R&D TAX CREDIT—WHAT IS IT?
The R&D Tax Credit allows startups who meet certain requirements to use the credit against their federal tax bill and claim up to $250,000 towards FICA for payroll tax savings. The requirements for payroll tax savings include:
- Gross receipts in previous five years of tax returns only
- No more than $5 million in gross receipts in any year
- Not a publicly traded company
WHAT’S THE CATCH?
Only qualified R&D activities are eligible for tax credit, which must pass the IRS’s 4-part test:
-
Permitted Purpose
a. New or Improved Business Component -
Elimination of Uncertainty
a. Uncertainty related to business component -
Process of Experimentation
a. Evaluate one or more alternatives, attempting to resolve uncertainty -
Technological in Nature
a. Activities must rely on;
i. Physical Sciences
ii. Biological Sciences
iii. Engineering
iv. Computer Science
WHAT’S THE HISTORY BEHIND
THE TAX CREDIT AND WHAT’S CHANGED?
The R&D Tax Credit has existed as a temporary year-to-year measure since 1981, requiring congressional approval every few years. However, in 2015, with the passage of the “Protecting Americans from Tax Hikes Act” (PATH), the R&D Tax Credit became permanent. In addition, the credit can now be used to offset payroll taxes (as well as income taxes), which allows even companies with net losses to receive the credit immediately.
THAT’S GREAT, BUT WHAT DO I DO NOW?
Each company is eligible for up to 250% of their average monthly payroll expense, with a salary cap of $100,000 per employee, with a maximum of $10 million.
R&D TAX CALCULATOR
*This calculator is just an estimate and is not an official quote or guarantee.
To fully understand how much you can save please contact us.
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