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.
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.
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.
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.
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.
I was more taking a shot at the companies who do a redesign/facelift of their website/customer portal, or a bank struggling to integrate an off the shelf trading tool into their systems.
No idea why people think R&D needs to be cutting edge tech research...
At the level of a national or regional restaurant chain, it would definitely qualify. The development of menu items for a large chain involves a significant amount of research and scientific experimentation to nail down ingredients, storage and cooking processes, etc., that meet certain financial metrics, nutritional requirements, regulatory requirements, etc.
For a one-location restaurant, or small chain, it would be a lot more difficult to qualify for R&D credits. You'd have to show that menu items were developed to meet specific predefined targets in ways that would not have been obvious without the research/experimentation activity. Flavor is an acceptable target if the flavor can be clearly defined.
I've talked to other companies doing nothing related to novel research, just standard SaaS, who were able to get a healthy sized deduction.
Please don't let this person dissuade you from checking if you can get the credit.
To the accountant - please see all the comments below yours and edit your post, unless you have evidence against them. Your comment may well make people not apply for this who could've gotten the deduction without issue.
cde-v is spreading categorically false information to the potential detriment of many entrepreneurs. This comment should be downvoted or flagged.
HN thinks if you can shoot something down it means you're smarter than that thing. Therefore the most negative sentiment is the most intelligent, and should be voted to the top.
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.
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.
Good luck if you get audited, though.
that's patently untrue, I know plenty of firms claiming this credit, not doing cutting edge research, and who are not getting audited.
My personal guess on audit risk rule of thumb is how close to zero does the R&D tax credit get your tax liabilities. e.g. If after the credit, you still pay a lot of taxes, your audit risk is low.
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.
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?
While you may be eligible, you will need to make sure that you have filed Form 6765 with your 2016 Corporate Tax Return. The good news (I guess) is that if you didn't file this form you can amend you Corporate Tax Return (https://www.irs.gov/pub/irs-pdf/i6765.pdf). However, just be advised that the process to amend a corporate tax return is often pretty painful. So you may want to be sure that the credit will be worth your while.
It sounds like you are eligible, but I would double check with an accounting firm just to be sure. If you go to our accountant page (https://gusto.com/partners/find-an-accountant) look for "Offers R&D Tax Services" on their company listing. This should give you some very reputable firms to work with on your credit study.
Good luck with your Credit!
Michael from Gusto
Generally speaking, any US-based systemic research- or experimentation-based process that results in the development of new or improved (cheaper, better, etc.) business components (broadly meaning goods, services, processes) can qualify for the R&D credit.
In general, when you claim a deduction on your US income taxes (personal or business) you want to be pretty darned sure that the deduction is going to stand up to an audit.
2) The PDF is for the 2004 version of the R&D statutes. They have been revised significantly since then.
Current version of the statutes:
Current version of the regulations:
Cornell is not an authoritative source but it's easier to read than the GPO website. If you want final authoritative sources, you'll need to read the House and Senate resolutions and to track down a physical copy of the appropriate issue of the Federal Register.
Thanks for following up on each of these -- as a small business owner that might pursue this, it's often difficult to separate signal from noise without having much time to spend on it.
Is it this (which does not appear to be new) or something else?
- 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
Now, I don't think that's actually what the policy change has done, but the problem isn't allowing firms to offset the tax.
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.
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.
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.
Regarding business vs hobby criteria: https://www.irs.gov/uac/business-or-hobby-answer-has-implica...
> Beginning in 2017, qualified small businesses may claim up to $250,000 per fiscal year, applying it against their Social Security taxes.