R&D Tax Credit Advantages for Startups and Small Businesses

Co-authored by Angelo Poletis and Rick Happel | SC&H Group Tax Services

Updated 5/27/2021

Are you taking full advantage of the R&D tax credit to accelerate results and offset costs?

Many business owners across all industries are unaware that federal and state research and development (R&D) tax credit programs exist that can reward their day-to-day efforts aimed at producing an improved product.

The R&D tax credit is a government-sponsored benefit that provides cash incentives for companies conducting R&D in the U.S. These economic incentives were implemented to:

  • Stimulate research and development in industries of all sizes
  • Encourage companies to work together
  • Transform the economic landscape

As part of the Protecting Americans from Tax Hikes Act of 2015 (PATH), the R&D credit was extended and expanded to benefit even more taxpayers. The PATH Act permanently extended the credit to give taxpayers more certainty about its future and the applicable tax benefits.

SC&H Key Takeaways:

  • Eligible small businesses ($50 million or less in gross receipts) may claim the credit against the Alternative Minimum Tax (AMT) liability.
  • Certain start-up businesses can elect to use the R&D credit (up to $250,000 in credit) against the employer’s payroll tax liability.
  • The Act retroactively extended the Work Opportunity Tax Credit (WOTC) for nine categories and added a tenth category for long-term unemployment.
  • The IRS will not issue a refund until February 15 if you file for either an Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTA) to protect against fraud.

Start-up businesses normally do not generate taxable income in their early years. However, using the R&D credit to help offset payroll taxes may allow start-ups to hire more employees and accelerate progress.

For start-up taxpayers to utilize the payroll tax offset, they must have had gross receipts for five years or less. In addition, the taxpayer must have less than $5 million in gross receipts for the first year and for each subsequent year that the payroll tax credit is elected.

If a company meets the qualifications above, and has valid R&D expenditures, the company would calculate and claim the credit on its federal income tax return. The calculated credit would then be available to claim on the taxpayer’s payroll tax returns (Form 941).

Are you taking advantage of the R&D tax credit to accelerate results?
If you’d like to speak with SC&H Group’s tax specialists about how they can help your organization claim the R&D tax credit, or any other applicable tax credit, please contact us.