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March 29, 2021
Did you know that your business could qualify for a tax credit of up to $250,000? The federal startup R&D tax credit allows new businesses to reduce their payroll tax by a set percentage of their research and development (R&D) expenses, with a maximum reduction of $250,000. With such a large financial incentive, it pays to start thinking about the R&D credit well before tax time and from the earliest days of starting your business. In this article, you’ll learn the basics of applying for the federal startup R&D tax credit, plus how to calculate the amount for which you’re eligible.
Businesses from a broad range of industries can apply for the federal R&D tax credit, including engineering, manufacturing and software development companies. To apply, a business must fulfill two conditions:
If your business is eligible for the credit, you can use the money spent on certain research and development expenses to offset the amount of payroll tax you pay. R&D tax credit qualified research expenses (QREs) include:
Once you have identified your total qualified expenses, there are two methods for R&D tax credit calculation:
For both calculation methods, the resulting figure is the amount of the credit the taxpayer can use to offset the payroll tax. 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 the startup R&D tax credit:
Once your R&D credit is approved, you can apply the value of the credit to offset 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 not being prepared 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, and, 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.