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Is Your Start-up Missing Out on this Lucrative Tax Credit?

by
Sonu Shukla
on
10/20/2021
Is Your Start-up Missing Out on this Lucrative Tax Credit?

Just as there are billions of dollars in tax liabilities that go unpaid every year, there are also untold monies that businesses are needlessly paying the IRS because they are unaware of available tax credits. One of these is the U.S. Research and Experimentation Tax Credit available to innovative businesses. This credit has existed since 1981 and is specifically meant to encourage and reward startups that are incurring research and development costs. 

If you're not sure whether your business would qualify, here are a few examples of those that do:

  • Those involved in developmental engineering, design, testing, or data collection work
  • Software designers and developers
  • Those who have created cost-reduction methods by modifying a process
  • Those who have made improvements to an existing product, built a prototype or created a new product
  • Those whose work on a process, project or prototype is incomplete due to unresolved technical problems, and have incurred expenses while working towards solving those problems 

Though not everybody who matches these characteristics will qualify, if any of them sound familiar it is well worth your time to learn more about the program, because the tax credit it provides can be used against up to $250,000 per fiscal year of the employer portion of the Social Security taxes your business pays, regardless of whether you have made a profit.

To qualify for the R&D tax credit, you must have performed work whose end goal is innovation within a scientific or technology field. There's a four-part test for eligibility that includes:

  • Determining whether permitted purpose is to create new functionality, performance, reliability or quality of a business component, or to improve the existing performance. 
  • To eliminate uncertainty surrounding the development or improvement of said business component.
  • Using a process of experimentation that systematically identifies existing uncertainty and one or more alternatives that would solve it.
  • Being technological in nature, defined as having to do with engineering, computer science, or some other physical or biological science.

Beyond the scope of the work itself, to qualify a small business must have gross receipts of $5 million or less for the tax year and have gross receipts for five years or less. It also cannot be a section 501 tax-exempt organization.

To take advantage of the tax credit, small businesses need to file for it each year, including information regarding the amount of credit being requested. This amount cannot be more than $250,000 per year, which can be used as either a qualified expense or against the employer portion of Social Security tax liability. Any credit that exceeds the $250,000 credit can be carried forward to either reduce future taxes or as an offset against Social Security taxes. This can be done using Form 941, a quarterly statement connected to the Social Security liability, and can be filed in the calendar quarter after the business's income tax return is filed, with C corps with December fiscal years filing for the credit on or before April 15th and S corps with December fiscal years filing on or before March 15th, and all others calculating either 4.5 months after the tax year's end for C corps and the 15th day of the 3rd month after the tax year's end for S corps.

If you believe that you qualify but failed to file, you can amend tax years going back at least three years. Doing so may be well worth it, as up to five years' worth of Social Security taxes with a maximum credit of $250,000 per year adds up quickly. And it's important to remember that even if you don't have Social Security taxes to offset, the credits can be carried forward for up to 20 years against profits.

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Sonu Shukla

Sonu Shukla

Sonu Shukla is a CPA, accountant, and tax preparer based in Orlando, FL. Sonu Shukla can assist you with your tax preparation and planning needs. Sonu is more than just another accountant in Orlando, Florida; he is a small business owner himself. It is a position in life that grants him the perspective and insight to emphasize with his clients, bringing them the best service possible. A Certified Public Accountant and a Certified Financial Planner, Sonu possesses the skills, education and experience to demonstrate unerring business acumen and passionately planned financial strategies. Being proactive is key for Sonu, tailoring highly efficient tax plans for his small business clients, all in a one on one environment where he and the client can bounce ideas around until every detail is worked out.

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