Beware of PPP Pitfalls in the R&D Tax Credits

For those who took advantage of the Paycheck Protection Program (PPP), the way R&D Tax Credits are calculated for the 2020 tax year will be different from years past, and this may affect businesses.

The IRS has issued a notice that could significantly affect the way R&D tax credits are claimed for 2020. Under the CARES Act, PPP forgiveness was to be “excluded from gross income.” However, in Notice 2020-32, the IRS determined that other eligible expenses, paid for with PPP forgiveness proceeds, cannot be claimed for deduction. Potentially, leading to necessary adjustments in the calculation of the federal and state Research and Development tax credit.

The Many Ways 2020 Has Affected Businesses

It’s no question that businesses of all sizes and industries had to pivot this year in reaction to the global health crisis of COVID-19 and the subsequent global recession that followed. Many office teams are still operating remotely, and this is where the changes regarding R&D tax credits will come into the forefront.
The Research and Development tax credit is a dollar for dollar tax credit that rewards companies for investing in Qualified Research Activities. A notable share of Qualified Research Expenses (QREs) are employee wages.
We can see how this may play out in two vastly different ways. For example, Company A that had to shut down and send their employees home for 6 months may have lost out on valuable time that employees would have normally spent conducting Qualified Research Activities. On the other hand, Company B may have overhauled its operations to a remote work model during 2020, and could have higher Qualified Research Expenses to report for even more R&D tax credit potential.

R&D on Capitol Hill

Earlier this year, members of Congress wrote a formal letter to Secretary of the Treasury Steven Mnuchin stating they were not in agreement with his legal interpretation of the law. These two bodies are usually in accord, so the current IRS interpretation is expected to change to fall in line with Congress. However, all businesses should brace for the change as currently stated in the IRS literature.

How to Maximize Your Tax Return

Navigating the world of specialty tax benefits is not an easy task for most business owners. Given the changing tax provisions and consequences, it is advised that companies partner with a specialty tax group that can maximize their savings. If you are considering claiming R&D tax credits for the next tax year, trust our tax experts. Call National Tax Group at 561-257-3436 to start your free assessment.

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