The R&D tax credit is sizable: it’s worth up to $250,000 per year. Over time that can add up to millions of dollars in savings – which you can then reinvest in your business to extend your runway or accelerate growth.
Yet, despite its size, the credit continues to go unclaimed by thousands of small- and medium-sized businesses who don’t realize they qualify. For instance, many don’t know that engineer wages, contractor payments, and payments to cloud service providers commonly count towards the tax credit.
In fact, we estimate that hundreds of our own customers at Pilot aren’t claiming the credit when they could (that’s one reason we launched Pilot R&D Credit). Many companies are leaving money—and lots of it—on the table. Are you?
While the best way to see if you qualify is to talk to an expert, we created this brief guide to help you understand the basics about the credit. We’ll answer all your top questions including:
Let’s dive in.
The R&D tax credit isn’t just for tech startups. Businesses from many industries can qualify, including hardware, life sciences, ecommerce, agriculture, financial services, and more. Started in 2016, the goal of the R&D tax credit is to encourage innovation through designated research and development activities.
For pre-revenue businesses, the credit is typically applied by offsetting payroll liabilities—specifically Social Security and Medicare taxes (FICA).
For businesses that already have revenue, the credit is applied against income tax liabilities instead.
There are many R&D activities and costs that count towards the credit. If you think you’re on the fence, start by asking yourself the following questions about the nature of your product development:
Did you answer is “yes” to any of the above questions? Then there’s a good chance some of your expenses could be claimed.
More specifically, the IRS allows four main categories of R&D costs to count as expenses. Some may even surprise you, including:
Though these may seem exhaustive, there are many expenses that are explicitly excluded from the credit. Those include research conducted outside of the US, reverse engineering, surveys and market research, studies that relate to social sciences or humanities, and research funded by grants or contracts. Get in touch if you want a full list.
Applying for and getting the credit can be a long, tedious process. It requires detailed documentation, filing the right paperwork, and working with your payroll provider to apply it against your FICA taxes.
Here are three main steps to claim your credit:
With many moving pieces, make sure to periodically monitor your payroll taxes to ensure your credit is being applied correctly throughout the year.
Choosing the right partner to help you get the credit is crucial: They should have expertise in both tax law and technical businesses who rely on R&D practices.
Your partner needs to build documentation that protects you in an audit. In fact, the R&D tax program is on the “Dirty Dozen list,” which means the IRS frequently audits companies who claim the credit—and they can do so for up to seven years. If you can’t produce sufficient technical evidence in an audit, you will need to return the money and even worse—potentially pay a hefty penalty.
Here’s what you should look for in a partner to help you claim the credit:
Many accountants and tax preparers who provide R&D tax claiming services only provide part of the puzzle: They ask you a couple of questions around your expenses, and then file the forms based on the calculations. However, without the engineering expertise, it’s difficult for them to understand, document, and defend your R&D practices to the IRS.
To ensure you get the maximum amount you’re owed and protect you from audits, it’s best to partner with the right types of experts.
The R&D tax credit is designed to offset a portion of your R&D costs, not eliminate all of them. How much money can you expect? In general, the IRS tends to credit back 5% to 15% of your total qualifying expenses, which include: wages, contractor payments, and equipment that can be counted towards that tally.
Whether you’re a tech startup, ecommerce, or agtech company, it’s time to claim what’s yours. The claiming process can be tedious with a ton of paperwork; Find a partner who gets your business, has meticulous documentation, and has the area expertise to get the maximum amount you deserve. If you’re doing all this great R&D, at least you want the credit!