Reduce your startup's payroll taxes through the new Federal R&D Tax Credit

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.

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.

https://www.irs.gov/pub/irs-regs/research_credit_basic_sec41...

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.

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.

cde-v is spreading categorically false information to the potential detriment of many entrepreneurs. This comment should be downvoted or flagged.

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.

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.

IANACPA

- 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

> Beginning in 2017, qualified small businesses may claim up to $250,000 per fiscal year, applying it against their Social Security taxes.

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.