Turning Innovation Into Cash Flow
With increasing pressure to limit government spending, many government contractors are seeing their clients tighten budgets and reduce discretionary spending, leaving them to seek ways to improve cash flow without compromising operations. The Research & Development (R&D) Tax Credit offers government contractors a strategic opportunity to lower tax liabilities, increase liquidity and reinvest in their businesses.
R&D Tax Credit Opportunities
Federal R&D Tax Credit: Tax Saving Opportunities
The federal R&D Tax Credit rewards businesses for developing new or improved products, processes or software, activities that many government contractors perform daily. By claiming the tax credit, government contractors can reduce their federal tax obligations, allocating more cash to business operations. Even small projects, like enhancing internal systems or developing prototypes for government clients, may qualify.
State R&D Tax Credit Refunds: Cash Back in Your Pocket
Several states offer refundable R&D Tax Credits that can put cash directly back into a contractor’s business, regardless of income tax liability. Virginia’s refundable R&D tax credit allows small businesses to receive cash refunds for qualifying research expenses, while Maryland offers refundable tax credits to both small and large businesses performing R&D activities. These programs offer an immediate cash flow boost, making them especially valuable during periods of reduced client spending.
Payroll Tax Offset: Small Business Tax Credit for R&D
Qualified small businesses with less than $5 million in gross receipts and less than five years of reporting gross receipts can use the federal R&D Tax Credit to offset up to $500,000 in payroll taxes each year. This option allows early-stage contractors or businesses without significant income tax liability to benefit from the tax credit, turning innovation into cash flow even when profits are low.
Your Guide Forward
Amid rising financial pressures, government contractors can unlock valuable cash flow opportunities through the R&D Tax Credit. Cherry Bekaert’s R&D Tax Credit team can help businesses identify qualifying activities, calculate tax credits, and navigate federal and state-level incentive programs.
Whether you are looking to lower federal tax obligations, pursue state refunds or offset payroll taxes, these incentives can help counteract rising costs and provide additional resources to reinvest in future innovation. With deep experience in the government contracting industry, our consultants are available to discuss your unique situation and guide you through maximizing your benefits.
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