Four Reasons Startups Miss Out on the R&D Tax Credit

3 Minute Read
Posted by Randy Eickhoff on Feb 13, 2019 12:14:11 PM

The research and development (R&D) tax credit first launched in the 1980s as a government-driven means to stimulate economic growth and technology advancement in the U.S. However, the original legislation to the innovation tax credit firmly established it as an income tax credit, offering few benefits to pre-revenue startups. That changed in 2015, when the federal government modified the rules and regulations of the R&D tax credit. Since then, early-stage enterprises have also been allowed to officially tap into the potentially significant cash flow opportunities offered through this program.

Are You Missing out on Innovation Tax Credit Benefits?

Despite modified legislation, many qualifying small and startup businesses still fail to claim their R&D tax credits, essentially leaving hard-earned cash on the table. Understanding some of the many reasons why startups fail to capitalize (literally) on the research and development tax credit can ensure you don't miss out on the lucrative incentives this initiative offers. Some common misconceptions include:

Businesses that don't generate revenue don't qualify
Many entrepreneurs still assume that not generating revenue immediately disqualifies from them from claiming R&D tax credits; however, this is not the case. Qualifying organizations in over 40 industries can take the credit as a payroll tax offset (up to $250K each year).

Startups must perform "lab work" to establish program eligibility
Forget about the outdated notion that only companies with scientific labs can leverage the benefits of the R&D tax credit. Many business owners are surprised to learn that the research and innovation program is available to companies in over 40 industries and has been used to cover R&D in a multitude of unlikely verticals including agriculture, cosmetics, and even pet products. Qualifying processes must pass a four-part test to establish eligibility.

The R&D tax credit is just for successful operations and efforts
Most business owners believe they can only leverage the innovation tax credit if their work is successful and ultimately incorporated into the final product. Once again, this is not the case. Startups that spent time and money to test eligible business operations only to realize the efforts didn't work can still qualify for the deduction when they file their taxes.

Claiming this tax credit benefits large enterprises exclusively
Startup executives sometimes think that getting rewarded for investing in innovation is "too good to be true," or assume that just the largest organizations will benefit from the program. The recent legislative changes to the initiative really do level the playing field for companies of every size, allowing startups and industry giants alike to reap the rewards of innovation investment.

Don't let obsolete legislation and preconceived assumptions deter you from claiming qualifying R&D expenses to minimize your corporate tax burden. Acena Consulting partners with businesses of every size to help our clients maximize their earned benefits. Contact us today to learn more.

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Randy Eickhoff

Randy Eickhoff

Acena Consulting President Randy Eickhoff, licensed CPA, has partnered with more than 200 companies during more than 20 years of experience securing tax credits and other government incentives. His corporate partners range from multinational technology firms to smaller, privately held manufacturing, sports, and technology enterprises.