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Startup R&D Tax Credit Calculator

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R&D Tax Credit Calculator

Estimate your R&D tax credit using our free calculator

Startup R&D Tax Credits

The IRS has a startup R&D tax credit that allows unprofitable startups to decrease their payroll tax liabilities by up to $500,000 after the passage of the Inflation Reduction Act. The tax credit is available to startups that conduct qualified R&D activities within the United States. Kruze clients are collectively saving over $75M using this credit. 

R&D Tax Credits for Startups - What You Need to Know

Scroll down to use the R&D Tax Credits Calculator

There are several important points for startup founders to know about R&D tax credits, how they are calculated and how to claim them.

  1. Even unprofitable startups can likely decrease their burn rate using R&D tax credits - they are offsets to payroll taxes that all companies with payroll in the US pay.
  2. Don’t file your tax return with out the R&D tax credit paperwork (Form 6765)! Once you file your final tax return, you can no longer get the payroll tax offset - so file an extension if your CPA hasn’t completed the R&D forms by the time that your return is ready. And the IRS is requiring major documentation if you file an amended return with a R&D tax credit, so file it right the first time!
  3. The credit is based on “qualified,” domestic research and development spend. Spend outside of the USA doesn’t count, and the definition of qualified work is more complicated than it sounds. Work with an experienced CPA firm to calculate this. The amount is roughly 10% of qualified spend.
  4. R&D credit “puppy mills” often do shoddy work that opens up startups (and their tax preparer) to legal action - watch out for supposed specialists in the R&D credit calculation space; there are numerous examples of the IRS going after all of the clients of these firms when they find evidence of shoddy work. 
  5. The Inflation Reduction Act increased the maximum “cash back” credit startups can get from $250,000 to $500,000. However, we estimate that most startups will get $50,000 to $60,000 - still a great burn rate reduction!

The Kruze Consulting R&D Tax Credit Calculator is designed to estimate your R&D tax credit using Federal Form 6765.

Let Kruze Consulting handle your startup’s R&D Tax Credit analysis and preparation. We charge a fixed fee of 1.5% of the anticipated qualifying expenses with a minimum fee of $1,000. Our clients are saving over $10 million per year!

How to calculate R&D Tax Credit amount 

Again, we strongly advise you to work with a qualified R&D tax credit advisor - a CPA like us - since this is a difficult tax form to fill out, and estimating the amount is difficult. 

Estimating an R&D tax credit

  1. Determine Your Total Qualified Research Expenses (QRE): Sum up all theQRE for the tax year. This should include only the expenses you’ve identified as qualified under the IRS guidelines. This is a great reason to work with an experienced CPA who can help you avoid claiming expenses that don’t count toward the credit - and who can help find expenses that you may not know about that do meet IRS specifications.
  2. Select the Calculation Method: Choose between the Traditional Credit Method and the Alternative Simplified Credit (ASC) method.
    1. Traditional Method: Calculates the credit as 20% of the excess of current year QRE over a base amount. The majority of startups use this method, as it yields the highest credit for most technology companies. 
    2. ASC Method: Provides a 14% credit for QRE that exceed 50% of your average QRE for the three preceding tax years.
  3. Calculate the Base Amount (for Traditional Method):
  4. Determine the excess of current year QRE over this base amount.
  5. Apply the Credit Percentage: For the Traditional Method: Apply 20% to the excess QRE calculated above.
  6. Adjust for the Inflation Reduction Act: For tax year 2023 onwards, the maximum credit limit has increased. Adjust your calculations accordingly.

How much is the R&D tax credit?

The R&D tax credit has increased to $500,000 starting in the tax year ending 2023. The credit amount is roughly calculated as 10% of the qualified expenses - but there are substantial complications so work with a CPA to know how much the exact amount is for your company. Unprofitable startups can use this to offset / get a refund for their Federal Insurance Contributions Act (FICA) Social Security tax (currently 6.2%) as well as the Medicare taxes (currently 1.45%). 

The Inflation Reduction Act and R&D Tax Credits

The Inflation Reduction Act doubles the possible R&D tax credit that a startup can get to half a million dollars. 

We analyzed over 625 startup tax returns and noted that only 2.5% of startups would be eligible for over $250,000 in credits. Of course, this is still a great incentive that startups should take advantage of to reduce their burn rate!

Increased documentation rules

Recently, the IRS is requiring additional documentation from startups that are claiming research and development tax credits. The new requirements include providing more information about the startup’s R&D claim.

Startups will need to identify:

  • The “business components” to which the R&D claim relates
  • All research activities performed for that business component
  • The individuals performing the research
  • The information the research is intended to provide
  • The total qualified research expenses that are being claimed

If the IRS rejects your claim, you may not have the opportunity to “perfect” your claim and you may lose R&D tax credits. It’s important for you to review these requirements with an R&D tax professional so you document them properly.

Caveat: The information on this page intended as general guidance and it doesn’t substitute the need to work with a professional. It’s also a high level overview and is in no way complete. Your company is unique; contact Kruze Consulting.

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Startup R&D Tax Credits FAQs

Why are R&D tax credits now so valuable for startups?

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! 

Why should I have my startup file for the R&D tax credit payroll offset?

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. 

Why should I have my startup file for the R&D tax credit payroll offset?

Section 382

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.

How much does Kruze Consulting charge for R&D tax credit preparation?

For Startup R&D Tax Credit analysis and preparation, Kruze Consulting charges a fixed fee of 1.5% of the anticipated qualifying expenses with a minimum fee of $1,000.

Is my startup eligible for the R&D tax credit payroll offset? What defines research & development?

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.
Is my startup eligible for the R&D tax credit payroll offset? What defines research & development?

Are there any R&D activities that don't qualify?

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.
Are there any R&D activities that don't qualify?

Is my startup eligible for the R&D tax credit payroll offset?

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.

Is my startup eligible for the R&D tax credit payroll offset?

What qualifies as an R&D expense? What goes into the calculation?

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.

How do I claim the R&D tax credit payroll offset?

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.
How do I claim the R&D tax credit payroll offset?

When should I file the R&D tax credit payroll offset?

Early in the year, after you’ve close your books, it’s time to get ready to file for the credit. 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 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.

When should I file the R&D tax credit payroll offset?

How much will my startup really save by implementing the startup R&D tax credit payroll offset?

~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. 

How much will my startup really save by implementing the startup R&D tax credit payroll offset?

How much money can you save with the R&D tax credit?

You can save about 10 percent of your eligible R&D costs up to half a million 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.

How Can Startups Benefit from up to $250K to $500k in R&D Tax Credits and Deductions?

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. 

How Can Startups Benefit from up to $250K to $500k in R&D Tax Credits and Deductions?

Can unprofitable companies claim the 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.

Which states have R&D tax credits for startups?

In addition to the federal credit, many state governments have incentives that dovetail with the federal R&D credit; some of these are helpful to VC-backed startups. Approximately 36 of the states have this credit: Alaska Arizona Arkansas California Connecticut Colorado Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Minnesota Nebraska New Hampshire New Jersey New Mexico New York North Dakota Ohio Pennsylvania Rhode Island South Carolina Texas Utah Vermont Virginia Wisconsin.

Specifically, other R&D tax credits for startups and their investors include:

Another incentive biotechnology companies in California should consider is the California Partial Sales Tax Exemption

What is a R7D tax credit?

A common misspelling of R&D tax credit is “R7D tax credit” - where the “&” is replaced by the “7.” This happens because the number 7 key and the ampersand key are the same on most keyboards (of course, you need to hit shift 7 to get the ampersand). Don’t worry if you’ve made this mistake - we’ve all done it!!

And while you’re here, use our R&D tax credit calculator to estimate your possible savings under this government incentive! 

Do Acquiring Companies Value a Startup's R&D Credits?

The biggest technology companies in the US - Apple, Amazon, Facebook - have very sophisticated tax and finance teams. These teams conduct intense due diligence when they acquire startups - including looking at the R&D credits. Below is a typical question that a big tech company would ask a startup on their due diligence checklist:

Provide an analysis of all tax attributes (e.g., net operating losses, capital losses, built-in losses, R&D credits, etc.), including expiration dates of such attributes and any applicable limitations on the utilization of such carryovers.

One major advantage of working with Kruze is that we have great accountants on staff who are used to answering these types of questions. We wouldn’t expect a startup founder to be able to provide such a detalied analysis - but we can! 


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