R&D Tax Credit
R&D Tax Credit
Helping Startup Companies With R&D Tax Credit
If you recently started a business, you may be worried about how you’re going to develop new and innovative products, pay an entire team of qualified individuals and pay your startup taxes all on your tight to non-existent budget. You’re not the only one. Starting a business is a costly endeavor, and without proper planning and help, many startups go defunct before they even have a chance to turn a profit. Fortunately, the government realized this and encouraged the IRS to revise its stance on the research and development tax credit.
What is the R&D Credit?
The R&D was first conceived in the 1980s as a means of helping companies offset the costs of their experimentation and development efforts. However, upon its conception, the tax credit only applied to companies that were paying federal income taxes and that could prove that their efforts were profitable. Startups that were not yet profitable—and therefore, that weren’t paying federal income taxes—were able to claim R&D tax credits, but they wouldn’t count toward anything until their returns showed tax authorities that their innovative efforts were finally paying off. Thanks to the Protecting Americans from Tax Hikes (PATH) Act, however, that has all changed.
Startups Can Now Use R&D to Offset Payroll Taxes
As of this year, startups can apply the R&D to their payroll taxes as well as their federal income taxes. That being said, even if they don’t yet pay income taxes, they can still receive credit via their payroll taxes.
Companies that qualify must have less than $5 million in gross receipts and cannot have any gross receipts for any taxable year five years prior to the current taxable year. However, the maximum benefit is tremendous; eligible companies can now claim up to $250,000 against payroll taxes. For companies with a large team of scientists, developers and engineers, the credit is a game changer. Over a five-year span, new businesses have the potential to claim a maximum total of $1.25 million in total credits. For many companies, savings could total anywhere between 6 and 14 percent of their eligible research and development costs.
What Companies Are Eligible for the R&D Tax Credit?
The R&D credit is available to companies that invest time and money into producing innovative products, improving existing products, hiring scientists, engineers or designers and developing innovating processes, prototypes or software. If your business meets any of the above criteria, you may be eligible for this game-changing startup tax savings.
What Activities Qualify?
Research and development activities that qualify must meet the IRS’s four-part test:
- The company can prove that they actively sought to remove any uncertainty regarding the product or process’s development or improvement.
- The company experimented, evaluated alternative solutions and utilized a systematic process of trial and error to remove any uncertainty regarding the product or process.
- The company used recognized sciences such as physics, biology, chemistry, computer science or engineering to perform its experimentation.
- The overall goal of the activity is to create or improve upon a process or product in order to increase usability, function, quality or reliability.
Eligible R&D Costs
In order to be eligible for the tax credit, your expenses must fall into one of the following four categories:
- Supplies actually used in the experimentation and development process (general administrative supplies are not eligible).
- The cost of renting or leasing a space or a computer or other essential piece(s) of equipment.
- The costs associated with contract research.
- Wages offered to employees who offered direct support or supervision throughout the R&D process.
The R&D tax credit is extremely beneficial to anyone involved in the research and development of any new and innovative products or processes, and thanks to the PATH Act, small businesses can now claim the credit on their payroll taxes. Now, whether or not your efforts are profitable, your team of scientists and engineers can continue to innovate until you develop something great.