The New and Improved (and Permanent) R&D Tax Credit

Research and Development is a critical component of most early-stage tech companies. It can also be a significant cost center in the beginning days of your startup. To help facilitate continued innovation and development, The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 1981 created what is essentially known as the R&D Tax Credit. The credit allows a dollar-for-dollar reduction of taxes for any qualified R&D expenditures. Examples of qualified expenses are costs associated with testing, design, compatibility, functionality and production.

One catch with the R&D Tax Credit was that it was continually renewed, but with an expiration date. Between 1981 and 2015, the R&D Tax Credit was renewed by Congress almost twenty times. As of 2015, it has now been made permanent, with a few updates to the law as a result:

- Enhances the credit for eligible small businesses ($50 million or less in revenue).  

- Beginning in 2016, qualifying small businesses can now take the credit against alternative minimum tax

- Allows very small businesses (under $5 million revenue) to claim a credit up to $250,000 against some  payroll taxes   

That last point is great news for startups - particularly those that are not currently profitable (and therefore do not have to pay corporate taxes). If your company is paying payroll taxes for your employees, you can now offset some of those payroll taxes with the new enhanced R&D Credit.

The other two points could also mean big things for your business. It’s important to speak with your tax professional, or contact our tax team at EGFS, to discuss how the R&D Tax Credit might apply to your company.

Anjum Tunuli is the Chief Tax Officer for Early Growth Financial Services.

Disclaimer: This article has been written for informational purposes only, and is not intended to provide, and should not be relied on for, tax or accounting advice. You should consult your Early Growth Financial Services tax representative, or your own tax and accounting advisors before beginning your tax work.