Federal R&D tax credits can be used by startups specifically to offset up to $500k of payroll tax liability for up to 5 years in certain circumstances – as long as the firm regularly commits resources to developing and improving products and services. If your business has been founded in the past 5 years and has less than $5 million in revenue, you may be eligible.
Even small companies doing business for a number of years can benefit from qualified, professional consultation for acquiring R&D tax credits for qualified research activities and expenditures.
What Startups or Small Businesses qualify for R&D tax relief?
Nearly any company that creates or improves products or processes may qualify for some R&D-related tax relief. The key is whether your firm undergoes activities or has related expenses that generally qualify for R&D tax credits and specifically meets the qualifications of the IRS’ four-part test.
In general:
- Is your company designing or developing a new product or process in order to improve quality, expand function, or add reliability?
- Do your R&D activities adhere to principles of the sciences of engineering, physics, biology, or computer science?
- Is there some uncertainty involved in the development of the product or process that needs to be demystified before offering it to the public?
- Has the R&D process included alternative solutions to any uncertainties in order to find the best answer?
Examples of Qualifying R&D Expenses for Startups & Small Businesses
There are many possible examples of expenses a small business or startup may incur in effort to develop or improve a product or service that can qualify for R&D Tax credits, given the right conditions. These qualified research expenditures (QRE’s) can include:
- Wages paid to employees for working on research
- Third party costs for work done by other companies on your behalf
- Cost of supplies used during the research process
- Cost of leasing computers and cloud storage spaces
The Basics: How to claim R&D Tax credits as a startup or SMB
Besides contacting an R&D tax credit expert to be sure you’re getting the biggest credit possible, here are the basic steps:
- Study & understand your company’s R&D processes and their relevant financials
- Collect the needed documentation, complete the forms that indicate the total expenses
- Fill out form 6765 and submit it with the business’s federal income tax return
Documentation Needed
Certain paperwork needs to be retained and available in order to start the R&D tax credit application process, including:
- Payroll records for employees involved in R&D
- Contracts and invoices for 3rd parties involved in your R&D
- Expenses, receipts and accounting for supplies and equipment used in the R&D process
- Designs, blueprints, patents, prototypes related to the research
- Notes from meetings and presentations re: R&D research
- Amendment memos stating required items of information.
IRS form 6765 – Credit for Increasing Research Activities
IRS form 6765 helps taxpayers claim the credit for increases in research activities, elect and figure the payroll tax credit and elect the reduced credit under section 280C. Form options to fill out include:
- Section A: Regular Credit – This is for filling out the Regular credit if the taxpayer has decided to claim the credit using this calculation method.
- Section B: Alternative simplified credit – This is for filling out the ASC credit if the taxpayer has decided to claim the credit using this calculation method.
- Section C: Current Year credit – This is the method to apportion the credit to the relevant shareholders or individuals entitled to the credit.
- Section D: Qualified Small Business Payroll Tax Election & Payroll Tax Credit – This is an election that the client checks off and makes to inform the IRS they will be using the credit to offset future payroll tax bills.
Contact the R&D specialists at Ayming USA for R&D tax credit help
Getting your startup off on the right foot or running a small business comes with a range of pitfalls, but you wouldn’t be doing it without also seeing the opportunity among the risks. Our team of R&D Tax Credit experts are here to help you get things off the ground and make sure your finances are running smoothly, with quality insights to save on business expenses. Contact our team today to get the most out of tax credit offerings for your small business or startup.
