Cutting your corporation’s income tax liability can make the difference between a good year and a great year. This is particularly true for manufacturing and technology companies. Whether you’re a newly minted corporation or a well-established business, every saved dollar matters in uncertain economic times. If this describes your company, you might consider research and development (R&D) tax credits—and the State of Florida can help.
Among Florida’s incentives for businesses is the Corporate Income Tax Research and Development credit. If you have a target industry business that engages in research and development in the state, you may be eligible. Each year, Florida provides up to $9 million in corporate income tax credit for qualified research expenses incurred during the previous year. In 2020, 127 businesses benefitted from this program.
To take advantage of the Florida R&D tax credit, you should move fast. While applications don’t open until March of next year for 2020 expenses, the window to apply only lasts one week. So now is the time to start planning. Here’s what you need to know about the credits, whether your company is eligible, and how to apply.
To claim an R&D tax credit, your business must be in a “qualified target industry” as defined in Section 288.106. It must also qualify for research credits against federal income tax for qualified research expenses, under Section 41 of the Internal Revenue Code.
Per the Florida Department of Revenue (DOR), businesses in the following industries are eligible for the tax credit:
- Life sciences
- Information technology
- Aviation and aerospace
- Homeland security and defense
- Cloud information technology
- Marine sciences
- Materials science
- Nanotechnology industries
If your business does not fall into one of these categories, your application will be denied.
The R&D tax credit is also limited to C corporations who are liable for taxes that year. Partnerships and limited liability companies are not considered corporations under Florida State Statute 220.03. However, you may be able to claim some credit on behalf of corporate partners:
“[E]ach corporate partner of a partnership may apply separately for an allocation of credit based on the corporation’s separate research expenses, including allocated partnership research expenses, if the corporate partner is a qualified target industry business.”
If you want to pursue tax credits as a partner, we suggest working with a knowledgeable accounting firm during the application process. This will help you avoid costly mistakes.
How much credit can you claim?
If approved, you may claim “10 percent of the amount of qualified research expenses incurred in Florida and allowed under s. 41, IRC, which exceeds the base amount, defined as the average of the qualified research expenses incurred in Florida for the four tax years prior to the calendar year for which the credit is determined.” Have your prior tax information handy to calculate the base amount.
Furthermore, the tax credit cannot exceed 50 percent of your total corporate income tax liability after all credits have been applied. If your application is approved and you receive credit in excess of what you’re allowed to claim, the remaining credit will carry forward for five years.
If the requested R&D tax credits for all Florida businesses exceeds the $9 million cap, the credits will be prorated among the approved applicants.
The Tax Credit Application Process
Savvy business owners should begin the process early to avoid missing out on this opportunity. This allows ample time to complete and double-check your required materials.
Businesses must first get a letter from the Florida Department of Economic Opportunity (DEO) certifying they’re in a qualified target industry. This form to request this letter is included with the application packet; you can also download it from the DEO website. This year, the deadline to request a letter was February 28, 2020—almost a month before tax credit applications opened.
DEO certification lasts three years, so if you have a letter dated 2018 or later, you can use it in your 2020 application. Businesses without DEO certification will not receive an allocation of funds. However, if you have been denied certification and issue a timely challenge, you may still apply for the credit.
Once you have your certification, you can file your R&D tax credit application with the DOR when the window opens. Make sure you have the following documents and information handy.
- The application form. This is completed online; the website will be available when the application window opens.
- IRS and state tax forms. You will need to attach federal Form 6765 (Credit for Increasing Research Activities) and federal Form 3800 (General Business Credit) to Florida Form F‑1120 (Florida Corporate Income Tax Return).
- The qualified target industry. This information is required on your application.
- The NAICS code. Make sure that you have the correct NAICS code number for your business type, and know the number of employees within that code.
- A description of your major activities, products and services. The application requires you to list these items for each NAICS code you put down.
- Prior tax returns. You’ll need the past four years of your tax returns to calculate your base amount of qualified research expenses.
Applications for expenses incurred during the 2020 calendar year will open on March 20, 2021. Late applications are not accepted, so give yourself plenty of time to get DEO certification and everything else needed.
Accuracy is Critical
No matter how careful you are, mistakes can still happen on your R&D tax credit application. This often occurs when an applicant over- or underestimates their research expenses. If you overestimate your credit, the state will apply your prorated share to the amount you should have requested. If you underestimate, however, you will be stuck with the lower amount due to the allocation cap.
You can also run into difficulties if your information is incorrect or incomplete. If your NAICS code is just one digit off or you forget a form, your application could be rejected entirely.
We recommend working with a qualified manufacturing or technology services CPA firm when applying for R&D tax credits. With their industry knowledge and accounting expertise, they’ll help you sort through the application requirements, calculate your base amount and otherwise get your ducks in a row.
By starting the certification process now and having professionals at your side, you’re more likely to get the maximum R&D tax credit amount. And that can be just the boost your company needs.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.