The R&D tax incentive is a boon to many businesses, large and small. The tax offset of up to 43.5% allows you to invest in innovation and so gain an edge in your market.
But as more and more businesses claim the innovation rebate, questions arise about the best way to report the rebate in your financial statements. Considering the amount of the R&D Tax Incentive, how you claim this non-refundable tax-offset will have a massive impact on your financial statements. This may be important in particular if you seek further funding through debt or new investors.
The benefit of the R&D Tax Incentive is generally received as a cash back or through a reduction to tax payable. Either way, there are effectively two significantly different ways of recognising it when you present your profitability.
The R&D Tax Incentive as a Government Grant
The first way is recognising the R&D tax offset as a grant. In this case it is a form of income.
Your offset amount would be determined from your R&D expenditure for the year. So claiming the R&D Tax Incentive as a grant would be particularly appropriate if you are claiming R&D on a year by year basis. This treatment actually increases your profit before tax, but also increases your tax expenses and tax rate as disclosed in your financials.
The R&D Tax Incentive as Income Tax
The second means of recognising the R&D Tax Incentive is as a reduction in income tax expense. Since your R&D investment reduces the amount of tax you have to pay, showing the offset as an income tax benefit effectively reduces your income tax expenses. Your net profit after tax increases but your profit before tax stays the same.
There is also the possibility of splitting your presentation so that you recognize 30% of the rebate as tax and 10% as a grant.
How do I determine the best approach for my financial statements?
You need to determine which approach best aligns with the plans of your business. Do you wish to show an increase in your profit before tax? In this case recognizing it as a grant makes the most sense. Do you wish to increase your profit after tax? In this case, you might be better off declaring the R&D Tax Incentive as income tax.
You will need to think about the stakeholders that will review these reports and the purposes for which they are provided.
It is also important to speak with your auditor regarding this treatment to determine whether it will have a material impact on the financials and their audit opinion.
Calibre has a team of accountants, auditors and advisors who are R&D Tax Incentive specialists. We can help you apply and plan for this lucrative rebate, and also help you most effectively declare it in your financials.
Important Disclaimer: Readers should not act solely on the basis of the material on this page. Items herein are general comments only and do not constitute or convey advice. Legislation and proposals of legislation are also subject to constant change. We therefore recommend that formal advice be sought before acting in any of the areas. This news article is issued as a guide to the readers. Calibre Business Advisory Pty Ltd and its associated entities disclaims any losses that may be incurred as a result of the reader undertaking any action based on this article.