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June 1, 2022
Did you know that your startup business could utilize the federal R&D tax credit to offset up to $250,000 of payroll tax liability? The federal R&D tax credit allows startups to do just that.
With such a significant financial tax incentive, it pays to start thinking about the research and development (R&D) tax credits well before tax time and from the earliest days of starting your business. In this article, you’ll learn the basics of qualifying for the federal R&D tax credit, plus how to calculate the amount for which you’re eligible.
Companies from various industries, such as engineering, manufacturing, and software developing new or improved products or processes can qualify for the R&D tax credit. You see if your business qualifies, you must first identify your business components and determine if they meet the following 4-part test:
In addition, startups that meet the following criteria each year may be eligible to offset payroll tax liability up to $250,000 annually for up to five years.
If you’re eligible for the R&D tax credit for startups, you can use the money spent on certain research and development expenses to offset your tax liability, if any, or your payroll tax liability. R&D tax credit qualified research expenditures (QREs) include:
Once you have identified your total qualified expenses, there are two methods for R&D tax credit calculation:
For both calculation methods, utilize Form 8974 to determine the amount of the credit the taxpayer can use to offset payroll tax liability. You can carry forward any unused credit for up to 20 years. Tax accountants calculate the R&D credit with both formulas and use the method that results in a larger credit for your business, so you may end up switching methods from year to year.
To apply for startup R&D tax credit:
Claim the credit against payroll tax liability, if eligible — Complete the applicable Tax Form 8974 (Qualified Small Business Payroll Tax Credit for Increasing Research Activities), which is part of the annual corporate tax return.
If you are eligible, your tax accountant can claim the R&D credit against your income tax liability or if you qualify, against your payroll tax liability.
The calculation and application process outlined above might seem complex for most businesses — it often is complex. Startups that try to apply for the R&D tax credit without the guidance of an accountant risk missing out on thousands of dollars of credit and are not adequately preparing for an IRS audit.
If you’re looking for an expert to help you navigate the confusing world of corporate tax, Zeni might be the solution your business needs.
Built specifically to meet the needs of startups, Zeni is an AI-powered finance concierge that manages all your bookkeeping, accounting, invoicing, bill pay, reporting, and more.
Our team maintains detailed, GAAP-compliant records for your business year-round. For a fixed fee, we can take care of all your federal, state, and local tax returns, so you can be confident that your business isn’t leaving money on the table.