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

gusto.com

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

#71

Post by stult »

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…

As a tax lawyer who works exclusively on section 41, you're completely wrong. You should send your clients to tax consultants who know what they're talking about because you clearly do not. Section 41 is a taxpayer centric test, so the work does not have to be "cutting edge." It merely has to resolve technical uncertainties via a process of experimentation.

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

#72

Post by bshoemaker »

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…

This is categorically wrong. HN sure loves a contrarian comment, even if it's completely incorrect

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

#73

Post by codecamper »

gamblor956 wrote: post #60
codecamper wrote: post #51

Earlier quoted context omitted.

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.

That makes sense.

So it really doesn't make much sense to outsource offshore during the seed stage of a start up.

Can R&D credits be applied to future year earnings?

Is there a time limit for retroactively claiming these?

Thank you!

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

#74

Post by learc83 »

gamblor956 wrote: post #61
tedmiston wrote: post #17

Earlier quoted context omitted.

Can you clarify sources for what types of R&D activities apply? I've been curious myself and didn't see this mentioned in the blog post.

If your company is looking to see if R&D credits are available, consult with an established major accounting firm or R&D-specialist firm. (But not cde-v's firm.) Most firms that do R&D work will charge a percentage of the R&D credit recovered rather than an out-of-pocket fee, so you generally won't have any financial outlay if your business doesn't qualify. Generally speaking, any US-based systemic research- or exper…

Sounds like even sales funnel optimization with A/B testing would qualify.

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

#75

Post by Dwolb »

gamblor956 wrote: post #57
jliptzin wrote: post #49

Earlier quoted context omitted.

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…

This credit is unique in that it can be used against federal payroll taxes. i.e. most companies (even if unprofitable) can realize a cash benefit immediately

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

#76

Post by sokoloff »

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.

In addition to the other posts, if your developer is creating a capital asset (software/IP with a useful life beyond the current tax year), you may not be able to expense 100% of their cost.

It's just like if you hire a builder to make you a rental property. You can't deduct 100% of the costs of that house in the year it's built.

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

#77

Post by dnh44 »

In the U.K. you can trade in your R&D tax credit for cash.

Protip: Instead of living off savings it may be beneficial to lend money to your startup in order to pay you so the wage can count towards an R&D credit. But make sure to see an accountant to make sure the numbers work in your particular case.

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

#78

Post by fooey »

hn_throwaway_99 wrote: post #69
fooey wrote: post #50

Earlier quoted context omitted.

At my work, we specifically log hours differently if we're working on new development versus bug fixing to document our work for the R&D credit.

Are you sure that's why? Many companies do this to differentiate between capex and opex, but it's rare that all new development would qualify for R&D credit.

Yeah, we had an all hands meeting where they explained that this was the reason. We're small, and money is tight, so saving a couple hundred thousand dollars a year is a lot of motivation for people to track their time accurately.

We're basically creating a new industry niche, so it is clear R&D. It's not like we're just churning out new shopping carts sites for the customer of the week.

We're just wrapping up our Series A, which included a major investment from CAT though, so we're in a lot better shape than we were a year ago when we started the initiative to take advantage of the tax credit.

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

#79

Post by Shooter »

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…

I don't have time to look at the details of this particular incentive, but I know from personal experience that many R&D tax credits do not require earth-shaking research to qualify.

I own two SaaS companies that have received R&D credits and I'm also an investor in a few other businesses, including an injection molding company, that have received R&D tax credits. The injection molding company mostly makes cups for gas stations. Which is not exactly quantum computing.

I used the same company to get all of the credits. They had a staff of tax attorneys, accountants, engineers, etc. that worked with us to see what we could qualify to receive. They looked at about 30 different programs to get tax incentives or reduce expenses. And they worked entirely on a contingency basis, where we only paid them a percentage of what we saved. They were very accurate in their initial assessments, and we have not been audited since receiving the incentives (/knock on wood/)

At one point, they commented that the bane of their existence (as tax incentive specialists) was misinformed accountants that thought you had to have an army of lab coats or a clean room in order to qualify.

I would agree, however, that Gusto is trying to drum up business.

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

#80

Post by late2part »

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…

This post reminds me of about 70% of accountants. "Unless the tax code explicitly says you can do, it I'm not going to let you!" Then there's accountant that say "It's sort of a grey area, I suppose that makes sense, are you willing to defend it at audit?"

The whole system is designed to discourage risk; and so many people say "I won't write off what I'm entitled to because I fear an audit."

Then I hear stores about accountants that say "Well you're not flagged unless you're over X% of revenue on expenses in this category, so go ahead and increase it."

Like so many well defined laws, there's a lot of room for intepretation.

IANACPA

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