R&D Tax Credits Can be Big Boon for Startups

Dec 22, 16 R&D Tax Credits Can be Big Boon for Startups

The Texas R&D tax credits are in line with Federal R&D credits introduced by the US Government. In fact, the Texas State government has made the deal sweeter by increasing the purview of the research and development credit.

We need not tell you that how important the additional cash is for a startup to keep the business running when profits is a distant dream that will take some time to realize. Until December 2015, the R&D tax credits were temporary but in December 2015, the R&D tax credits were made permanent under the PATH Act (The Protecting Americans from Tax Hikes Act of 2015). This means organizations can plan their long-term R&D projects with greater certainty.

R&D Tax Credit for Startups

• 1-5 years – 3% for first five taxable years after December 31, 1993, in which the company has QRE’s

• 6th Year – 1/6th of aggregate of qualified research expenses of 4th and 5th year divided by Years 4 and 5 aggregate gross receipts

• 7th year- 1/3 of aggregate of qualified research expenses of 5th and 6th year divided by Years 5 and 6 aggregate gross receipts

• 8th year – 1/2 of aggregate of qualified research expenses of 5th, 6th, 7th year divided by Years 5, 6 and 7th aggregate gross receipts

• 9th year – 2/3 of aggregate of qualified research expenses of 5th, 6th, 7th, and 8th year divided by Years 5, 6, 7, and 8 aggregate gross receipts

• 10th year – 5/6 of aggregate of qualified research expenses of 5th, 6th, 7th, 8th, and 9th year divided by Years 5, 6,7, 8, and 9 aggregate gross receipts

Texas Provides Credits and Exemptions That Create a Thriving Startup-Ecosystem

Texas R&D Credit extends the purview of R&D tax excemption proposed by the Federal government. According to new guidelines, the Texas government provides sales/use tax exemption to companies that applies to use, storage and sale of depreciable tangible property directly that was used in qualified research. If the property is rented, sold, leased, or used by a person who is involved in “qualified research” then he can claim sales/use tax exemption

To get the exemption the taxpayer is required to register with Comptroller’s office prior claiming the exemption on qualifying purchases.

Texas R&D Tax Credits Can Be Used Against Franchise Tax

The amount of credit given against the Franchise Tax is 5% of the difference between QRE’s(Qualified Research Expense) incurred in Texas during that period and 50% of the average amount of QRE’s incurred in Texas during three tax periods immediately preceding the period on which the report is based. The good thing is R&D tax credit can be carried forward for 20 consecutive reports.

R&D Tax Credits Are Applicable to AMT (Alternative Minimum Tax)

The revamping of R&D tax excemption rules has benefitted the startups immensely. Earlier startups generating less revenue were required to AMT and the R&D credits were not applicable to AMT. With modifications to the R&D tax credit laws, eligible businesses including startups with $50 million and less in gross receipts can apply for R&D tax credit against the AMT liability.

According to new regulations, startups having gross receipts less than $5 million can apply for R&D incentives up to $25,000 against their payroll taxes.

How Can Startups Get the Payroll Tax Benefit?

Consider Company A, a startup employing 25 people with an annual average salary of $80,000

· Total Payroll costs for a year – $2,000,000

· the OASDI(Official Name for Social Security) Employer Tax Liability (full year) for 25 employees will be – $2,000,000 X 6.2% = $124,000

· 2016 Research Credit = $25,000

· Estimated OASDI employer tax–2017 Q2 is $31,000

· Credit applied is $31,000

· OASDI employer tax amount due- Q2 is $0

· Carry forward to 2017 Q3 is ($250,000 – $31,000) = $219,000

According to the Small Business Trend ranking, Austin is the best city in Texas to launch a startup. There is no denying that startups in Texas have low tax burdens and a great startup- network. All this creates a business atmosphere that is encouraging and stimulating for startups. Texas has its own version of R&D tax credits that puts more money back in startups that help startups in their initial struggling years.