Maximizing R&D Credits for Start-Up Companies
The R&D Tax Credit has a long history, it was originally introduced back in 1981, and over the years it has been a very successful and beneficial incentive to many companies. Traditionally, however, the R&D Credit was only beneficial to larger, more established organizations with income tax liability. Thankfully, this all changed with the PATH Act of 2015. Starting in 2017, a qualified start-up can elect to use the credit against the employer portion of social security taxes, instead of just against their income tax liability. This opportunity provides an immediate cash benefit back to the company.
How the Payroll Tax Offset Works
To qualify for the payroll tax offset, a company must be considered a Qualified Small Business (QSB). This means the company has less than $5 million in current gross receipts and is also basically be less than 5 years old (technically, does not have gross receipts or revenue more than 5 years previously). As a general rule of thumb, the gross credit typically equals about 10% of the total qualified development expenses. As an example, a company that is spending $300,000 on qualified development should have about a $30,000 federal credit, which can be used against the employer portion of social security taxes (if eligible).
To claim the credit, form 6765 gets filed with your tax return and you make the election to apply all or a portion of the credit towards offsetting the payroll tax on this form. You can begin applying the R&D credit against payroll taxes in the quarter following the quarter in which you file your tax return making the election.
Do your Expenses Qualify for the Credit?
Any company incurring expenses in the design or development of new products, processes, or software applications can potentially be eligible for the R&D Tax Credit. Development can also be for iterative improvements on existing products or processes as well as development of software for internal use, so long as the 4-part test for qualifying from the tax code is met. Tri-Merit has extensive experience with start-ups and small companies. Our representative start-up client industries include software development, manufacturing, brewing, biotech, pharmaceuticals, and several more.
Let us help you maximize your R&D Tax Credit.
Tri-Merit Specialty Tax Services has extensive experience working with start-up and small businesses on the R&D tax credit. Using our proprietary methodology, Tri-Merit can help ensure that you capture and benefit from the most robust and sustainable tax credit available. Contact us today to begin working on your R&D Tax Credit.