R&D Tax Credit Calculator

First, what is an R&D tax credit? When you spend a lot of money on true R&D, your engineers are building something unique and novel, you can capture a small percentage, about 5 or 10%, of that spend into credit. Today’s R&D tax credit can be used to offset payroll costs that even unprofitable startups incur, although this was not always the case (read on to learn more about the history of the incentive). It’s a nice policy designed to encourage companies to spend money on R&D and move the ball forward in technology.

In the past, R&D tax credits were not able to be used immediately. R&D tax credits have been around for a long time, but in the past, you could do an R&D tax credit, but you couldn’t use it until you were profitable. For most startups, they don’t hit profitability until about five to ten years in. Or they may even be acquired before hitting profitability. It became this thing where it’s a low ROI thing for startups. The feeling was, “why would I spend precious dollars now for some benefit that I’ll maybe get 5 to 10 years from now?” Because of this, many companies either did a placeholder or they just wouldn’t file it.

A few years ago, the tax policy changed. Congress, the Treasury, and the IRS got together a few years ago and said, “how can we incentivize more R&D expenditures in our economy?” What they realized was that startups, one of the biggest innovation engines in the economy, were not taking advantage of the R&D tax credit. They realized they needed to make it more applicable and ROI-positive for them immediately. Once they looked around and they realized that pretty much every startup that was doing R&D was paying payroll taxes, they realized they could let startups apply for the credit against their payroll taxes, and that made them ROI positive immediately. Use the Kruze R&D tax credit calculator to estimate how much money your startup could save using this valuable incentive. Kruze has helped hundreds of companies save millions of dollars - this year our clients are collectively saving over $10 million. Take advantage of this government program! 

It saves You direct $$$ NOW!!! The Treasury actually sends a check, or your payroll provider decreases your payroll taxes, so you save money now. For the year ended 2021, you can save up to $250,000, and for the tax year 2023 the amount is increased to $500,000! 

Use our R&D tax credit calculator - above - to estimate how much of this valuable government incentive your startup can get. 

Section 382 is a part of the IRS code that the IRS created 20 or 30 years ago to try to limit how corporations could use their net operating losses to reduce their profits.

This is a difficult calculation, and we do not recommend you try to do a Section 382 calculation on your own. And startups really ought to work with a CPA who knows early-stage businesses, because part of the calculation involves looking at your company’s capitalization table. Unless your accountant works with venture-backed companies, they are going to have problems applying Section 382 to your VC backed cap table!

At a high level, there are 3 items or “triggers” to Section 382.

If you become profitable. You are going to want to start using your Net Operating Losses (NOLs) - so contact us or a CPA who knows early-stage companies.

If you are getting acquired. If a big company is buying your business, they are going to want to use those NOLs, and those NOLs have real value. You are going to want to capture those, so again, get a good accountant to help you. On average one to three of our clients are acquired each and every month, so we know how to negotiate with public company tax teams!

If you are liquidating some of your assets, you probably have valuable NOLs.

Watch the video to learn more.

Unfortunately, not every company is eligible. You must be creating something new, and by new I mean pass the IRS’ 4 Part Test. Your R&D must be:

• Specific: no mindless tinkering allowed. The project must be defined.
• Eliminate uncertainty: must be contributing real scientific advancement, not just proving existing knowledge.
• Experimental: either have a scientific method or trial and error process.
• Technical: the work must be grounded in the hard sciences like biology or engineering.

Yes. Here are a few:

• Research after commercial production.
• Adaptation of existing business components.
• Duplication of existing business component.
• Reverse Engineering.
• Surveys & studies.
• Computer software for internal use.
• Foreign research.
• Research in the Social Sciences, Arts, Humanities, etc. Funded research.

Your startup must have qualifying R&D expenses (see definition below). Your business must be new; only startups that have generated revenue for 5 years or less can claim the new tax credit. If you had receipts prior to 2012, then you’re ineligible. Your company must have less than $5 million in revenue in 2018 and each subsequent year that you claim the payroll offset.

What goes into the calculation of an R&D expense, for the tax credit calculation purposes? And the answer is there are four main categories.

The first of which is wages. And this is where you’re going to capture a lot of your value. But keep in mind you can only do this for people who are engaged in R&D type activities. So usually this is your engineers.

Next up are your subcontractors. But again, only those are engaged in R&D and only the ones that are domestic.

Next up we have supplies, this is your nuts bolts all of the hardware that kind of goes into whatever you’re developing. You can absolutely include that in the R&D tax credit study.

Last but not least, but we rarely see this computer leases and rentals.

Follow these steps:

1. File the R&D tax credit on Form 6765 (Credit for Increasing Research Activities) which is a part of your 2020 annual corporate form 1120 (US Corporation Income Tax Return).
2. Claim your R&D tax credit on payroll tax form 941 (Employer’s Quarterly Federal Tax Return); you’ll need to work with your payroll processor to make this happen. We love working with Gusto, but just about every major payroll processor should be able to help.

In early 2022, after you’ve closed out your 2021 books. Work with your CPA on an R&D tax credit study: once you’ve determined what your tax credit will be, add it to your 2021 annual corporate form 1120 and file the return. In the quarter following your 1120 filing, you can start applying those tax credits to your payroll taxes.

For example, if you file your Form 1120 by March 15th, the first payroll tax offset you would receive is for Q2 2022.

~10% of eligible R&D costs, up to $250,000 per year, for 5 years. This amount doubles for the tax year 2023 to $500,000. Our average client saves between $50,000 to $60,000, but we estimate that about 2.5% of our clients will get over $250,000 for the tax year 2023 thanks to the Inflation Reduction Act. 

You can save about 10 percent of your eligible R&D costs up to two hundred and fifty thousand dollars per year for up to five years. So, if you have about 2.5 million dollars in engineering R&D expenses for last year you can get close to a quarter of a million. And the amount is doubled thanks to the Inflation Reduction Act of 2022 for the tax year 2023 (which you will file for in 2024). Use our R&D tax credit calculator above to estimate how could save. 

Many young companies with annual sales of less than $5 million can apply up to $250,000 of their research and development (R&D) credit to reduce their payroll tax liability. This amount doubles for tax year 2023 thanks fo the Inflation Reduction Act. This means that many unprofitable, young companies can cut their burn up to a quarter of a million dollars per year. This replaces the older rules that did not allow loss making businesses (i.e. most startups) from using these offsets until they generated an income tax liability (i.e. a profit!)

Your company should work with a qualified expert like Kruze to make sure that your business is eligible, and to conduct a solid study that only uses appropriate expenses that the IRS will agree with. And use our calculator to estimate your credit. 

Yes. Your company does not have to be generating profits or positive net income to claim the payroll tax offset offered by the Research & Development credit. This is a very valuable, ROI-positive activity than an unprofitable startup can do to reduce their burn rate.