Are You Leaving Money on the Table? R&D Tax Credits for Startups

One of Startup Tucson's favorite sources for all things startup is the phenomenal duo at Boring Startup Stuff. We agree it is "Kinda like a Harvard MBA sent weekly to your inbox."

This week they are our featured guest post to highlight Research and Experimentation (R&D) Tax Credit that can save startups thousands! Be sure to check out all their content and follow along through their newsletter.


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An Interview with Brian Goodwin

What is the R&D tax credit and how does it apply to my company? The Research and Experimentation (R&D) Tax Credit has been around for over 30 years and aims to promote innovation and jobs within the United States. Traditionally, this credit has been used by larger profitable companies looking to eliminate their overall tax burden, since it is applied dollar for dollar against income tax liabilities. A great example of this is Amazon, who reduced their federal tax bill to nearly zero.  Startups innovate at a very high level, but until the recent PATH Act, they were unable to take advantage of the program. Now early-stage businesses with qualifying expenses can put the credits toward the employer share of Social Security payroll taxes, thereby freeing up cash flow. Which kind of companies are eligible for the R&D tax credit?  Companies just need qualifying R&D activities and expenses. These can differ by industry, but here are a few quick items we look for at a high level:

  • Does the company create or improve a new product process or technology? 

  • Do employees have scientific-based roles (e.g. engineer, mathematician, developer, etc.)?

  • Was there a level of uncertainty in the process?

Startups are eligible for up to $250k per year in credits on R&D-related payroll taxes (~6.2% of wages) if they:

  • Have a total of less than 5 years in revenue (or gross receipts)

  • Have less than $5 million in revenue in the current open year (greater revenue in prior years is allowed) 

One thing to note: income tax credits (if available) must be applied before payroll tax credits. For instance, if a company gets $100k in R&D credits while having an income tax liability of $25k, the credit would be applied to eliminate that first. The remaining $75k would be applied to payroll taxes in the early-stage provision. Why don’t more companies know about this? Is this different from other typical business deductions? Keep reading at BoringStartupStuff.com



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