A business must be innovating to stay caught up with a competitor. To compete with others, a small business can use R&D to support growth, profitability, marketability, branding, and more. Yet, R&D is expensive. For a small business to conduct its self-funded R&D, there’s no guarantee you will arrive at the result you expect.
In addition, it’s hard economic times right now for businesses. If you’re a novice entrepreneur or small business owner, operational costs have increased and inventory is more expensive. As such, every source of funding or financial assistance is important.
The Scientific Research & Experimental Development (SR&ED) program is designed to help businesses of all shapes and sizes, supporting innovation and research in Canada. SRED provides you with some financial support to chase your creativity. As an entrepreneur, you can use the funding to flesh out ideas and theorize new products or processes. SR&ED supports all types of businesses and a wide range of products or processes, although there is a strict criterion.
Have a little assistance and use SR&ED funding to help innovate within your company’s context. Let’s learn about how SR&ED helps small businesses:
What is the SR&ED program?
The SR&ED program is massive. Every year, more than $3 billion in tax incentives are given out. More than 20,000 claimants are rewarded every year, with approximately 75% of these small businesses. SR&ED helps your business by giving you the same advantage, so many others are already tapping into.
If you qualify for SR&ED support, you can pool deductible SR&ED expenditures and reduce your net income for tax purposes. This can dramatically impact how much taxes a small business must pay and can even be applied to future earnings if you choose.
SR&ED Expenditures
There is a limit on what you can qualify for under the SR&ED criteria but what you claim is fairly expansive.
- Salaries and wages of employees directly engaged in SR&ED work are eligible. All amounts must be paid in the tax year or within 180 days of the tax year-end.
- Overhead costs and related expenditures relating to SR&ED activities can be claimed.
- Contracts used to secure the services of a contractor to perform SR&ED work are eligible.
- Materials bought and used for an SR&ED project are included under expenditures.
- Third-party payments done to contribute to the results of an SR&ED project are included.
Depending on your business type, you can receive non-refundable and refundable investment tax credits (ITCs). Though there is a formula, the total ITCs received are 15-35% of qualified SR&ED expenditures.
SR&ED Funding
How ITCs work in the SR&ED program is that you can reduce income tax payable in the current year, carry them back to past tax returns for up to three years, and carry them forward up to 20 years. It’s up to you to decide how to maximize the benefits of your investment tax credits. For excess ITCs in the current year, you may also be able to opt for a tax refund.
Although there are limits to ITC rates, there is no top limit to SR&ED funding. A small business can pursue innovation and not worry about its costs falling within certain parameters to qualify for these financial resources. While you do not receive a total cost reimbursement, small businesses can benefit greatly from the provincial and federal SR&ED rates.
How to Use SR&ED to Compete with Bigger Businesses
A small business does not have the same financial resources as larger corporations. However, SR&ED funding equalizes things a little bit in terms of innovation. If you have a unique idea, you can test it, trademark it, claim it, and use it to build your brand in the face of bigger, more powerful competition.
As a Canadian-owned and Canadian-based business, it is within the country’s economic interests for you to succeed. Especially if you are delivering a product globally or are interested in expanding to new territories in or outside of Canada, SR&ED provides a financial incentive to allow you to maintain your business work in Canada.
SR&ED has spurred its collection of the industry with SR&ED consultants, SR&ED virtual guides and information sessions, and lots of SR&ED information available online. Filing an SR&ED claim is easy with little assistance, so long as supporting documentation is available and the required forms are filled out correctly.
