new Federal FUnding Source for startups IN 2016
- A company that is not tax-exempt under Code Sec. 501
- The company can not have had gross receipts prior to the five-tax-year period ending with the credit year(e.g., for credit year 2016, must have no gross receipts in any year prior to 2012).
- Current gross receipts are less than $5 million for the credit year (e.g., less than $5 million in Gross receipts in 2016)
WHAT ACTIVITIES ARE QUALIFYING?
Regardless of industry, if a company’s activities meet the following requirements, known as the four-part test, then they could potentially be eligible for this credit:
- Technical uncertainty. The activity is performed to eliminate technical uncertainty about the development or improvement of a product or process, which includes computer software, techniques, formulas, and inventions.
- Process of experimentation. The activities include some process of experimentation undertaken to eliminate or resolve a technical uncertainty. This process involves an evaluation of alternative solutions or approaches and is performed through modeling, simulation, systematic trial and error, or other methods.
- Technological in nature. The process of experimentation relies on the hard sciences, such as engineering, physics, chemistry, biology, or computer science.
- Qualified purpose. The purpose of the activity must be to create a new or improved product or process (computer software included) that results in increased performance, function, reliability, or quality.
Congress made a small but valuable change to the R&D credit in December 2015, allowing a qualifying small business taxpayer to use federal R&D tax credits against their federal payroll tax liability.
Many startups will meet the criteria of a Qualified Small Business (QSB), and can improve cash flow by up to $250,000 a year by claiming federal R&D tax credits under this new provision.
If the company wants to offset payroll tax for the 2016 year, it must make the payroll offset election on its original tax return. Therefore, if the company wishes to use the credit at the earliest point possible and the company has a return due date of 3/15/17, the company should properly quantify the amount of the 2016 credit prior to 3/15/17. This includes documenting the company’s 2016 R&D activities and expenses PRIOR to the 3/15/17 return due date. Once elected on the tax return, the company may then utilize the credit to offset payroll tax on the next quarter’s payroll tax liability up to $250,000 annually.
wHAT ARE THE RISKS?
Similar to a deduction, credits are a way for companies to reduce tax. The benefit of a credit is far greater because it is a dollar for dollar reduction. The increased benefit result in increased documentation requirements imposed by the IRS that a company is required to maintain in order to use the credit. Companies should consult with Altius on any exposure so they fully understand that although the benefit may be large it must be able to retain and deliver documentation proof as a result of increased documentation requirements imposed by the IRS. Altius helps clients understand these requirements and identify if there are any areas where the company can improve their compliance with the ever changing R&D tax laws and documentation requirements.