For businesses investing in research and development (R&D), the R&D Tax Incentive (R&DTI) provides a vital source of funding. The rebate can help drive further innovation, improve cash flow, and strengthen your balance sheet. But once you have claimed the rebate, how do you record it properly in your accounts?
Many founders and finance teams find this area confusing. Is the R&D tax credit treated as income or an offset? How should you account for it in your profit and loss statement or balance sheet? And how do you ensure consistency so that stakeholders, investors, and auditors can clearly understand your financial position?
In this blog, we will break down how to record the R&D tax credit in accounts clearly and correctly. This is not tax advice. It will help you understand the principles so that you can work confidently with your accountant or finance team.
What Is the R&D Tax Credit?
The R&D Tax Incentive is a government programme that offers a tax offset to eligible businesses conducting eligible R&D activities in Australia.
For most small and medium businesses, this takes the form of a refundable tax offset. This means that once you lodge your company tax return and claim eligible R&D expenditure, the government pays a cash rebate back to your business.
For eligible entities engaging in core R&D activities, this rebate can be significant, often representing up to 43.5% of eligible R&D spending for smaller companies. It provides a powerful incentive to invest in new products, processes, or technologies, and aligns with broader development R&D tax incentives.
The rebate arrives as a lump sum after tax lodgement. While it is a cash benefit, it also has accounting standards implications. Recording it accurately in your accounts is key to ensuring transparency and maintaining the integrity of your financial statements.
When Should You Recognise the R&D Tax Credit?
One of the first questions businesses face is when they should recognise the R&D tax credit in their accounts.
Timing is an important factor. You should only recognise the R&D tax credit when both of the following are true:
- You have reasonable assurance that you will receive the rebate
- You can reliably measure the amount of the rebate
For most companies, this point is reached when the R&D claim is prepared and lodged with the Australian Taxation Office (ATO), and the rebate is considered probable. This typically occurs around the time of year-end tax lodgement, often at the close of relevant income years.
You should not record the R&D tax credit earlier in the financial year unless you have prepared the claim and have a high degree of certainty regarding both eligibility and amount.
How to Record the R&D Tax Credit in the P&L
Once you recognise the R&D tax credit, it is typically recorded as other income in your profit and loss (P&L) statement.
This is because the rebate is a government incentive, not a direct reduction of your R&D expenses. Recording it as other income ensures your R&D expenditure remains fully visible, which is important for internal analysis, external reporting, and funding discussions.
For example, if your company spent $200,000 on eligible R&D and received a $87,000 rebate, you would:
- Leave the full $200,000 of R&D expense in your P&L
- Record $87,000 in other income (R&D Tax Incentive)
This approach prevents confusion. Investors, lenders, and auditors can clearly see both your level of R&D investment and the government support you have received from claiming the R&D offset.
How to Record the R&D Tax Credit on the Balance Sheet
Before you receive the rebate, but once it is reasonably assured, you may record it as a current receivable on your balance sheet.
This typically occurs once your R&D claim is lodged and you are awaiting payment from the ATO.
When the rebate is eventually received, you remove the receivable from your balance sheet and record the cash in your bank account.
This two-step process ensures your balance sheet reflects the timing of the transaction correctly. It also gives a clear view of both your cash position and any receivables associated with your R&D claim.
Why Consistent Treatment Matters
One of the most important principles in accounting standards is consistency.
Whichever method and timing you choose for recognising the R&D tax credit, you should apply it consistently from year to year. This is particularly important if your business is:
- Seeking investment
- Subject to external audit
- Reporting to a board or shareholders
Consistency ensures your financial reports remain comparable over time and builds trust with your stakeholders.
It is also good practice to disclose your R&D tax credit accounting policy in your financial statement notes. This provides transparency and helps external parties understand your approach.
What Not to Do
A few common mistakes to avoid:
- Do not net off your R&D expenses against the rebate in your P&L. This can obscure the true level of R&D investment.
- Do not record the rebate as a reduction in income tax payable. The R&D Tax Incentive is a separate government grant, not a conventional tax credit.
- Do not recognise the rebate too early. Wait until you have reasonable assurance of eligibility and amount.
Sticking to best practice accounting treatment ensures your financial reports remain clear and accurate.
How R&D Finance Affects Your Accounting
If you use R&D finance, for example, a loan from Rocking Horse that gives you early access to your expected rebate, your accounting should also reflect this.
When you receive the R&D finance loan, you record it as a liability on your balance sheet. This loan remains in place until you repay it from the proceeds of your R&D rebate.
When you receive the rebate from the government, you:
- Record the rebate as other income in your P&L (as usual)
- Use the rebate cash to repay your R&D finance loan, clearing the liability from your balance sheet
This approach keeps both the loan and the rebate clearly represented in your accounts and avoids any risk of double-counting.
R&D finance is a useful tool for improving cash flow while waiting for your rebate. Just be sure to account for the loan accurately and transparently.
Practical Tips for Managing R&D Tax Credit Accounting
Here are a few final tips to help you manage this process smoothly:
- Work closely with your accountant when preparing your R&D claim and year-end financial statements.
- Keep clear documentation of your R&D spending and rebate calculation.
- Apply a consistent approach each year to both recognition timing and classification.
- Be transparent in your disclosures so that external users of your accounts can understand your treatment.
- If using R&D finance, account for both the loan and the rebate carefully to avoid confusion.
Getting this right not only ensures compliance. It also helps you present a clear and professional financial picture to potential investors, lenders, and other stakeholders.
Unlock the Full Value of Your R&D Investment
Recording your R&D tax credit correctly in your accounts is an important part of maximising its value. It gives you transparency, strengthens your financial reporting, and ensures you can confidently tell your company’s story to investors and partners.
If you want to go one step further and unlock part of your rebate early to improve cash flow, R&D finance could be the right solution.
At Rocking Horse, we help innovative businesses access flexible R&D finance based on their accrued R&D spend. This enables you to put your rebate to work sooner, without waiting for the government payment cycle.
To learn more about how R&D finance can support your growth plans and improve your financial flexibility, get in touch with Rocking Horse today.