The R&D Tax Credit: Now for Startups, Too

In our February blog post, “The R&D Tax Credit Unleashed: 3 Things You Should Know,” we discussed how the PATH Act of 2015 had “unleashed” the R&D tax credit, allowing it to finally become what it was always meant to be—a reward for businesses that made new or improved products and processes.

The R&D tax credit provisions afforded by the PATH Act include one that’s particularly advantageous to startup companies. In this post, we’ll take a closer look.

In the past, startups missed outR&D Tax Credits for Start-ups

Prior to the PATH Act, the R&D tax credit could only be applied against a company’s income tax. Because most startups take years to turn a profit, and therefore pay no income tax in their formative years, these newly formed and often highly innovative companies had little incentive to pursue the R&D tax credit. It didn’t matter how research-focused the company was—if it didn’t have an income tax, it couldn’t use a single dime in R&D credits, and wouldn’t be able to until it became profitable, if it ever did at all. This, understandably, made the R&D tax credit nearly useless to startups.

A step in the right direction

With the PATH Act now in place, a company that has yet to post a profit can use its R&D tax credit against its payroll taxes—the one type of tax it will most surely have to pay if it has employees. These companies may apply their credit (up to $250,000) against their employer share of payroll tax, beginning with the first quarterly payroll return after the R&D tax credit is filed. Any unused credits can be carried forward.

Eligibility requirements

 In order for a company to take advantage of this provision, it must meet the following criteria:

  • The company has not had any gross receipts in any year preceding the five taxable years that end with the most current year. (Companies still in their first five years of generating revenues need not worry; however, in the sixth year the company generates revenues, it can no longer apply its R&D credits against payroll taxes.)
  • The company must have less than $5 million gross receipts in the current year.

Don’t miss this incentive!

 If your company has yet to post a profit, don’t assume the R&D tax credit is out of reach. Thanks to the PATH Act, things have changed. Put in a quick call to your CPA to determine if your company is eligible for this new provision. If it is, get ready to put more of your hard-earned dollars toward making your startup a success.

About the Author: Jeff Holmberg, CPA, CMA

Jeff Holmberg, CPA, CMA is a manager at Froehling Anderson specializing in R&D Tax Credits and business valuations.