Recent changes in legislation (specifically, the Protecting Americans From Tax Hikes (PATH) Act of 2015) allow early-stage, pre-revenue companies to take advantage of the Federal R&D tax credit. Since the enactment of PATH, many caught the change and claimed up to $250,000 in credits; but even more missed it. Fortunately, there is still time to claim it by amending your business’ return; but time is running out.
A total of $10.3 billion will be claimed in federal R&D tax credits in 2017 alone. For the first time, this will include pre-revenue technology startups. Beginning with the 2016 tax year, the R&D tax credit created a new way for qualified small businesses to receive a credit for up to 10 percent of their research expenditures through a payroll tax offset.
Companies with their first gross receipts after 2011 and under $5 million in revenue now had access to a new cash benefit that previously never existed. But there was a problem: Most of them still missed it.
Columbus, Ohio-based Clarus R&D (Clarus), a Skoda Minotti partner, has been working with technology startups to help them claim the R&D credit. Clarus will help more than 130 companies throughout the U.S. claim in excess of $12 million in R&D credits over the next three years. Clarus and Skoda Minotti have partnered on four clients that will benefit significantly, and will look to partner with more in 2017.
Clarus created a solution specifically for startups. By combining technology with an efficient process, Clarus allows busy entrepreneurs to focus on running their businesses while Clarus generates fully compliant documentation.
But what about this year? Is there still time to claim potential credits? Below, we address some of the most frequent questions about the R&D credit.
I already submitted my business’ taxes; is it too late to claim potential credits?
No, it’s not. In this year alone, the IRS is allowing businesses that did not elect the payroll tax credit to amend returns and include Form 6765 to claim the credit. The amendment must be filed by Dec. 31.
How does the fact that my business does or does not have revenue affect my eligibility?
Companies do not need revenue to claim the credit. The credit can be taken as a payroll tax offset (up to $250,000 per year) as long as they are a qualified small business, meaning they are under $5 million in revenue in the tax year, and within a five-year period from earning their first revenue.
My business does not yet have any payroll; can it still take the credit?
Yes, it can. Wages are typically the biggest component of the credit calculation, but contracted costs and supplies also count. If the company elects a payroll tax offset, but there is no payroll, the credit can be carried forward until payroll does exist.
If my business is not a qualified small business, and it cannot elect the payroll tax offset, can it still claim a credit?
Yes—the credit can still be taken as a credit against income tax, and carried forward for a period of 20 years.
I’m unsure whether my business engages in R&D work. How do I know whether it does?
Businesses in a multitude of industries can qualify for this credit in cases where R&D activities pass a four-part test. Most technology-based startups, including software companies, can qualify based on the business activities in which they engage. (For more about the four-part test, read our recent blog.)
Part of my business’ R&D work was not successfully incorporated into the end product. Would it still potentially qualify for the credit?
R&D work does not need to be successful to qualify. If your business spent time and money working in a certain direction and then needed to change because that path did not work, the associated time would still qualify.
Will the PATH Act or other R&D-related rules change with tax reform?
The credit is written into law, and the PATH Act is not subject to periodic funding. It has bipartisan support, and it is specifically preserved in the proposed legislation by the House of Representatives. Nothing is final until Congress finishes its work; but it is unlikely that the current credit will be eliminated or altered/limited.
If your company still stands to benefit from the R&D tax credit for the 2016 tax year, it must act before Jan. 1, 2018. For questions about R&D credits or other tax-related issues, contact Paul Etzler, CPA, CGMA, GACP, at 440-449-6800 or email email@example.com.