Hi everyone! I’m trying to figure out how to qualify for R&D tax credits and how to go about claiming them. My situation: small startup making under $2M in revenue and fewer than 10 software developers.
I’ve spent hours going through search results and blogs, but I’m hoping for some real, detailed advice. Any help would be great!
Look up the ‘R&D 4-part test.’ You’ll find plenty of guides from accounting firms explaining what expenses qualify for R&D credits. If your company is developing new software, most of your credit will come from wages for your developers’ R&D time, 65% of payments to contractors, and cloud storage costs if applicable.
Have your developers track and log their time spent on R&D activities. Some companies just estimate a percentage, but if you’re audited, detailed logs are better. Small companies like yours probably won’t face an audit, but better safe than sorry.
You claim the credit annually on Form 6765, attached to your income tax return (likely a 1065, 1120, or 1120S). Hopefully, your CPA is handling this.
Discuss with your CPA whether it’s better to apply the credit toward income taxes or employment taxes. If you’re not profitable yet, the employment tax option might be better, but it does add some extra steps for payroll.
Don’t forget state credits! Some states let you sell these credits for cash, so they’re worth looking into even if you don’t have taxable income.
Also, ask about how software development costs will affect your taxable income. Technically, you don’t get a choice, but some companies skip claiming the credit if the tax costs of capitalization are too high in the early years. Congress might fix this, but who knows when they’ll get around to it.
@Reagan
I’m not a CPA either, but I worked with our firm on R&D tax credits. For #2, I wanted to mention that our auditors were happy with exports from our project management tool as proof of work. These exports showed the estimated effort for each task, the project name, and status updates with timestamps. It covered a lot of what they needed.
@Reagan
Quick question about #6. Do you just total up software development costs each year and list them as a separate depreciation item? Assuming a 5-year depreciation, would you end up with 5 different costs being depreciated at once after year 5?
To be honest, talk to a CPA firm that knows this stuff inside out. I’m a CPA, and even I refer R&D tax credit work to specialists. It’s just too much paperwork.
Those R&D studies are pricey, and you probably won’t get a super detailed answer here. Developer salaries might be eligible, but it depends on what you’re doing.
Just a reminder to keep everything public so everyone can see. Offering or asking for DMs isn’t allowed here because of scams and the no-soliciting rule.
Figure out how much each developer is paid for R&D work compared to regular tasks like support and bug fixes. Report the R&D costs on Form 6765 with your business tax return. If you’re a startup, the credit is usually 10% of your R&D expenses.
Good advice already shared about the 4-part test and looking for outside help. Just wanted to add that for startups making less than $2M, you can apply the credit toward your payroll taxes. R&D studies can be expensive, but the benefits should outweigh the cost.
Also, some states offer great credits, even refundable ones, meaning you can get the benefit even without taxable income.