With 2017 fast approaching, business owners and executives at startup companies should be preparing to claim the research & development tax credit. Why now? For the first time, Qualified Small Businesses (“QSBs”), (companies under $5MM in gross receipts with less than 5 years of revenue), who normally could not utilize a Federal income tax credit, can now recover cash and reduce costs by applying the R&D credit against payroll taxes.
TRCG Advisors has a few best practices for companies planning to take advantage of this opportunity for the first time.
- Plan on filing 2016 Federal income tax returns on or before March 15, 2017. Since QSBs cannot begin applying credits against payroll tax until the quarter after the Federal income tax return is filed, it benefits QSBs to file the 2016 return as soon as possible. S-Corporations and LLC’s should file by 3/15/17 and C-Corporations should file no later than 3/31/17. The sooner the returns are filed, the sooner the savings can be realized.
- Begin organizing your records at year-end. Before leaving for the holidays, gather information to answer a few key questions:
- What were the major research efforts, projects, design, and/or development activities conducted in 2016?
- Which employees worked on these efforts? What percentage of their time was spent on each project? What were these employees’ wages?
- For manufacturing companies, were any supplies or raw materials used to produce prototypes or “first article” item?
- Were any US-based contractors utilized on these projects?
- Have someone lead the process from beginning (gathering information) to end (realization of savings). This process has a lot of moving parts: identifying and documenting qualified research activities and expenses, calculating the credit and filing the proper forms with the 2016 tax return, and ensuring that payroll credits are properly applied against payroll taxes and reported correctly. Having one party lead this process to ensure accuracy and timeliness at each step will be critical to (a) ensuring the business receives the maximum benefit while (b) correctly documenting and reporting the benefit to satisfy IRS compliance.
Please keep in mind that this is a new incentive, both for taxpayers and the IRS, and we fully expect this to be a learning-process on all sides. Many parties – the company, its CPA / tax preparer, and payroll service – will need to be in sync to take advantage of the benefit.
TRCG Advisors stands ready to assist startup business owners, as well as their executives and outside advisors, with potential R&D credit claims.