As companies work to adapt to commercial life during the COVID-19 pandemic, tax planning has come into focus for cash recovery and cost reduction. For many companies, decreased earnings and special tax incentives/remedies in response to COVID-19 will greatly reduce or eliminate federal income tax for a year or more. As R&D credit practitioners, we are sometimes asked “why should I  claim R&D credits if I won’t be paying much (if any) tax?”  Turns out there are a few good reasons to continue the pursuit….

1. NOLs may get used faster than you think - With the CARES Act’s expansion of the carry-back period for net operating losses, many companies’ NOLs will be carried-back as opposed to carry-forwarded. Companies in this position will find R&D Credit carryforwards generated during loss years to be quite valuable once net income and tax bills return.  
2. Looming Specter of Tax Increases – It's hardly a secret that the federal government has increased spending to address COVID-19. When the bill comes due, tax increases may be part of how the government addresses these deficits. Additionally, former Vice President Biden has expressed support for an increase in the US corporate income tax rate to 28% (an increase in the top individual rates may also be on the table). R&D credit carry-forwards could help companies offset some of the “bad news” from tax increases. 
3. Ongoing R&D Investments – The Wall Street Journal recently highlighted how many companies are maintaining or increasing investments in capital expenditures and research and development during the pandemic. Many companies see an opportunity for new markets and market share in the post-pandemic world. So, while the immediate tax benefit of an R&D credit may not exist for companies generating losses, the potential activities that give rise to the R&D credit are ongoing.
4. Document Now, Benefit Later - You may be asking, “why not skip the R&D credit for now and just go back and file an amended return to get the credits later?” We have observed that companies who pursue R&D credits closer to the years in which the R&D was performed incur less expense and experience a more efficient process. The old axiom of “pay a little now or a lot later” definitely applies to multi-year R&D credit claims.  Also, R&D activities can be more difficult to document if the study is prepared years after the activities, which could lead to issues upon IRS examination. 

Even for companies not expecting a big tax bill for the next few years, Research &Development tax credits may still have near term value. Also, companies may be able to obtain immediate benefit from state tax credit opportunities, especially in California as discussed previously.  Companies in industries likely to qualify for R&D credits should continue evaluating the opportunities and consult with their advisors as appropriate.

Contact an A&M Taxand R&D specialist to learn more about these developments.