
Reduce your startup's payroll taxes through the new Federal R&D Tax Credit - edawerd
https://gusto.com/framework/payroll/new-federal-rd-tax-credit/
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cde-v
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 new R&D tax credit, it was extended, again, for the
umpteenth time. There were slight changes made in addition to the extension,
but they did not change what qualifies as qualified research.

Gusto is trying to drum up business, that is all.

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gamblor956
_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 "cutting edge" is not one of
them, nor has it ever been.. Generally (broadly paraphrased), it is sufficient
that the R&D result in new (or improved) functionality, etc. of a business
component (specific to the taxpayer), in a systemic process of a scientific,
engineering, or computer-science nature.

For example, a game developer developing a new game engine would qualify for
the R&D credit; as would a retail company developing an improved inventory
system. (The latter is in fact one of the examples that IRS employees give at
tax seminars.)

The real issue with the R&D credit isn't claiming the credit; it's supporting
the amount claimed with proper and sufficient documentation. It's the
documentation part that gets most taxpayers, since the R&D credit is one of
the areas that the IRS still devotes resources to auditing.

Further edit: by the way, Gusto's article is about the _new_ small business
R&D credit from the Protecting Americans from Tax Hikes Act (PATH) which went
into effect for the 2016 tax year. The original credit is limited to taxable
income, so you couldn't use it until you had profits or if you were subject to
AMT. The new credit applies against federal payroll and AMT.

~~~
jliptzin
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.

~~~
gamblor956
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.

~~~
Dwolb
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

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jonah
Patio11 says that US-based software employers should also look into the
Domestic Production Activities Deduction:

[https://twitter.com/patio11/status/879238827612684288](https://twitter.com/patio11/status/879238827612684288)

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notadoc
Interesting and could be helpful, but I'd like more details about the "new
Federal R&D Tax Credit" specifically

Is it this (which does not appear to be new) or something else?

[https://en.wikipedia.org/wiki/Research_%26_Experimentation_T...](https://en.wikipedia.org/wiki/Research_%26_Experimentation_Tax_Credit)

~~~
martinpannier
2 things are new:

\- Before, you could only offset your corporate income taxes, so you couldn't
claim the credit if you weren't profitable (because you wouldn't have
corporate income taxes). Now, you can offset social security taxes, which are
based on payroll. So more startups can now benefit from this credit.

\- Gusto has rolled out an new tool that allows their customers to much more
easily claim their R&D tax credit, taking on much of the grunt work.

Disclaimer (?): I'm a PM on Gusto's payroll team

~~~
toomuchtodo
There's something gross about being able to avoid social security
contributions as a government provided business incentive. I get it wasn't a
Gusto decision (and that they're just enabling claiming the benefit), but it's
still unsettling.

~~~
dzink
Actually, it is the right kind of incentive. If you are doing innovative work
- go hire more people, because your payroll will be lighter.

~~~
toomuchtodo
At the expense of shortchanging an already underfunded social program.

The right kind of incentive would be a grant, just like the earned income tax
credit which comes out of the general fund.

It wasn't enough to get rid of pensions, stagnate wages, shift most income to
the top 1%. Now we're going to fund innovation out of the piggy bank of the
social program that keeps most elderly out of poverty.

That's my point. It's the wrong way to build a business incentive.

No offense intended to Gusto.

~~~
martinpannier
Credits like these don't necessarily affect the actual money flowing into
social security—social security is just used as a "taxation basis" in this
case. That being said, that is a hypothesis—I'd have to look at the precise
funding plan.

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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.

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nodesocket
What sort of expensense qualify as R&D? If I have a small SaaS business
(operating as an LLC), does it even make sense to pursue this? I'm always
looking for ways to reduce my tax liability as revenue is about 6x of
expenses.

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jhallenworld
What if I have R&D expenses in a side business- can I use the credit to offset
my main job's income tax?

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uiri
I am not an accountant.

You may use a loss from a side business in order to offset W-2 income. No need
for complicated tax credit forms. Look into the IRS rules around hobbies as
they may get suspicious if your "business" loses money for years on end.

~~~
toomuchtodo
This is accurate (I take losses on an LLC occasionally against W2 income).

Regarding business vs hobby criteria: [https://www.irs.gov/uac/business-or-
hobby-answer-has-implica...](https://www.irs.gov/uac/business-or-hobby-answer-
has-implications-for-deductions)

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njarboe
The layers of control in the current economy seems boundless. Makes me want to
join the goldbugs sometimes. Hard money seems so much simpler and freer. An
anonymous, portable, fungible, hard to counterfeit and inflate, universal
account of previous work value. People give it to you when you give them
something or a service they want. It seems like a system of the people, by the
people, and for the people.

~~~
ovi256
And after a while, maybe we could pool resources together for projects such as
infrastructure, bridges, fire stations, that are too expensive for any single
person, but from whom we would all benefit! It would be great! We could all
give some of our money for these! Let's call this way of doing things
government. Oh wait.

~~~
njarboe
Was not criticizing the government in particular, just commenting on one
aspect of how monolithic systems over time become inscrutable to the humans
that have to use them. See Kafka who lived under the Austro-Hungarian Empire
for some famous literary examples.

