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One of the best opportunities out there in the tax code is the tax credit.
Rather than a deduction that saves you tax at your marginal rate, a credit is a dollar of tax reduction (or more!) for a dollar spent.
One of the best credits out there is the R&D Tax Credit
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Rather than a deduction that saves you tax at your marginal rate, a credit is a dollar of tax reduction (or more!) for a dollar spent.
One of the best credits out there is the R&D Tax Credit
Thread
The Research and Development Tax Credit was created in the early '80s to incentivize business research in the US.
The credit generally reimburses 10-20% off qualified expenses depending on which state you are in, as most states have their own R&D programs as well.
The credit generally reimburses 10-20% off qualified expenses depending on which state you are in, as most states have their own R&D programs as well.
There are 2 types of eligible expenses for credits - Qualified Research Expenses (QREs) and Business Research Payments (BRPs).
BRPs relate more to nonprofit lab work, and for the goal of being most helpful to SMBs I will focus on QREs in this post.
BRPs relate more to nonprofit lab work, and for the goal of being most helpful to SMBs I will focus on QREs in this post.
There is a 4 part test for an expense to be considered a Qualified Research Expense, and the standard must be met for all 4 parts.
1. Qualified Purpose - expense must create or improve a product, process, software, technique, formula or invention relating to its function, performance, reliability or quality. Also, you must intend to use it in your business, or retain ownership in the project.
2. Technological in Nature - The process of creating and evaluating must rely on "hard sciences" like biology, chemistry, data sciences, and physics. As opposed to "soft sciences" like economics, psychology, etc..
3. Elimination of Uncertainty - There has to be a chance the the development could not work, and there is a risk of loss.
This includes the idea that you are paying folks based on their work, regardless of whether the project succeeds or not.
This includes the idea that you are paying folks based on their work, regardless of whether the project succeeds or not.
4. Process of Experimentation: Fairly straightforward. Company goes through a systematic, iterative process to test outcomes and refine a solution.
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You don't need to reinvent the wheel or win the Nobel prize, but you do need to take something with uncertainty and improve it.
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You don't need to reinvent the wheel or win the Nobel prize, but you do need to take something with uncertainty and improve it.
You are eligible if you make almost anything and improve the process in almost any way. Even if you fail in your pursuit.
This is where it gets muddy and you should seek a qualified consultant (more on that below.) Many projects seem like a no brainer, but are excluded.
This is where it gets muddy and you should seek a qualified consultant (more on that below.) Many projects seem like a no brainer, but are excluded.
Certain exclusions:
- Market research
- Development after commercial production
- Foreign development
- Software for internal use
- Reverse engineering
- Grant funded research, Humanities research
Huge benefactors of these credits are companies engineering software and products
- Market research
- Development after commercial production
- Foreign development
- Software for internal use
- Reverse engineering
- Grant funded research, Humanities research
Huge benefactors of these credits are companies engineering software and products
Qualifying expenses for the credit include -
- Salaries
- Supplies
- Computer, equipment, server costs
- A portion of related US based contract expenses
Now down to the nitty gritty -
- Salaries
- Supplies
- Computer, equipment, server costs
- A portion of related US based contract expenses
Now down to the nitty gritty -
Calculation
There are several ways to calculate the credit for Federal (Regular vs Alternative Simplified Credit) and State purposes.
The calculation involves examining expenses for qualification and finding the most advantageous method.
There are several ways to calculate the credit for Federal (Regular vs Alternative Simplified Credit) and State purposes.
The calculation involves examining expenses for qualification and finding the most advantageous method.
Monetization
This is the most important part of the process and should be at the forefront of everyone's mind from the beginning.
Even if you calculate the credit - how are you going to turn the credit into cash??
This is the most important part of the process and should be at the forefront of everyone's mind from the beginning.
Even if you calculate the credit - how are you going to turn the credit into cash??
Monetization of the credit is different based on whether the business is a C-Corp or a pass through.
As a result of the PATH Act of 2015, Startups with little or no revenue can claim the credit against their future payroll tax for nondilutive funding.
As a result of the PATH Act of 2015, Startups with little or no revenue can claim the credit against their future payroll tax for nondilutive funding.
If you own a pass through entity, AMT limitation can be a barrier to monetizing the credit.
AMT is much less common today - With TCJA, the exemption has been pushed up, and the 10,000 cap on SALT and property taxes helps.
Again - Look at this BEFORE you sign on for a study.
AMT is much less common today - With TCJA, the exemption has been pushed up, and the 10,000 cap on SALT and property taxes helps.
Again - Look at this BEFORE you sign on for a study.
So where to start? If you think you are eligible for this credit good news! There are thousands of companies that will help you. This has been around since the 80's and there are plenty of subject matter experts.
The model has shifted with technology, and it favors the consumer.
The model has shifted with technology, and it favors the consumer.
The old model is pretty standard - a company digs through all of your stuff, interviews you, finds your credits, maybe amends old tax returns, and charges 30%
The newer companies can go directly into your payroll, use smarter systems of interviewing, and charge less (15-20%)
The newer companies can go directly into your payroll, use smarter systems of interviewing, and charge less (15-20%)
2 newer companies heading the right direction - @MainStreet and @ClarusRD
Main Street offers a % of your payroll credit up front interest free, and checks for many other credits based on the info you provide. Use my link below for a discounted rate.
https://www.mainstreet.us/partnerships/baldridge
Main Street offers a % of your payroll credit up front interest free, and checks for many other credits based on the info you provide. Use my link below for a discounted rate.
https://www.mainstreet.us/partnerships/baldridge
Clarus is the primary partner of @GustoHQ and has a great team as well. I also have a discounted link for their service. https://clarusrd.com/baldridge/
Tell me your stories with the credit, and how it has worked for you.
If you want to see more threads like this about tax, financial planning a, and real estate, please view the pinned tweet on my profile! https://twitter.com/baldridgecpa/status/1333953486208241665
