The Research and Development Tax Credit was established by Congress in 1981 and was made permanent in the tax year 2016. The greatest change adapted by lawmakers over the years allowed start-ups and other early-stage companies to realize monetary savings for R&D of up to $250,000 annually, even without taxable income.
To understand the incredible cash savings available to eligible businesses, it is important to understand the difference between a tax credit and a deductible expense. The terms are often used interchangeably, but a deduction merely reduces taxable income, while a credit is a dollar-for-dollar direct reduction of a company’s tax liability, therefore providing significant savings for businesses as they work to grow and develop their product.
The R&D Credit can be claimed by completing Form 6765 to report eligible expenses and calculate the credit. Form 6765 must be included with a timely filed income tax return (including extensions). The election to apply the credit to offset payroll tax is made on page 2 of Form 6765. The election cannot be made on delinquent or amended tax returns.
Are you eligible to claim the R&D Tax credit?
To be eligible for the payroll tax election, businesses must have qualifying R&D expenditures and meet the following criteria:
No more than 5 years of gross receipts (including interest income)
Less than $5M of gross receipts
Typically, qualifying businesses include technology, life sciences, and manufacturing. The most common qualifying expenditures include wages, supplies, contractor expenses (65%), and rent or lease of computers, all of which must meet the following requirements:
uncertainty as to the capability or method for developing or improving a product or the appropriate design of a product
undertaken in the US and is technological in nature
intention to be useful in the development of a new or improved business component
Substantially (80%) of which constitutes elements of a process of experimentation conducted for a purpose that relates to a new or improved function, performance, reliability, or quality.
How can Rooled help?
The tax team at Rooled is experienced at working with businesses to determine eligibility, conduct a thorough study to determine eligible expenses and gather the necessary support documentation, prepare the requisite tax forms, and coordinate with payroll providers to ensure the credit is applied in a correct and timely manner, and give clients peace of mind with audit support.
Rooled also works with clients to maximize their five-year eligibility period and identify potential areas of concern that can lead to loss of credit eligibility.
Many tax firms have taken advantage of this substantial opportunity and charge excessive fees for similar support, often basing their fees on a percentage of the tax credit due to their clients. Instead, our approach and depth of experience allows us to be efficient and provide a cost-effective value for our clients.
About The Author
Bryce Allen is the Director of Tax at Rooled, Inc., and he is in his 15th year of public accounting firm experience.
Born and raised in the South Bay Area, he earned his Bachelor of Science in Accounting at San Jose State University, and upon graduation immediately began working with many Silicon Valley start-ups and small business clients.
Bryce notes that “The primary reason why I love being a tax professional in the Bay Area is the opportunity to work with innovative enterprises, advising and taking care of their tax compliance and planning while witnessing their development and cutting-edge technology. When I see my clients making positive, world-changing headlines a few years out, I feel privileged to have played even a small part in their success.”
R&D tax credit guidance is one of the key areas of Bryce’s expertise.
You can connect with him on LinkedIn here.