The Protecting Americans from Tax Hikes (PATH) Act, passed in 2015, has helped many qualified small businesses and startups plan for long-term growth. Now that many provisions of the Act have been made permanent, learn how to utilize them to better position yourself for success.
First, how does a Startup qualify? A corporation, partnership, or individual with less than $5 million of gross receipts during the tax year, for whom the taxpayer did not have gross receipts for any tax year prior to the fifth tax year ending with the year of the claim, is a qualified startup business that may take advantage of the following provisions.
What is the Research and Development credit worth for a Startup? Based on eligible R&D expenses, this credit can be used to offset payroll taxes up to $250,000 annually.
How to qualify. In order to claim R&D credits, Startups must meet the following qualifications:
- Have gross receipts for five years or less
- Have less than $5 million in gross receipts during the year in which the credit is elected
- Have qualifying research activities and expenditures (even if they aren’t profitable)
What are qualifying activities? Regardless of industry, activities must pass this four-part test in order to qualify for the R&D credit:
- The activity was performed to eliminate technical uncertainty regarding development or improvement of a product or service
- The activities included a process of experimentation
- The process involved the sciences such as engineering, physics, biology, chemistry, or computer science
- The purpose of the activity was to create a new or improved product, service, or process aimed at increased function, performance, reliability, or quality
Which expenditures qualify for the credit? Eligible expenditures include:
- Contract research
- Technology Purchases/Usage
What are the benefits? Start-ups could potentially claim the credit for up to five years, amounting to a maximum of $1.25 million in total credits claimed. In the event that the credit exceeds a company’s Social Security tax liability in any quarter, the credit can be carried forward to the next quarter. Thus, the credit can help business owners plan for and mitigate expenses in the long term.
For more information or questions about the PATH Act, please contact us.