Would it surprise you to learn the government — federal and many states — is on your side when it comes to innovation? Yes, the very government that loves to collect taxes from you may be willing to give some of that money back through a particular credit that encourages innovation.
The Research and Development (R&D) tax credit lets businesses deduct R&D expenses up to $250,000 per year from payroll tax, or an unlimited amount against income tax if your startup qualifies. Over several years, this credit could save you millions of dollars.
It’s important to start the review process early not only to help avoid penalties, but to take advantage of all opportunities, and to know that not all opportunities can be leveraged at the same time.
Where to begin
It may seem obvious, but everything begins with great bookkeeping. Your records are the first and biggest step to successfully getting an accurate calculation. Additionally, it’s important to keep technical records in good order. You must be able to produce evidence of the technical R&D process. Even an investor presentation about progress on the product could be considered backup documentation for R&D.
One of the requirements to qualify for this tax credit is that activity needs to be “technological in nature.” So anything to do with engineering, physics, biochemistry, medical, hard sciences, computer sciences, or mathematics will almost guarantee you qualify. If you’re in one of these industries, you’re already meeting that minimum requirement. But if you’re not operating in one of these — say you’re in clothing or food — you might still be experimenting with technology that makes your business better.
Just because you have an available product and customers, doesn’t mean you’re automatically ruled out. Many companies are never finished with R&D. You might be always creating new solutions, answering new questions, or thinking about how to achieve something. Even improving your product that’s already on the market could contain work that’s eligible for the R&D credit.
Finally, the only people who are going to be eligible are U.S. employees and contractors. So consider that if you’re trying to decide between being international or based in the U.S.
What you need to know about the R&D tax credit
We know innovation is expensive and often goes nowhere, but it’s impossible to innovate without investing in R&D. So, the government offers a way to make it less expensive to take the risks involved with innovation, especially for startups.