Free money! Get your free money!

That’s essentially what the R&D tax credit is for startups.

In today’s blog, we’re going to discuss how the R&D Tax Credit works for startups, how much you can claim, and whether or not your company is eligible.

Let’s dive in!

The R&D Tax Credit is a tax incentive for growing companies that allows you to claim a percentage of each employee’s salary – back against your payroll taxes – as long as their work relates to research and development.

The often-missed tax credit was passed to stimulate innovation and development among companies in the United States.

The percentage you can claim will depend on the employee and how much time they are spending on R&D, however we can look at a few examples:

If an engineer is spending 75% of their working time on research, then 75% of their payroll can be claimed as a credit.

Conversely, if the receptionist only spends 5% of their working time on R&D tasks, only 5% of their salary can be claimed.

A startup accountant is the best person to help you formulate the exact amounts for each employee.

The tax credit is used to reduce the amount of payroll taxes you owe – by up to $250,000.

A good rule of thumb is 10% of your R&D costs.

So, for example, let’s say you spend $2.5M on research and development this year. The credit will offset $250,000 of your payroll taxes.

Pretty great, right?

1. It expires!

If you don’t claim the R&D tax credit in a given year, you lose out on the money you’re owed.

2. It has a revenue cap

If your startup makes more than $5M in revenue in the taxable year, you cannot claim the R&D Tax Credit.

3. There is a time limit

After 5 years of revenue, a startup can no longer claim the credit.

4. It’s often forgotten!

The R&D Tax Credit is a commonly missed tax deduction among even the most experienced accountant. Find a CPA who is well versed in the tax credit as it can save you hundreds of thousands of dollars each year.

5. It’s not just for startups

The tax credit is applicable for companies in other industries that can prove innovation or research, such as construction.

6. You don’t have to be profitable

Historically, startups had to be revenue-generating in order to claim the tax credit however, not any more. You can reduce your burn rate up to $250,000.

7. In 2022, more documentation is needed

This year, the IRS is requiring additional documentation from startups that claim the R&D tax credit. Work with your accountant to meet the new criteria.

The best person to guarantee that your startup is eligible for the R&D Tax Credit is a good accountant.

If you do not currently have a startup CPA, you can book a free consultation with one of our experts here.

In general, your company must be creating something new, and your R&D should be:

• Specific: no mindless tinkering allowed. The project must be defined.
• Eliminate uncertainty: must be contributing real scientific advancement, not just proving existing knowledge.
• Experimental: either have a scientific method or trial and error process.
  
• Technical: the work must be grounded in the hard sciences like biology or engineering.

Additionally, in order to be eligible for the R&D Tax Credit in 2022, you must be able to show the following:

(The following are words from the IRS, not us!)

• Identify all the business components to which the research credit claim relates for that year.
• For each business component, identify all research activities performed and name the individuals who performed each research activity, as well as the information each individual sought to discover.
• Provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year.

The best time? Yesterday.

The next best time? Now!!

It’s important to work with an accountant long before tax season to ensure that you’re making the most out of the R&D Tax Credit. 

Remember, there is up to $250,000 at stake if utilized correctly!

If you do not currently work with a tech accountant you trust, you can schedule a 15-minute – completely free! – consultation with one of our experts.

BOOK NOW!

We’d love to help answer any questions you have.

Until next time!