What You Need to Know About R&D Tax Credits

A perspective from CEO of Neo.Tax, Ibrahim

A perspective from CEO of Neo.Tax, Ibrahim

by: Ibrahim, CEO of Neo.Tax|

February 15, 2023

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Articles | Corporates | What You Need to Know About R&D Tax Credits

Consider that 6.25% of every paycheck you cut is federal payroll tax. You can get that refunded with the R&D tax credit, which ends up being quite a bit of money. – Ibrahim, CEO of Neo.Tax

The U.S. Government has had a tumultuous relationship with Research and Development tax credits. Imagine you’re building a company, whether it’s self-driving or otherwise, and the U.S. Government says to you: “We’d really like you to build this in the U.S. This way you’re creating high-tech jobs and we can keep the innovation right here in America.” Ultimately, when your startup is selling for hundreds of millions of dollars in revenue, that revenue is of course taxable in the United States. 

You might say to Uncle Sam: “Well, it’s a lot cheaper to build this in China.” The Government responds with: “Okay, fine. If you build it here, we’ll give you 10% to 14% cash back on all the money that you’re spending here in the US in the form of a tax credit.” That’s not a bad deal, as it happens. Even though China still works out cheaper, you decide to support the US. This is how things worked back in 1981. 

In 2015, congress realized that most of the companies that are applicable for the R&D credit were startups — startups that weren’t even paying taxes because they weren’t profitable — thus rendering the credit useless. The lion’s share of R&D credits were instead going to huge megacorps like GE and Raytheon. 

Supporting innovation at these megacorps has its benefits for the economy, but the vast majority of high-tech jobs created in the US are by startups. As a result, in 2016, congress amended the law to allow startups to take the credit as a payroll tax credit instead. Every single company is paying payroll taxes, irrespective of whether or not they’re profitable, so this change brought huge benefits to startups. Finally, the prerevenue innovators driving America’s economic growth could get money back in the form of the R&D credit.

Consider that 6.25% of every paycheck you cut is federal payroll tax. Getting that refunded with the R&D tax credit is quite a chunk of change back into your company’s coffers.

At Neo.Tax, we set out to solve the R&D credit filing process, because it was a problem we understand personally. We’re 18 people at Neo.Tax — by no means a huge company — and yet we just got last quarter’s check back and it was around $37,000. That’s not a small number.

At this moment, when every startup is hustling to extend its runway through this economic downturn, it can be the difference between keeping the lights on and closing shop.

Because of the broad definition for qualified activities, businesses from almost every industry have claimed R&D tax credits. If you have employees or contractors in the United States who spend any time developing new or improved products, processes, software, algorithms, formulas, or inventions, then you likely qualify for the R&D tax credit. Learn more about how Neo.Tax can help you capitalize on R&D credit by clicking here.

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