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Early Growth
January 11, 2018
If you spend time on research & development, recent changes to the tax law could give you a big break on your payroll taxes—up to $250,000 a year. That cash could make or break a startup, where cash is king.

If you spend time on research & development, recent changes to the tax law could give you a big break on your payroll taxes—up to $250,000 a year.  That cash could make or break a startup, where cash is king.

We helped our clients save approximately $10 million with the R&D tax credit on 2016 returns.

R&D tax credits

Tax credits give you discounts on federal and state taxes, if you satisfy all of the qualifications. (Not all states have a credit, so check your state’s laws.)

The R&D tax credit has been around since 1981, applying only to income tax, until recently. With changes to the law, the credit can now apply to payroll tax too. Now, early-stage companies who haven’t been profitable don’t have to miss out; they can claim the credit too.

On average, the credit equals 6 to 10 percent of a company’s R&D cost, including, but not limited to wages, supplies, and even contract researchers. The maximum cap annually is $250,000, which means your company could save $1.25 million over five years.

Does my company qualify?

To receive the R&D tax credit, your company must:

  • Have $5 million or less in annualized gross receipts (that includes companies with no declarable income yet)
  • Have 5 years or less of gross receipts
  • Have its R&D evaluated and determined valid

Be prepared to devote some time and resources to the testing process. Getting your R&D evaluated and approved is a four-part process, with each part having extensive regulations and intensive documentation:

  1. Technical uncertainty – What’s being made new or improved?
  2. A process of experimentation – Were alternatives explored? Modeling done?
  3. Be technological in nature – Are you using hard sciences?
  4. Qualified purpose – Are you making or improving a product as it relates to performance, ability, function, or quality? (One caveat: Software and other similar developments that are for internal use only don’t qualify; the work must benefit the public.)

The fields for R&D are varied and popular, and we think lots of our clients will qualify, especially those in these industries: 

  • App development
  • Platform design
  • Cryptocurrency
  • Robotics
  • VR hardware and software
  • Drones
  • Wearables

(A clarifying note: A company that was founded before 2012 can still qualify if it did not generate any gross receipts. For example, a research-intensive firm might have existed for years before generating receipts.)

Getting started

Using this credit will probably increase the chance of an audit, so make sure you enlist a qualified tax advisor to claim this credit correctly. After your company qualifies for the R&D validation, claim the credit on the annual income tax return, then monetize the credit on subsequent quarterly payroll tax returns.

We’ve already helped our clients save millions of dollars, and we’re ready to help you too. Contact us to get the process started!

Still have questions? Email us, and we’ll help.

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Early Growth
January 11, 2018