The R&D tax credit is a tax incentive that encourages companies to invest in research and development activities in the United States. The credit is available to businesses that engage in qualifying R&D activities.
Potentially Qualifying Activities
While seemingly routine, many of the activities performed by e-commerce companies can qualify for the R&D tax credit. See below for a non-exhaustive list of potentially qualifying activities:
- Experimenting with new features or functionality for an existing e-commerce platform.
- Developing new improvements that increase the lifespan, shelf-life, or performance of products.
- Designing cybersecurity and data encryption techniques for payment gateways.
- Conducting trial and error testing of product recommendation algorithms based on customer browsing and purchase history.
- Testing new or improved manufacturing processes to enhance efficiency, reduce waste, or improve product quality.
- Architecting mobile applications to improve user experience and streamline the shopping experience.
- Engineering backend and frontend architecture for a new e-commerce platform.
- Improving the sustainability of existing products, such as creating biodegradable packaging or utilizing recycled materials in production.
- Developing new or improved software for managing inventory and processing orders.
- Creating AI-powered chatbots and virtual assistants to handle customer inquiries and support.
R&D Tax Credit Updates for E-Commerce Companies
For e-commerce companies in the United States, there have been several recent tax law changes to the R&D tax credit:
- Permanent extension of the credit: The R&D tax credit has been permanently extended, which provides e-commerce companies with greater certainty and stability when planning their R&D activities and strategic tax planning.
- Payroll tax offset: Beginning in 2016, qualified small businesses (defined as those with less than $5 million in gross receipts and those in their first 5 years of existence) can elect to use the R&D tax credit to offset their quarterly payroll taxes, which can provide a significant cash flow benefit. For tax year 2023 and beyond, the maximum election amount has increased from $250,000 to $500,000, where up to $500,000 in credits per quarter is applied against employer-paid FICA (6.2%) and Medicare (1.45%) taxes. This is a significant change, as businesses no longer need to incur federal income tax liability to monetize the R&D tax credit.
- R&E capitalization requirement: Starting with the 2022 taxable year, the Section 174 R&E capitalization requirement may drive an e-commerce company’s desire to reexamine potentially qualified research expenditures to increase their research credit and lower their overall income tax liability.
Upcoming Changes
The IRS is instituting sweeping changes to federal Form 6765, which is the R&D tax credit form filed on your federal tax return. Taxpayers may be required to submit upfront documentation to the IRS for all R&D tax credit claims, whether timely filed or via the amendment process. Withum’s team of R&D tax credit professionals have been carefully monitoring such changes to ensure compliance with current tax law.
Takeaways
It’s worth noting that the specific rules and regulations around the credit can be complex, so it’s crucial for businesses to consult with R&D tax credit specialists to ensure they are properly claiming the credit.
Authors: Darcey Long | [email protected] and Tyler Collins, Partner, Market Leader, R&D Services | [email protected]
Contact Us
For inquiries about how the proposed changes may affect your R&D tax credit claim, please contact a member of Withum’s R&D Tax Credit Services Team.
