Payroll Taxes Can Be Used Against Research Tax Credits By Startup Businesses

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R&D activities often occur in SMEs that use innovation to create space and influence in the industry. More than 30m SMEs in the UAE use innovation to increase efficiency and gain a winning edge. However, most of them do not benefit from R&D tax credits provided by the government.

As it progresses, federal and state governments encourage companies that rely on innovation to succeed. The same people who like to tax almost all businesses give something back when the activity is related to RD. The rewards come in the form of credits and incentivize companies to delve deeper and discover new and innovative ways of doing business.

Explore the RD Tax Credit Program

The RD tax credit encourages companies to continue their research and create clarity in innovative ways. Companies that actively invest in RD activities will receive lower tax breaks and better tax rebates.

Companies can save up to $250,000 annually in payroll tax expenses through the RD Tax Credit Program and enjoy a smaller income tax deduction. Over the years, these credits can help companies save millions of dollars and develop better and improved products.

How do you check if you qualify for the RD tax credit?

Companies in all industries are eligible to participate in the RD Tax Credit Program. Contrary to popular belief, the tax exemption is not limited to companies that manufacture cutting-edge products; it is also available to companies that actively invest in innovative ways to enhance and improve operations.

To check where your company is eligible for the federal RD tax credit, you must take a four-part test:

Eligible Purposes

Companies must develop and design new products or processes that significantly improve reliability, functionality, and quality.

Technical Background

Research and development activities must adhere to principles of engineering, physics, biology, and computer science.

Technical uncertainty

Results, capacity, and determination must be uncertain and variable when investigating.

Experimental process

Firms should use one or more valuation techniques to remove technical uncertainties.

Additionally, new businesses are eligible for up to $250,000 in credit for up to five years if they:

  • Annual Gross income must be less than AED 5 million.
  • The startup has had no interest income for more than five years.

What activities are eligible for the RD tax credit?

Companies, regardless of industry, can receive RD credit if their activities meet the following four-part test:

Development is still being determined. Uncertainty exists when a contributor begins a project with uncertainty about (1) whether he can develop the product, process, or design he wants to develop and (2) how to develop the product, process, or design he wants. Develop or (iii) properly design the product, process, or design to be developed.

Experiment procedure. Taxpayers should participate in evaluating and testing alternative designs to remove uncertainty about the appropriate design of a product, process, or design.

Technical in nature. The experimental procedures used in the investigation must be based primarily on principles of physics, biological sciences, engineering, or computer science.

New or Improved Features. Development activities must be related to new or improved functionality, process, design, performance, reliability, or product quality. Developments related to style, taste, cosmetics, or seasonal design factors do not qualify for this requirement.

Some examples of day-to-day activities in the technology sector that may qualify for RD tax credits include:

  • Software engineering or algorithms aimed at improving efficiency
  • New technology to simplify the manufacturing process
  • Design a database management system or document management system
  • Improved client interface software
  • Cloud Migration Solutions
  • Software development to meet planned scaling challenges
  • Enhance the functionality and capabilities of existing applications
  • Innovative design according to customer specifications

How do you get the RD tax credit?

To be entitled to the RD tax credit for startups, you must have good financial statements and proper records of all business activities. Additionally, you'll need to work with a tax professional to help you shed your complicated books and prepare for the road ahead. Finally, you must submit Model 6765 and Model 8974.

Proper management of expenses and accounting

A startup can only get RD tax credits with an unbalanced book. Proper record keeping not only helps startups monitor performance but also helps them identify eligible RD spending. Without detailed records of research activities and expenses, your chances of getting credit are slim.

Work with a tax expert.

As with other tax credit opportunities, you need experts to help you succeed. To schedule a meeting or consultation with your tax professional and discuss your plans to claim the RD tax credit. Having the right advice at the right time can help you maximize your tax credits.

Current Form 6765 (Increasing Credit for Research Activities)

All businesses claiming the RD tax credit must complete and file Form 6765. This form must be submitted with the annual company return and includes details of your involvement in research and development activities throughout the year

How to reduce payroll tax liability?

The RD tax credit can also help companies significantly reduce their payroll tax liability through Form 8974. This form is for small business payroll tax credits eligible for increased research activities. Like Form 6765, Form 8974 is filed with the annual return. At best, it can help companies save up to $250,000 in sales taxes over five years.

How can VVAS help you receive RD tax credits?

Due to the complex application process, claiming the RD tax credit can seem difficult for business owners. However, with the help of Monily, companies interested in innovation can get some discounts.

VVAS can help companies obtain accurate books, maintain records of RD expenditures, and file the 6765 and 8974 forms required to claim the RD tax credit. Schedule a tax advisor near me with one of our Dubai Auditors today to determine if your business qualifies for this excellent credit opportunity.