TRCG Advisors: R&D Tax Credit Now Yields Refunds for Start-up CompaniesJuly 9th, 2016 by gainesvillechamber
The R&D tax credit has recently undergone some enhancements that make it valuable for companies of all sizes. Worth +/- 6.5% of the wages, supply costs and contractor expenses associated with the development or improvement of a product, process, software, formula or invention, the R&D tax credit is a dollar-for-dollar reduction of federal income tax liability for qualified expenditures.
The credit was recently made permanent by The Protecting Americans from Tax Hikes Act of 2015 (“PATH” Act). In addition to enhancing the R&D credit for later stage companies, the PATH Act can provide a cash benefit to start-ups, in addition to larger, mature companies.
As a result, start-up companies can now receive refunds from the R&D credit. Beginning in the 2016 tax year, start-up companies with annual gross receipts of less than $5 million can apply up to $250,000 in R&D tax credits against its payroll tax liability. Before this change in law, a company had to actually generate a profit and taxable income to utilize the R&D tax credit. With this change, startup companies can receive a refund of a portion of their payroll tax payments.
Companies of all types can qualify as long as they are performing qualified research and development. For example, assume an early-stage information technology-based company has approximately $1,500,000 in annual payroll expenses, of which $1,000,000 consists of wages paid for software development. If the company meets the qualified small business criteria, it should qualify for between $45,000 and $100,000 in federal R&D tax credits. Assuming the company has no tax liabilities to offset, it can apply the R&D credits against its payroll tax liability of +/-$93,000, which would generate an immediate refund.
Larger companies can use the R&D tax credit to offset federal income tax liability. With the recent change in law, some companies can use the credit to reduce its tax liability below Alternative Minimum Tax (“AMT”). For example, a biotechnologies company with a $1,000,000 R&D spend could be entitled to a credit of approximately $65,000.
“TRCG is excited to have the opportunity to work with the high-impact startups the Chamber supports,” said Adam M. Weems, Managing Director. “We joined the Gainesville Chamber to show our commitment to Florida’s developing innovation economy, and look forward to assisting companies who may qualify for the tax credits that are now available through the PATH Act.”