimulate American innovation and competitiveness in the face of growing global competition. It was so successful that, over the years, it was extended several times until it became a permanent part of the tax code in 2015. The core intent of the credit is to reward US-based companies taking risks in developing new or improved products and processes.

The four-part eligibility test.

The IRS uses a four-part test to determine if your work qualifies for R&D tax credits. The criteria are outlined below.

Funding availability: Beyond "revolutionary" innovations.

Many aspects of routine work done in the plastics industry could be eligible for tax credits. It’s not just major breakthroughs that the IRS cares about — routine improvements also qualify. Better yet, success isn’t required. Even if a project ultimately fails to achieve its goals, its activities can still count toward the credit.

How to identify qualifying activities.

So, how can you determine which of your activities qualify? The four-part test is always the best place to start. If we rephrase the IRS’s test to be a set of yes or no questions, it looks something like this:

To help you brainstorm, here are some of the most common qualifying activities in the plastics industry:

Of course, there are still plenty of gray areas. If you’re uncertain about eligibility, it’s best to seek expert advice. You may want to hire a specialty tax firm that works with R&D credits. Such firms have years of experience determining which activities qualify for R&D tax credits and documenting those activities appropriately.

How to claim R&D tax credits.

Now that you understand the basics of R&D credits and have a sense of qualifying activities, let's walk through the steps involved in claiming this incentive.

Step 1: Identify qualifying expenses.

Eligible expenses typically fall into one of four categories:

Step 2: Document your work.

You’ll need to keep documentation outlining project goals, progress, and any technical challenges. This may include:

You should also maintain clear records of eligible expenses, including:

Step 3: Calculate the credit.

This is where the complexity can increase. There are two main methods for calculating the R&D credit — the Traditional Method and the Alternative Simplified Credit Method — each with its own pros and cons. Determining which method is right for you isn’t always straightforward. It’s advisable to consult with a tax expert about your specific situation first.

As a general rule of thumb, companies with a consistent history of R&D activities will probably benefit more from the Traditional Method. On the other hand, startups, companies with fluctuating R&D activities, and those that haven’t claimed R&D credits in the past might find the Alternative Simplified Credit Method to be a better choice. 

Step 4: Claim the credit.

Fill out IRS Form 6765 (Credit for Increasing Research Activities) and attach it to your federal income tax return.

Step 5: Use the credit.

Finally, we get to the exciting part — actually using the money you’ve earned. The first thing to clarify here is that the R&D tax credit is a tax credit, not a tax deduction. This might seem like a minor distinction, but the difference is significant.

Tax deductions reduce the amount of income that you pay taxes on. So, a tax deduction of $1 million will reduce your tax bill by between $100,000 and $350,000, depending on your tax bracket. Tax credits offer a direct, dollar-for-dollar reduction. If you claim $1 million in R&D credits, your tax bill is decreased by the full $1 million.

The other great news about R&D tax credits is that they’re eligible for carryover. Let’s say you qualify for an R&D tax credit of $2 million, but your tax liability for that year is only $1.5 million. Does this mean that extra $500,000 is lost? Fortunately, no. You can carry forward unused credits for up to 20 years, and you don’t have to use the entire credit all in the same year.

But what if your company is not yet profitable? The IRS has special provisions in place for companies with less than $5 million in gross receipts and less than five years in operation. In these cases, startups can use the R&D credit to offset payroll taxes rather than income taxes. 

Potential pitfalls.

It’s clear that R&D tax credits offer tremendous advantages. Still, nothing in life is completely without risk. Let’s look at some common pitfalls and how you can proactively address them.

The process Is complex. For the sake of making this article readable, I’ve simplified the process quite a bit, but suffice to say it can be very complex. The amount of documentation required is extensive, and determining what is and is not a qualified expense isn’t always easy. 

You might want to hire a firm or individual to assist with your documentation and application, but be sure to closely examine their qualifications. Do they have a track record of success with R&D tax credits specifically for the plastics industry? Do they offer audit defense? Are their prices suspiciously lower than competitors? Do they promise suspiciously higher tax credits? If it sounds too good to be true, it probably is.

You may be audited. The IRS does look at R&D tax credit claims closely, particularly if you’re claiming very large credit amounts. Due to the nature of research and development work done in the plastics industry, your claim may be substantial. There’s always a chance the IRS will ask you to back it up with supporting evidence and documentation.

If your claim is justified and appropriately documented, you have nothing to worry about. However, companies have gotten into legal trouble in the past for trying to claim R&D tax credits in dishonest ways. Even if you made a simple mistake and had no intention of committing fraud, you would still be on the hook to pay back any extra. So be sure to double- and triple-check your work.

A lucrative, often-untapped resource.

The R&D tax credit is a lucrative and often-untapped resource for companies in the plastics industry. As the pace of innovation accelerates, the businesses that take advantage of this incentive will be well-positioned to thrive and outpace the competition.

Of course, navigating the technicalities of claiming the credit can be challenging. That said, the potential financial rewards often far outweigh the initial investment of time and resources. If you're exploring ways to fuel your R&D initiatives, streamline production, improve sustainability, or simply gain a competitive edge, don't let this valuable opportunity pass you by. 

Remember: The plastics industry is in a unique position to capitalize on this generous tax incentive. Don't miss out on funding that can propel your company toward even greater innovation!