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Qualifying for the R&D tax credit

The US government provides a tax credit for companies that engage in qualified Research and Development (R&D) activities. When filed properly, this R&D tax credit can save your startup thousands. But calculating tax credits like this can be tricky territory.

The US government provides a tax credit for companies that engage in qualified Research and Development (R&D) activities. When filed properly, this R&D tax credit can save your startup thousands. But calculating tax credits like this can be tricky territory.

So, how do you know if you qualify for the Research & Development (R&D) tax credit?

If your company participates in any of the following, your business likely qualifies for the R&D Tax Credit:

  • Enhances existing products or processes

  • Develops or designs new products or processes

  • Develops or improves upon existing prototypes and software

It’s important to note this credit is not just for scientists. In fact, many companies in the tech industry are qualified to apply for the R&D tax credit as well.

In addition, many startups and small businesses may qualify for a chunk of this credit as well. According to AlliantGroup, up to $1.25 million (or $250,000 each year for up to five years) of the federal R&D Tax Credit to offset the Federal Insurance Contributions Act (FICA) portion of their annual payroll taxes. To be eligible, your company must:

  • Have less than $5 million in gross receipts for the credit year

  • Have no more than five years of gross receipts

To calculate your R&D tax credit, you must first determine your Qualified Research Expenses (QREs) in excess of a ‘base amount’ for each year. The base amount can be determined by multiplying the ‘fixed-base percentage’ by the average annual gross receipts of your prior four taxable years.

However, there is also a simpler way for companies to determine their R&D tax credits. The Alternative Simplified Credit (ASC) approach equals 12 percent of the excess of current-year QREs over 50 percent of the taxpayer’s average QREs for the prior three years. For start-up taxpayers, the credit would equal 6 percent of current-year QREs.

You can get a rough estimate of what your R&D tax credit is by using our free calculator tool.

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