3 Ways to Get the Highest R&D Tax Credit

Startups should always strive to be innovative and affordable. Unfortunately, they don’t always succeed, as a CB Insights survey notes that 29 percent of startups fail because of cash-flow issues. For tech entrepreneurs who want to break into an established industry — or just start a business — research and development (R&D) tax credits are a great way to decrease taxes and increase cash flow.

R&D tax credits provide dollar-for-dollar tax offsets for any company working on new technology, software, products, or formulas. The Protecting Americans from Tax Hikes Act of 2015 made these R&D credits a permanent fixture for entrepreneurs.

Better yet, numerous credits are available to help startups get off the ground. One of the best things startup founders can do is apply for tax credits that provide demonstrable long and short-term value for themselves and their companies.

Why You Should Get Credit (When It’s Due)

R&D tax breaks don’t just lend a hand during the production phase of startup life. The dollar-for-dollar savings make them preferable to tax deductions, which pay back only pennies on the dollar. There are plenty of R&D tax credit choices available, with most depending on your corporate structure.

For an LLC startup leader, the financial windfall of an R&D credit flows through individual owners and counters any personal income tax liability. But what about a C corp? These credits can counterbalance any corporate tax responsibility the company might have.

Startup founders who skip out on these credits because their organizations are pre-revenue or in a loss position are seriously missing out. That line of thinking made sense in the past, but changes to the R&D credit now allow it to be utilized to offset payroll taxes up to $250,000 annually. That cushion can then go toward development, recruitment, retention, and anything else that solidifies your startup’s footing.

How to Make Your Own Breaks

Alliantgroup estimates more than $7.5 billion in federal R&D tax credits are allocated annually. Plenty of pie is available, so almost any tech startup can grab a piece simply by knowing which R&D credits it’s interested in and how to get them.

These three tips can help you reap the rewards of R&D credits:

Print or It Didn’t Happen

Keep updated records to verify your company’s costs and the work it does. Seriously, track everything to avoid mishaps. Some startups tried to claim the R&D tax credit and are later audited by the IRS. Track everything to make sure funds come through and work can continue.

Keep It Local

Be sure to note that these tax credits apply only to domestic research and development. Startups that employ overseas contractors have tried to leverage these breaks, only to be rebuked. Contract workers fall under this category, but they also must work stateside. Tech startups with outsourced labor sometimes have international scopes, so be mindful of this requirement when applying for tax credits.

Save Your Receipts

Any startup with gross receipts predating 2012 is ineligible for these credits. Capital earned via VC funding or bank loans doesn’t count as gross receipts. Review logs that go back five years or fewer to properly assess your R&D tax credit eligibility. It can prevent headaches during the application process.

Don’t let a dearth of cash flow keep your tech startup from reaching its full potential. Gauge whether your startup qualifies for a specific credit, and assess the associated benefits. It’s a break that could be exactly what your startup needs to keep its creative momentum moving forward.

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Written by:
Anjum Tunuli is the chief tax officer at Early Growth Financial Services, a firm that addresses the lack of on-demand financial support available to startups. With more than 12 years of experience working with small- to mid-sized companies and their ownership groups, Tunuli assists EGFS’ clients with tax and regulatory compliance and other valuation concerns. Tunuli draws on innovative thinking to understand the full financial impact of tax planning on his clients’ business operations. Read more tax advice from Anjum.
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