Traditionally, these tax credits were calculated and saved up against a Corporation's annual tax forms. For startups that aren't yet profitable, that meant that they would only benefit from these tax credits once they became profitable in future years.
The PATH (Protecting Americans from Tax Hikes) Act of 2015 has changed all of that. Regulators acknowledged that the old R&D tax credits weren't appetizing to founders if it only promised a potential future benefit that may never be realized. And so the R&D tax credit has been revised to give more instant gratification: R&D tax credits generated in 2017 can be used to offset payroll taxes come mid-2018, and R&D tax credits generated in 2018 can be used to reduce payroll taxes in 2019.
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 15% of the anticipated captured credit amount with a minimum fee of $2,000.
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.
Unprofitable startups can reduce their burn rate up to $250,000 per year with an R&D tax credit study. Take advantage of the startup incentives set in place by the US government and help your startup reduce your payroll tax burden!
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, and that credit can be used to offset your taxes in the future. It’s a nice tax policy designed to incent 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.
However, then the government, the Treasury, and the IRS got together a few years ago and said, “how can we incentivize more R&D expenditures in our economy?”
They wanted to keep improving on technology and incentivize companies to do this?
So 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 tax credit against their payroll taxes, and that made them ROI positive immediately..
Just to give you some flavor, Kruze did three and a half million dollars of R&D tax credits $3.5 million three years ago, $4.5 million last year, and we are going to do over $6 million this year. If you just think about those numbers, that's $6 million more that startups who are just Kruze clients were able to spend on their R&D. It extended their burn and supplemented the VC equity that they took.
The tax policy worked and we are seeing companies spend a lot more and aggressively and build their technology.
It saves You direct $$$ NOW!!! Up to $250,000 per year for up to 5 years!
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.
For Startup R&D Tax Credit analysis and preparation, Kruze Consulting charges a fixed fee of 15% of the anticipated captured credit amount with a minimum fee of $2,000.
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:
Yes. Here are a few:
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:
In early 2021, after you've closed out your 2020 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 2020 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 2021.
~10% of eligible R&D costs, up to $250,000 per year, for 5 years.
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 that full credit.
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 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 offets 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.
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