The R&D tax credit is a dollar-for-dollar, non-dilutive tax incentive for US-based companies that innovate. Companies across industries can qualify, including early-stage startups and profitable companies.
Federal R&D Tax Credits
In 1981, R&D tax legislation was passed, but in the years that followed it mostly benefited large enterprises with $100M+ in revenue. In 2015, the PATH Act gave small and medium-sized businesses access to R&D tax credits.
For early-stage startups – Startups may use federal R&D credits against up to $250,000 of their payroll taxes in five separate taxable years—a total of $1.25M—if they have: Gross receipts less than $5M in the tax credit year and no gross receipts for any of the four preceding tax years. The credits can also be carried forward as an asset on their balance sheet until utilized.
For mid-stage and mature companies – If a company has gross receipts over $5M or began bringing in sales over 5 years ago, it could qualify to offset unlimited income taxes with R&D credits.
A wide variety of activities typically performed during software and hardware development qualify for the R&D tax credit. However, even non-technical roles and activities can qualify, including marketing, legal, and C-Suite expenses.
At Ardius, we specialize in discovering the qualifying activities that get missed by everyone else, and that includes capturing credits for your non-technical roles and expenses.
Yes! Even early-stage, pre-revenue startups may use federal R&D credits against their payroll taxes. Don’t have payroll set up yet? The credits can also be carried forward as an asset on your balance sheet until you’re ready to utilize them.
On average, the federal credit ranges up to 20% of qualified research expenses. However, this is a generalized range and the actual benefit amount varies based on your company’s qualified activities. Keep in mind that in addition to federal credits, you may also be eligible for state R&D tax credits as well.
We’re glad you asked. Some R&D credit platforms only check for federal credits, but Ardius maximizes federal and state credits. There are currently 35 States (including CA) that offer an additional R&D credit. These state credits are available for companies with profit, and are only available to offset income taxes.
Yes, if the statute of limitations hasn’t passed, R&D tax credits that offset income tax liability can be assessed and claimed retroactively. This option is only available for profitable companies. Filing an amended tax return may be required if you paid tax in years past, but that refund check will be worth it!
R&D tax credits that offset payroll taxes (e.g. for early-stage startups) cannot be claimed retroactively, but can be carried forward as a deferred asset on your balance sheet.
We work with your accountant to help calculate and claim your R&D tax credits. To properly file an R&D tax claim, accountants must be well versed in the original law from 1981, the Alternative Simplified Credit (ASC) calculation added by the Tax Relief and Health Care Act of 2006, and the 2015 PATH Act which expanded the incentive to small and medium-sized businesses. If an accountant is trained on the above, it’s still time consuming to track eligible activities monthly and prepare to file each year.
Our technology automates the process, scanning your payroll and accounting data for qualifying credits and saving countless hours. Then, our expert CPAs review your claim, assist your accountant through filing, and provide support in the rare case of an audit.
No, the R&D tax credit is NOT taxable income. You can think of it as non-dilutive capital for your business.
The R&D tax credits and refundable amounts are generally received one of four ways, depending on your company and how you decide to utilize the credit:
Ways to Utilize Credits
- On an amended return against prior taxes paid (refund check)
- As a payroll tax offset, for startups with gross sales under $5M and less than 5 years of sales (quarterly refund check or credit from your payroll provider);
- To offset your current year’s income tax liability (filed with your tax return to reduce your amount owed);
- As a deferred asset on your balance sheet (carried forward for up to 20 years).
The R&D credit and payroll tax offset occurs on the employer side, specifically the FICA-SSN portion if you are utilizing it as a C-Corp. If your company is an LLC, Partnership, etc., the benefit will flow through.
If it’s not utilized or still a carryforward, the R&D tax credit is considered a deferred asset on your balance sheet. It is a below-the-line benefit and should be shown on your Income Statement or Profit & Loss Statement either as a corporation tax reduction or a credit (depending on how your accountant classifies it).
We use 256-bit, bank-level encryption to protect your data and safely and securely integrate with your existing platforms, including your payroll provider (e.g. Gusto) and your accounting system (e.g. Quickbooks).
It’s part of our mission to help startups and other companies grow, so we only make money when you do (aka when you actually utilize your R&D tax credit). A good benchmark for utilized credit is when it is officially filed and submitted on your tax return. It’s free to get an estimate of what you could qualify for.
Once you’ve utilized credits, you’ll be invoiced for $500 per filing plus a percentage of the utilized credits. Make an appointment to get details about an Ardius plan and pricing.
Ardius supplies you with supporting qualitative documentation compliant with IRS regulations for substantiating any R&D tax credits you claim. Ardius also provides support in the rare case of an audit. Our expert CPAs helped the IRS standardize their Audit Technique Guide for R&D tax credits, so you know you’re in good hands.
Questions or comments?
Send us a message and let us know how we can help.