Research & Development Tax Credit for Startups
Historically, the R&D tax credit served as a significant and immediate cash source for profitable companies paying income taxes, offering a dollar-for-dollar tax liability reduction for each identified R&D tax credit.
But what if you’re a start-up not paying income taxes yet?
The Protecting Americans from Tax Hikes (PATH) Act of 2015 introduced new, game-changing legislation for eligible small businesses, expanding the potential R&D benefit to businesses in start-up mode that are not paying income taxes yet.
Startups often miss out on R&D tax credits due to assuming they haven't grown or grossed enough to qualify. Effective January 2016, qualified small businesses like yours can use the innovation tax credits to offset the FICA employer portion of the startup payroll taxes, annually, up to $500,000. This new component of the federal research and development tax credit was enacted to directly support startups that are not paying income taxes yet
It's a no-brainer that these innovation tax credit benefits can directly impact your company's cash flow and overall profitability. The problem is that most startups are either unaware of the tax credit's availability to them, how to qualify for the credits, or how to claim them.
Historically, you could only use R&D tax credits to offset income tax, which generally excluded pre-revenue startups. With this new provision, these pre-revenue startups now qualify.
We have found at Acena that too few payroll startups are taking advantage of these significant benefits. Our sole purpose is to create awareness around government sponsored tax incentives like the R&D tax credit.
Timing Matters for Receiving the Credit Benefits:
You should know that the payroll tax offset is available on a quarterly basis beginning in the first quarter, after filing your federal income tax return.
If you file your 2022 tax return in the second quarter of 2023, you can apply your payroll tax offset on your Q3 Form 941.
- Less than $5 million in gross receipts
- Gross receipts for 5 years or less
Depending on your company's size and activities, the payroll tax election can offer significant benefits. Here is an example of a qualifying start-up company:
$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
Ready to See If You Qualify?
As a nationally recognized specialty tax credit authority, we can help you determine your eligibility and how to claim the available R&D tax credits. Fill out the form below to check eligibility.
Acena, a specialist in the R&D law, bridges the gap between the qualified activities and the associated costs.