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March 7, 2017

Startups without Taxable Income Can Now Take Advantage of the Research & Development Tax Credit

Research and Development (R&D) tax credits can be valuable for companies who incur R&D costs, but in the past startup companies couldn’t benefit from it immediately unless they had taxable income.  However, beginning in 2016, businesses can now use the credit to offset their payroll tax liability. To qualify, the startup company must have less than $5 million of revenue in the year that the credit is claimed and must not have had any revenue prior to the last 5 years. Startups that didn’t originally choose this option to offset payroll tax can still make the election for 2016 by amending their return by December 31, 2017.

It’s important to learn more before committing to additional expenses in anticipation of receiving the credit. Consulting a startup professional is always advised, but the information below will help you get started.

What is the R&D Tax Credit?

The R&D (Experimentation) tax credit is a general business tax credit available to companies who incur research and development costs in the United States. The credit is generally calculated based on a percentage of qualified R&D costs incurred during the year.  It’s important to claim these credits even if you don’t think you can benefit this year.  Any unused credit can be carried forward for 20 years until it is completely utilized.  Learn exactly what qualifies for R&D credits and how it’s calculated in the R&D Fact Sheet.

R&D Benefits Starting in 2016

The R&D tax credit is now a permanent tax law, making it easier and more efficient for businesses to do year-end tax planning. Until the Protecting Americans from Tax Hikes (PATH) Act went into effect in December 2015, the R&D tax credit had always been temporary and part of the annual Tax Extenders Legislation. Beginning in 2016, PATH provides businesses with less than $50 million in gross receipts the ability to claim the R&D tax credit against the alternative minimum tax (AMT).

Going Back in Time for R&D Benefit

If the R&D tax credit was overlooked on prior year tax returns, not all is lost. Taxpayers are allowed to amend tax returns to utilize the R&D tax credit.

Remember, the sooner you file your return claiming R&D tax credits, the sooner you can apply it to your payroll tax liability. Taxpayers are eligible to use the credit on payroll tax returns in the first quarter following after the income tax return is filed. Learn more about the R&D tax credit or contact an Anders advisor to discuss R&D credit opportunities in more detail.

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