R&D Tax Credit – What’s New!

Science and Technology in the year 1981 involved numerous significant events such as the release of IBM’s first personal computer, the first launch of a space shuttle – Columbia, the FDA’s approval of the use of aspartame, and the almost-forgotten release of Nintendo’s Donkey Kong (but can we really forget that?) Less memorable but certainly still important was the introduction of the temporary Research & Development (R&D) tax credit.

The goal of the R&D tax credit was to incentivize businesses to invest in research intended to foster innovation and promote long-term technological advances and economic growth. Since the enactment of the tax credit, it remained temporary, having expired 16 times over the span of 35 years until late 2015 when Congress passed the Protecting Americans from Tax Hikes (PATH) Act, which made the R&D credit a permanent fixture in our tax code.

In past years, many start-up and small tech companies were excited to hear about the R&D tax credit only to learn that it wasn’t all that helpful in the early years of their business life. Data from the US Government Accountability Office even suggested that large corporations with receipts of $1 billion or more dominated the use of the research credit, not the small start-up or tech companies who really needed the credit. Although the R&D tax credits reward companies for investment in developing new or improved products and processes, prior to 2016 the credit only provided immediate benefits to companies that were profitable and incurred an income tax liability. Only then could the credit be used to reduce their income tax. And while the credit could be carried forward to future years, most start-up and tech companies needed the savings immediately, not further down the road

Good news for start-up tech companies!

The permanent R&D tax credit finally includes important provisions that benefit start-up and small companies. These companies, who are often the nation’s most innovative and cutting-edge, can now use the tax credit to reduce payroll taxes. So while many early stage companies don’t have income, many of them do have payroll taxes. This credit can now lead to immediate cost savings.

To summarize what activities qualify as research and development:

  • The goal has to be to discover some technological information that does not already exist.
  • There must be a level of uncertainty related to the product or process development.
  • Any cost must be directly attributable to what the IRS calls a “process of experimentation,” with no assurance of success.
  • The research must have a general business purpose.

Fast-forward from 1981 to 2016, and companies like Google and Ford are making history with their self-driving cars and organizations like SpaceX are creating advanced rockets and spacecraft. Countless organizations- both large and small- are making advancements in biotechnology and life sciences. And through it all, the R&D Tax credit has provided billions in savings for companies while they created some of the world’s most innovative products.

Starting and growing a company is challenging, especially for business that require a significant amount of research and development. Make sure your company is taking advantage of everything the R&D tax credit has to offer.

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