For many startup companies, money is tight and income (if any) is low. Since these companies are not having to pay any federal or state income tax, they are generally not interested in spending money to perform research and development (“R&D”) tax credit studies because they do not believe they can actually use their R&D tax credits. Many entrepreneurs think, why should I invest money now and wait to use the benefit at some point in the future? Does this even make sense for me and my company?
Another reason startup companies may be unwilling to engage a tax specialist to assist in the calculation and substantiation of an R&D tax credit is because they believe they are unable to utilize the credit in the current year and cannot spend their limited cash on a study that results in a credit to be used at an unknown time in the future.
Fortunately, beginning in the 2016 tax year, startup companies can use all or part of the federal R&D credit to offset payroll tax liability if they meet the following criteria: 1) have less than $5 million in gross receipts; and 2) have only had gross receipts for a maximum of 5 years. They can offset the credit up to $250,000/year against the employer’s portion of FICA taxes.