Startups, did you know the R&D tax credit can help you offset up to $250,000 in payroll taxes? If you missed out on this benefit last year, don’t worry. There’s still time to claim substantial tax savings. But you have to act fast.
The IRS is allowing qualifying startups and early-stage companies that timely filed a tax return for a tax year 2016 to claim the credit on an amended tax return filed before January 2, 2018. To be eligible to claim the payroll offset through the R&D tax credit, a company must meet the following criteria:
- Have no more than $5M in gross receipts in the taxable year for which the credit is claimed
- Not have gross receipts in years prior to 2012 (i.e., the company must be less than five years old)
The payroll tax offset enables startups and early-stage companies to derive immediate value out of the R&D tax credit. Before 2016, startups with no taxable income could only carry-forward the credit and derive value from it once they became profitable. As of 2016, qualifying small businesses that do not yet have an income tax liability, but have incurred payroll taxes, can use the R&D tax credit to immediately apply up to $250,000 annually against their Social Security tax (OASDI tax) liability.
The amount of the R&D tax credit is based on a company’s eligible research and development costs. The benefit typically ranges between 6% and 9% of the total eligible costs, which include:
- Internal wages paid to employees involved in qualifying R&D activities
- Supplies and materials used in in qualifying R&D activities
- Expenses related to third-parties and contractors hired to conduct R&D activities on behalf of the company
The good news is that it’s not too late for startups to use the R&D tax credit to offset payroll taxes for 2016. However, time is running out to amend your prior-year return with the help of an experienced R&D tax professional. If you want to claim the R&D credit, you will need an analysis of your company’s research and development activities and expenses as well as a complex credit calculation that is based on several factors. A qualified R&D tax professional with an engineering background can help you calculate the credit and substantiate your claim with detailed analysis and documentation.
Startups who have already taken advantage of the payroll tax offset as part of the R&D tax credit on their 2016 tax return should now determine if they are likely to qualify again for 2017 and start planning accordingly to maximize 2017 benefits. Qualifying companies can claim the payroll tax offset through the R&D credit for up to five years.
Startups involved in the development of new products, technology and software should not overlook this opportunity for significant tax savings. Many business owners mistakenly believe that the R&D tax credit applies only to large companies, but that is simply not true. Companies of all sizes can potentially qualify. Projects involving the development of new or improved performance, quality, reliability or functionality for either a product or a process can potentially qualify, resulting in more money left in the hands of entrepreneurs and more opportunities for early-stage companies to invest and grow.
Contact me to learn more about the R&D tax credit and whether your company may qualify.
Louis Guay is a director of R&D tax and cost segregation services in Kaufman Rossin’s Boca Raton, Florida office. With a background in industrial engineering, Louis specializes in helping companies claim the research and development credit and other engineering-based tax incentives. Louis can be reached at email@example.com.