A quarter of a million dollars could transform your startup. Or it could buy you a vintage Taco Bell hot sauce packet. No joke—as of this writing, that is a genuine listing on eBay: one unopened pouch of Taco Bell hot sauce, circa 1984–1992, priced at exactly $250,000.
If you can think of better ways to spend $250,000 (or if collecting expired condiment packets is truly your definition of Living Más—I won’t judge), you should consider claiming the United States Research Experimentation Tax Credit, commonly referred to as the R&D Tax Credit.
A $250,000 Federal Incentive: What Is The R&D Tax Credit?
The R&D Tax Credit is a tax incentive offered by the IRS to encourage innovation, foster job growth, and promote research and development in key industries throughout the U.S. First introduced in 1981 as a temporary measure, the R&D Tax Credit proved to be a hit as far as tax laws go. In 2015, after years of extending the credit, legislators voted to expand it and make it a permanent part of the federal tax code.
These days, any business engaging in qualifying research and development can potentially save tens of thousands of dollars on their taxes. It’s not difficult to qualify for the R&D Tax Credit. To be eligible, a business’s R&D program has to meet four simple criteria:
- Specificity: The R&D should relate to a specific product or business component that you provide, rather than “general” research applicable to multiple areas of your business.
- Discovery: The R&D should target uncertainty associated with the development or improvement of a business’s offering (i.e. it needs to make tangible progress in the field).
- Experimental: The research process must identify the uncertainty and establish and evaluate alternative resolutions; you can’t “know the answer to the problem” ahead of time.
- Technological: The experimentation must rely on principles of science or engineering.
Why Don’t More Businesses Claim the R&D Tax Credit?
Your organization does not need to be profitable in order to claim this credit. Businesses can qualify as long as they have no more than five years of gross receipts before the year in which the credit is claimed, along with gross receipts not exceeding $5 million for the current tax year. In other words, this is something that can benefit small, innovation-centric companies that have just started (or haven’t yet started) turning a profit.
Sounds like your typical startup, right? Nonetheless, countless owners of growing businesses assume their organizations don’t qualify because they’re not big or “science-y” enough. Moreover, many still erroneously believe that their only option when claiming the credit is to carry it forward for years until they become profitable.
Here’s what these business owners don’t know: thanks to the changes in 2015, employers can now apply the R&D Tax Credit against their Social Security payroll taxes—up to $250,000 in a fiscal year.
Of course, before claiming these credits, organizations should investigate whether their activities qualify. We can help: as an inDinero customer, your financial team will determine eligibility and even help you claim this credit, all as part of your ongoing accounting and tax subscription.
For those who do qualify, let me repeat what you stand to gain: you can use R&D tax credits to offset your payroll liability by as much as a quarter of a million dollars. Now, I’m sure you can think of a few (hundred) ways to spend all that money, but just in case you’re having trouble seeing past the dollar signs in your eyes, here are a few ideas:
5 Ways You Could Spend That Extra $250,000
- Hire more people. The global talent market is tight and keeps getting tighter. Imagine having the power to expand your team without expending essential resources. With $250,000, you could recruit, hire, onboard, and pay a year’s salary for at least one or two skilled developers or engineers, if not more. Alternatively, you could use that money to enrich your existing team through employee engagement and workforce development programs.
- Overhaul your space. Who couldn’t use better chairs, desks, and tables? How about sofas, lighting, windows, indoor plants, or kitchen appliances? With $250,000, you could renovate your entire office, build an addition, or even move into a new space. We’re not just talking about decorative touches, either—think about the health and accessibility measures (such as ramps, elevators, and auditory devices) you could implement to ensure all employees feel comfortable and happy in your workplace.
- Purchase or lease new equipment. Looking to buy a new commercial truck, CT scanner, or industrial 3D printer? Good luck… Oh, wait, I forgot you claimed the R&D Tax Credit. What better way to spend all the money you saved on R&D than on a device that will take your research and development initiatives to the next level?
- Boost your marketing efforts. If you’re in charge of a startup, there’s a good chance you’re spending a lot of time thinking about how you can achieve more exposure. R&D is great, but even better is turning all that innovation into revenue. Consider what might happen if you took your $250,000 tax credit and used it to launch a major advertising campaign, rebrand your company, break into a new market, or attract investors.
- Do literally anything. A quarter of a million dollars is one of those sums of money that opens up limitless possibilities. In addition to the ideas above, you could invest in—or buy—another business, take care of insurance, build your cash reserve for legal emergencies, hire an advisor, upgrade your communications infrastructure—the possibilities are endless.
Of course, $250,000 is the maximum amount you can apply through the R&D Tax Credit program, but the point still stands. Any startup could benefit from an additional $25,000, $50,000, or $100,000 in offsets. And because R&D credit changes are potentially coming to the tax code in 2022, Now is the time to consider whether your business can claim this incentive.
To learn more about how the R&D Tax Credit might directly benefit your business, and to find out if your R&D program qualifies, download our free Business Owner’s Manual to the R&D Tax Credit.