Ohio R&D Tax Credit: Boost Your Business Innovation
Designed to promote innovation and technological improvement, the Ohio Research and Development tax credit is here to help firms that are interested in pursuing research within their respective fields. Through using this credit program, businesses ultimately lower their overall tax liability by offsetting a portion of the costs associated with research and development.
This post will give you the information that you need to understand the tax credit qualifying requirements, the process of how to claim this tax credit, and what you should do to take your credit application to the next level!
What are Ohio R&D Tax Credits?
Ohio R&D tax credits are financial incentives provided to businesses to encourage research and development activities within the state. They do this by offsetting the amount of cost associated with qualified research expenses.
These credits boost the economy, stimulate innovation in fields, and encourage competition by making it more attractive for companies to consistently invest in the development of better materials and processes, as well as solving other important problems in their field.
The Ohio Revised Code’s Section 5726.56 describes these credit characteristics, including how firms can compute and claim while remaining in compliance. The Ohio Revised Code Ann. §5733.351(C) also offers more details on the qualifying requirements and the procedure for application.
Despite the complex application processes, one of the key advantages for businesses is the tax savings you can garner that drastically cut the price of research and development initiatives. This allows businesses to put the money they save back into job creation and expansion.
It also makes the state a more appealing destination for new and established companies wishing to start research in their field.
The State of Ohio also has a lot of these tax credits available, which allows for existing businesses and new ventures alike to benefit from the program. The state has fostered an environment conducive to technological advancement and economic development, which means we will see an influx of research originating from the area.
Does Ohio have an R&D credit?
Yes, Ohio currently has a research tax credit available for businesses to use. This credit is currently codified under Section 5726.56 of the Ohio Revised Code, which was passed during the 129th General Assembly of the Ohio House of Representatives.
This tax credit allows businesses to reduce their tax liabilities to the state based on the amount of qualified research expenses that they accrue.
These expenses must fall under the categories that are laid out by the Internal Revenue Code, following Section 5726.98, or how you calculate the amount of taxes due in Ohio. The establishment of the research and development marked a big step towards making Ohio a more attractive location for businesses.
Eligibility Criteria for Ohio R&D Tax Credits
Businesses must fulfill qualifying requirements centered on their research and development in order to be eligible for Ohio research and development tax credits.
Eligibility for qualifying research expenses includes that the cost must be directly tied to research, and it must aim to find technologically related information that would be helpful in creating a new or better process in the business field.
Tax credit eligibility is available to a range of different corporate structures. They all have to meet the definition of qualifying research expenses, but every structure from limited liability companies (LLCs), C-corporations, and S-corporations are all eligible for these credits.
This broad eligibility means that research can come from a diverse variety of enterprises, regardless of their organizational structure.
Four-Part Test for Qualifying Activities
The four-part test is a framework that is used to determine if a company’s activities qualify for the research and development tax credit. These specific criteria to be eligible allow businesses to be able to properly apply for the tax credit and remain in compliance to avoid audits.
Technological in Nature
To get through the approval process for the research and development credit, This means that the research firm’s activities rely on a physical, biological, engineering, or computer science model of experimentation. These scientific disciplines demonstrate a level of complexity and innovation in needed fields that the research and development credit wants to encourage.
Permitted Purpose
To encourage Ohio’s corporations to delve into new processes, software, and formulas, the permitted purpose explanation should either create a new process or enhance the existing state of technology. This ensures that the credit is used for innovation in a field, and contributes to the growth of the field over time.
Eliminate Uncertainty
The qualified expenses must also be used to eliminate uncertainty in the field, specifically in the development or improvement of a product or process. The business should be working to resolve problems or unknowns throughout the process, looking for solutions to achieve advancements in technology.
Experimentation
There must be a trial and error process to qualify for a research credit. This means that the business should test and evaluate alternatives to overcome technological uncertainties. This can include modeling, simulation, or other forms of testing to refine the solutions that are currently under development.
It is best to keep track of the experiments, both failed and successful, over time in order to ensure that they meet the definition of qualified research.
Calculating the Ohio R&D Tax Credit
The amount of the Ohio tax credit that a business is eligible to receive is calculated using a formula and methodology that is outlined by the legislation. This credit uses calculations to determine the average amount of research and incentivizes gradually adding more.
This allows for companies to consistently allocate more resources towards research and development over the years, instead of encouraging large variations in activities.
One of the ways to calculate the total amount is to use the Alternative Simplified Calculation to get the base amount. This is calculated by multiplying the surplus amount of the current year’s qualified research expenses which is more than the average, by 7%. This is a simpler computation process that businesses generally prefer to use.
Another important factor is any interaction with the Commercial Activity Tax. Businesses benefit from a reduction in their overall tax burden when their Commercial Activity Tax is offset by the research and development credit that Ohio offers.
Businesses can use the taxes they pay under the Ohio CAT as a benefit of their research investments, improving the financial benefits they can get from the programs.
Selling or Transferring the Ohio R&D Tax Credit
Businesses can benefit greatly from the credit even if they aren’t able to claim it all in the first taxable year that it is received thanks to the carryforward provision.
Any unused credits under the R&D tax credit may be carried forward for up to three preceding taxable years up to seven years. This flexibility allows companies to manage their tax planning in the way that best benefits them!
Along with the carryforward provision, business owners can choose to levy the tax credit against their Commercial Activity Tax obligations. Specifically, businesses can reduce their tax rate and free up funds to invest in research and development processes.
While the Ohio Research and Development credit has many financial benefits, it isn’t refundable. Even if it exceeds the amount of taxes owed, a business cannot receive a cash refund; instead, it can only be used to lower the tax liability through the carryforward provision.
Ohio Qualifying Research ExpendituresÂ
Some of the qualified expenses that you can claim are:
Wages
Qualifying expenses in regard to wages must be given to staff members who are actively involved in the research and development project that you’re claiming on the tax credit. These wages are subsidized because they encourage companies to employ and keep qualified researchers.
Supplies
The cost of supplies used to carry out qualifying research is also recognized as a qualifying expense. This generally includes material goods like lab supplies, material used, and other essential resources that are used up or consumed by the research process. However, this wouldn’t count for things not used specifically for research, such as company headquarters or payment software systems.
Contract Research Expenses
The research and development credit rules in Ohio also apply to expenses for contracted research. Payments to academic institutions, research centers, or governmental agencies will be able to be a qualified research expense as long as the institutions are contracted for the same project.
This allows research initiatives to be expanded and improved through contract expenses, garnering more resources, creating more noteworthy breakthroughs and developments.
Interaction with the Research and Development Investment Loan Program
Businesses that invest in research and development are also a key audience for Ohio’s Research and Development Investment Loan Program (RDILP). This program provides low-interest loans to qualified companies and often acts as a vital source of funding for research and development projects.
This investment program has a very strong focus on creating jobs for the state, which is why businesses must describe how their research projects will result in the creation of new jobs or the preservation of current ones within the state in order to be eligible for financing. The goal is to produce high-quality, long-term jobs that will boost local economies.
Permissible project costs related to research and development are covered by the RDILP, in a very similar fashion to the Ohios research and development tax initiatives.
The lending conditions of the program are meant to be very useful to the researching firm, with extremely competitive interest rates and payback plans that are part of the budgets of the participating firm.
How to Claim the Ohio R&D Tax Credits?
It can be tough navigating the complex application process of claiming the R&D tax credit without having a certified public accountant on hand.
If you’re unsure about whether your research falls under any of the qualifications listed above, having a professional on hand will help you stay in compliance as well as giving your more individualized assistance with any needed paperwork.
Finding and recording all of the qualified research expenses that you wish to claim is the first step, which is why it’s best to stay organized throughout your research project. These fall into the three previously mentioned categories of wages, supplies, and contracted research.
The next step is to determine the credit amount after the qualified research expenses have been determined. After adding these up, you can calculate your base amount based on past spending levels. After taking everything above this number and multiplying it by 7%, you should have the amount of your credit.
There isn’t a specific application or pre-approval procedure, which is in sharp contrast to other states such as Oregon or New York. However, this doesn’t mean that it requires any less organization and documentation. The credit is actually claimed on the business’s Ohio state tax return, where it is included as its own separate schedule.
Along with the schedules and forms, companies are required to submit and deduct the credit from their Commercial Activity Tax. This means that you will have to provide comprehensive information about the credit consumption on the same return that you will use to pay your Commercial Activity Tax.
Before submitting the state credit, filling out the federal form 6765 credit for increasing research activities is another step that is necessary to ensure that you get the full benefit of your tax return.
Next Steps
Claiming the R&D tax credit involves several complicated steps, including identifying and documenting research expenses that may qualify, accurately reporting the credit on tax returns, and ensuring that it is used properly against the Commercial Activity Tax liability.
If you’re looking to get the most out of your expenses, hiring one of our qualified CPAs is the best way to make sure that your application process goes smoothly. Our experts are always eager to help and will help you unlock the full potential of your state credit.
FAQs
What is the R&D sales tax exemption in Ohio?
Businesses that conduct research and development in Ohio do not have to pay sales tax on items that are related to the research that they are performing. This is the research and development tax exemption and comprises of personal property, including computers, software, testing apparatuses, and lab equipment.
What are Ohio tax exemptions?
In order to assist Ohio businesses, individuals, and even certain industries, Ohio provides a large amount of tax exemptions that can lower overall tax burdens and foster economic expansion. There are important tax exemptions to real estate for charitable institutions such as churches, and small businesses, and for industries that are agriculture and technology-based.