Launching a startup organization enables business owners to capitalize on a wide range of tax incentives. However, startup businesses that conduct qualifying research activities can also tap into the benefits of a lucrative but often underutilized tax vehicle to help fuel their operations: the R&D tax credit.
What to Know About the R&D Tax Credit
The research and development tax credit was first passed into law in 1981. Four decades and over 40 participating industries later, this dollar-for-dollar tax vehicle is still often not claimed by eligible organizations of every size and scope. Larger companies may not know about the benefit or assume their operations don’t qualify under current legislation. Others believe they don’t have the infrastructure needed to identify eligible activities and develop the necessary documentation to validate their claims.
Bigger enterprises aren’t the only organizations failing to claim earned R&D tax credits. Missing out on the R&D tax credit is especially common for startup businesses. Many newer enterprises assume that they aren’t big enough, don’t make enough, or haven’t been in business long enough to take advantage of the credit’s accessibility and instant bottom-line boost.
Fortunately, the Protecting Americans from Tax Hikes Act of 2015 has completely changed the tax landscape for small to midsize businesses with operations that qualify as research and development activities. Previous iterations of Section 41 tax law did prohibit smaller, unprofitable organizations from claiming the benefit. However, effective January 2016, new regulations stated that small businesses could elect to use the innovation tax credits to offset the FICA employer portion of the payroll taxes, annually, up to $250,000.
Is Your Startup Eligible to Claim the R&D Tax Benefit This Year?
Understanding the details of using the research and development tax credit can help startup organizations recognize how to best leverage the credits in their operations. To qualify for the credit, a startup business must show less than $5 million in gross receipts for 2020. Additionally, the organization must have gross receipts for five years or fewer.
The annual innovation tax credit limit is $250,000. Depending on company size and activity, it can offer qualifying businesses up to:
- $700,000 for 10 employees/payroll
- $70,000 for R&D credits identified
- $44,000 for FICA refund
- $26,000 for R&D credit carryover
These benefits can directly impact a startup’s cash flow and overall profitability.
Timing Matters With the Research & Development Tax Credit
As with most tax vehicles, timing matters with the research and development tax credit. Startup business owners should know that the payroll tax is available every quarter, beginning in the first quarter after filing your federal tax return. Additionally, it’s vital to know businesses filing taxes after March 31 will have to wait until at least October to reduce payroll taxes. However, entrepreneurs filing before March 31 can apply for the payroll tax offset when filing the 941 at the end of July.
Is Your Startup Eligible for the Innovation Tax Credit?
Acena Consulting’s team of R&D tax professionals can help your startup claim the credit and develop supporting documentation to protect your organization in the event of an audit. Contact us today to learn more.