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Reduce your startup's payroll taxes through the new Federal R&D Tax Credit

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Re: Reduce your startup's payroll taxes through the new Federal R&D Tax Credit

#51

Post by codecamper »

cde-v wrote: post #7

As an accountant I have had to shoot attempts at claiming this credit down time and time again. Unless you are doing cutting edge/novel research into AI, machine learning, quantum computing, etc you will not qualify for the credit. Think about it this way, unless your research is something you could write a scientific paper on and have it published in a peer reviewed journal, it will not qualify. Also, this is not a…

Must the work be performed in the US to qualify as an R&D tax credit? Thank you

Re: Reduce your startup's payroll taxes through the new Federal R&D Tax Credit

#52

Post by redthrowaway »

geoka9 wrote: post #32
jbob2000 wrote: post #18

Earlier quoted context omitted.

You don't have to pass the requirements, you just have to pass the person who reviews your proposal. Put enough fancy language in there and you can make it sound like a simple messaging app is cutting edge machine learning. Every company I've worked for has done similar with the Canadian program (SR&ED).

> Put enough fancy language in there and you can make it sound like a simple messaging app is cutting edge machine learning. Good luck if you get audited, though.

We got audited. They just reduced the payout. It's the appeals process that's a pain in the ass. Takes about 3 years.

Re: Reduce your startup's payroll taxes through the new Federal R&D Tax Credit

#53

Post by fooey »

jliptzin wrote: post #49
gamblor956 wrote: post #16

Earlier quoted context omitted.

Think about it this way, unless your research is something you could write a scientific paper on and have it published in a peer reviewed journal, it will not qualify. That's not true at all. In the US, at least. As a tax lawyer, I've had to have this conversation quite a few times with accountants who misread the law and don't think it applies to their clients. The US R&D credit has 4 basic requirements, and "cuttin…

Let's say I pay a programmer to develop that new game engine...why wouldn't I just deduct the expense of paying the developer against my revenue? Why would I even need to look into this tax credit? The only companies I see this benefitting are those with no or negative income, but have high payroll taxes, which doesn't seem to me to be a lot of companies out there.

I would bet practically all software startups fall into the category of having negative income and high payroll taxes.

Re: Reduce your startup's payroll taxes through the new Federal R&D Tax Credit

#54

Post by gamblor956 »

mozumder wrote: post #33
gamblor956 wrote: post #16

Earlier quoted context omitted.

Think about it this way, unless your research is something you could write a scientific paper on and have it published in a peer reviewed journal, it will not qualify. That's not true at all. In the US, at least. As a tax lawyer, I've had to have this conversation quite a few times with accountants who misread the law and don't think it applies to their clients. The US R&D credit has 4 basic requirements, and "cuttin…

Also, it's not necessarily a tech requirement. A restaurant developing a new menu as it tests out recipes is just as much R&D as anything else. No idea why people think R&D needs to be cutting edge tech research...

I'm not sure why you're being downvoted. The development of menu items can be a permissible R&D credit activity.

At the level of a national or regional restaurant chain, it would definitely qualify. The development of menu items for a large chain involves a significant amount of research and scientific experimentation to nail down ingredients, storage and cooking processes, etc., that meet certain financial metrics, nutritional requirements, regulatory requirements, etc.

For a one-location restaurant, or small chain, it would be a lot more difficult to qualify for R&D credits. You'd have to show that menu items were developed to meet specific predefined targets in ways that would not have been obvious without the research/experimentation activity. Flavor is an acceptable target if the flavor can be clearly defined.

Re: Reduce your startup's payroll taxes through the new Federal R&D Tax Credit

#55

Post by gamblor956 »

cde-v wrote: post #36
mozumder wrote: post #33

Earlier quoted context omitted.

Also, it's not necessarily a tech requirement. A restaurant developing a new menu as it tests out recipes is just as much R&D as anything else. No idea why people think R&D needs to be cutting edge tech research...

No... one of the requirements is "research which is undertaken for the purpose of discovering information which is technological in nature"

The R&D credit is not limited to research undertaken for technological discoveries. I'm still not sure where you're getting that idea from.

Re: Reduce your startup's payroll taxes through the new Federal R&D Tax Credit

#56

Post by URSpider94 »

Kiro wrote: post #27
cde-v wrote: post #7

As an accountant I have had to shoot attempts at claiming this credit down time and time again. Unless you are doing cutting edge/novel research into AI, machine learning, quantum computing, etc you will not qualify for the credit. Think about it this way, unless your research is something you could write a scientific paper on and have it published in a peer reviewed journal, it will not qualify. Also, this is not a…

Why do you shoot down attempts instead of letting them try? Is there any downside of trying and get rejected? Judging by the comments it sounds like you risk shooting down attempts that may actually succeed.

While I do think the grandparent is being a little too conservative, there is no "trying and getting rejected" here. This is not a credit that you apply for, it's part of your income tax filing. The only case where it would be reviewed is if you were audited by the IRS, and if they then disallowed your credit, you would be liable to repay that amount, plus interest and potentially plus late-payment penalties. AND, you would likely be flagged as a target for future audits ...

In general, when you claim a deduction on your US income taxes (personal or business) you want to be pretty darned sure that the deduction is going to stand up to an audit.

Re: Reduce your startup's payroll taxes through the new Federal R&D Tax Credit

#57

Post by gamblor956 »

jliptzin wrote: post #49
gamblor956 wrote: post #16

Earlier quoted context omitted.

Think about it this way, unless your research is something you could write a scientific paper on and have it published in a peer reviewed journal, it will not qualify. That's not true at all. In the US, at least. As a tax lawyer, I've had to have this conversation quite a few times with accountants who misread the law and don't think it applies to their clients. The US R&D credit has 4 basic requirements, and "cuttin…

Let's say I pay a programmer to develop that new game engine...why wouldn't I just deduct the expense of paying the developer against my revenue? Why would I even need to look into this tax credit? The only companies I see this benefitting are those with no or negative income, but have high payroll taxes, which doesn't seem to me to be a lot of companies out there.

Deduction applies to pre-tax income, and is based on your tax rate. If, for example, you have a deduction for $100, and your effective tax rate is 20%, your tax liability is reduced by $20. Deductions also generally don't carry over if unusuable.

A credit applies against your tax liability. So if you have a tax credit for $100, your tax liability is reduced by $100. Credits generally do carry over to future years to the extent unusable in the current year.

Whether a credit is preferable to a deduction depends on the taxpayer's tax situation, including whether they would be able to make use of carried-over credits in future years.

Edit: in a previous comment I said R&D credits aren't available if you don't have positive income. That's not strictly true. R&D credits only apply against actual tax liabilities, but if you don't have any taxable income the unused credits would carry over into a future year for potential use.

Re: Reduce your startup's payroll taxes through the new Federal R&D Tax Credit

#58

Post by URSpider94 »

randyrand wrote: post #41

I've read that Trump's tax cuts are only supposed to help the top 0.4%. I don't think small business owners area allowed to use this tax credit if they're not part of the 0.4%. /sarcasm. Point being, clearly I've been hearing some lies. I hadn't heard of this yet and I'm sad my news bubble is such a bubble.

That's because Trump had nothing to do with enacting this. It was passed in 2015.

https://www.mossadams.com/articles/2016/february/r-d-credit-...

Re: Reduce your startup's payroll taxes through the new Federal R&D Tax Credit

#59

Post by gamblor956 »

cde-v wrote: post #38
cde-v wrote: post #7

As an accountant I have had to shoot attempts at claiming this credit down time and time again. Unless you are doing cutting edge/novel research into AI, machine learning, quantum computing, etc you will not qualify for the credit. Think about it this way, unless your research is something you could write a scientific paper on and have it published in a peer reviewed journal, it will not qualify. Also, this is not a…

Replying to my own comment since I'm too late to edit. Just read the regs people, the barriers are not as low as the little bit of anecdotal evidence in this thread are suggesting. https://www.irs.gov/pub/irs-regs/research_credit_basic_sec41...

1) Those aren't regulations, those are statutes. It is disturbing that you are attempting to advise people on this subject but do not know the difference. Statutes are written by Congress, regulations are written by the Treasury Department to implement or clarify statutes.

2) The PDF is for the 2004 version of the R&D statutes. They have been revised significantly since then.

3) Current version of the statutes: https://www.law.cornell.edu/uscode/text/26/41

Current version of the regulations: https://www.law.cornell.edu/cfr/text/26/1.41-1

Cornell is not an authoritative source but it's easier to read than the GPO website. If you want final authoritative sources, you'll need to read the House and Senate resolutions and to track down a physical copy of the appropriate issue of the Federal Register.

Re: Reduce your startup's payroll taxes through the new Federal R&D Tax Credit

#60

Post by gamblor956 »

codecamper wrote: post #51
cde-v wrote: post #7

As an accountant I have had to shoot attempts at claiming this credit down time and time again. Unless you are doing cutting edge/novel research into AI, machine learning, quantum computing, etc you will not qualify for the credit. Think about it this way, unless your research is something you could write a scientific paper on and have it published in a peer reviewed journal, it will not qualify. Also, this is not a…

Must the work be performed in the US to qualify as an R&D tax credit? Thank you

Yes. Limited to US-based activities. The primary purpose of the R&D tax credit is to incentivize the performance of R&D activities in the US instead of off-shoring it to cheaper jurisdictions.
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