For years, we’ve been working to make sure innovative companies claim the money they’re owed via the Federal R&D Credit. It’s never been more important to extend runway, and claiming your credit is the best way to secure non-dilutive capital.

But even as we’ve watched the Federal R&D Credit become more widely known by founders and CFOs, many innovative companies still aren't aware that 38 states offer an additional State R&D Credit for companies. This is tax law built specifically to incentivize innovative companies like yours to, well, innovate. Not claiming it is just leaving money on the table…

What is the State R&D Tax Credit?

Like the Federal R&D Tax Credit, many states have a state-specific R&D credit to incentivize innovative companies to create jobs and products within their state. Currently, 38 states offer specific R&D credits — each differs slightly, but many follow similar frameworks to the Federal R&D Tax Credit when it comes to Qualified Expenses and deadlines.

Which States Currently Offer an R&D Tax Credit?

As of 2023, 38 states offer their own R&D Tax Credit in an effort to incentivize job creation, and as a means to stimulate the local economy. Those states are:

Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Texas, Utah, Vermont, Virginia, Wisconsin.

While each state has different rules on which expenses qualify, what type of companies can file for the credit, and how much the credit is worth, it’s always valuable for a company to claim every R&D credit they’re owed. Go to Neo.Tax and we can help calculate how much you’re owed and help you prepare your R&D tax credits today!‍

You’re a California-Based Company; How Much Can You Claim?

To give a sense of how valuable these credits can be, we wanted to share a case study of a California-based company that used Neo.Tax to claim both the Federal and State R&D Credit. For any research and development done within the state of California, the California State R&D Credit is equal to the sum of: 1) 15% of qualified expenses that exceed a base amount + 2) 24% of basic research payments.

A Series A IT Management Software Company approached Neo.Tax to help with their R&D Credit filing. With a revenue of $1.5M and $9M in expenses, the rapidly growing startup was able to claim $150,000 via the Federal R&D Credit. And how much more could they claim via California’s State R&D Credit? $50,000! 

That extra $200K in their coffers was a game-changer during this precarious economic moment. And all it took was reaching out to Neo.Tax. As founders know, there’s almost no such thing as free money. But this credit was built by Congress and by 38 states to incentivize innovation within their borders. So, the money is available to innovators. All you have to do is claim it.

Book a call with an expert at Neo.Tax and we’ll walk you through the entire process. It’s easy and takes less than 30 minutes. So, what are you waiting for?

When Sachin Sood was in college at UC Irvine, a friend asked him what he planned to do with his economics degree. In retrospect, Sachin now knows, “You can’t do s*** with economics, quite frankly, unless you’re an East Coaster who wants to go into banking,” but as a 20-year-old college student, Sachin responded confidently. “I said, ‘I want to be a CFO,’” he remembers, grinning. “No joke.” 

In the two decades since graduating, Sachin has taken a winding path to the CFO chair at CRV, the venture capital firm that invests in early-stage enterprise and consumer startups. “Now, did I know what CFO meant while at UC Irvine? Hell no. I had no idea what a CFO was going to do at that point,” Sachin says, laughing. “And now, in retrospect, it's completely different than I ever anticipated. But I knew I wanted to go down this route.” 

Like most career paths, the route only looks linear when seen through the rearview mirror. “Economics went into tax when I took the job at PwC. Tax went into a finance operational role when I was a controller, and that actually ended up changing to more global thinking and finance models at e.ventures,” he explains. “And Social Capital was a completely different mold altogether.” 

Since entering the workforce in 1999, Sachin’s “done a little bit of everything.” As he explains it: “For me, it's been hop, skip, jump.” 

A Foundation in Taxes

Sachin credits a lot of his success in investing and venture capital to his time working on the tax side early in his career. He began at PricewaterhouseCoopers (PwC) as an associate before moving to the role of Tax Manager at Delloite and Controller at Saints Capital. Those 8 years getting deep on tax allowed him to understand the foundational aspects of alternative investments such as venture, private equity, and hedge. “Taxation is the fundamental basis of a lot of what we do, especially in venture,” he says. “When government creates a tax credit, you'll see more money going into that type of business because companies know there's a tax incentive behind it. So, tax drives a lot of what we do. People just don't notice it sometimes, but it's critical.” 

While so much of the focus for pre-IPO companies is on valuation, those numbers are projections for shareholders. Taxation at the time of an IPO is the tangible reality for a VC firm. “People will mark up portfolios and down portfolios in this market, but it doesn't mean anything,” he says. “At the end of the day, it's all about when you exit, what price do you exit, when do you sell it at, what do you IPO at? You want to ensure that when there is an IPO window and there is an exit, it's structured properly to give the best tax structure.”

His background in the fundamentals of economics and his years on the tax side has allowed him to remain laser-focused on the tangible reality. It’s the superpower that’s allowed him to thrive in his role as CFO. “I had an economics background. I went to work at a tax firm. I did portfolio management at Saints; a lot of it. And then I went to Social, where I did a little bit of everything, including working as a CCO at a RIA and sharpening legal skills,” he says. “Now, I’m in a role where all the skill sets are needed.”  

The Five Types of CFOs

Over the last seven years, Sachin has been on the finance side at the global investment fund e.ventures, at Social Capital, and now at CRV. His time as VP of Finance at the two former companies and as CFO at his current company has allowed Sachin to dive deeply into the wide breadth of leadership styles across the tech world. “The investment side is all about learning,” he says. “At times, it's not just about one business that you learn; instead, you have to figure out how that business works across the different companies that focus upon. Each sector is so different. It's so nuanced.”

But from his bird’s eye view, he’s identified what he likes to call “the five types of CFOs.” First, there’s the startup CFO, who is involved across many different slices of the company and must be a master of shareholder desires, cap tables, and much more. Next, there is the small-business CFO, who has to have a mastery of all that but also have a specialty that is specific to the company’s focus. The medium-sized CFO who takes on the role of scaling the business — they are a strategy specialist. “Then you'll have a division CFO at a public company, and finally the public company CFO,” Sachin explains. 

“What we end up seeing is, in the early stages of the company, you usually won't hire a CFO. You will hire an external firm to help you scale. You’ll hire a CFO when you have the breadth and the vision and when you have scale. The best way to say this: you have revenue, at that point, you bring the CFO,” Sachin says. 

But how do you select the correct CFO for your growing business? “It really depends on what the CEO of the firm is looking to do,” he says. “If you're looking at an exit, you're bringing someone a bit more strategic. You're bringing a banker who has a better understanding. And then if you're looking for an IPO, you bring in somebody who actually understands the business in the long run.” 

The real key is for both the CEO and CFO to understand the job of the Chief Financial Officer. “Quite frankly, a CFO’s job is just to know facts. At the end of the day, I always explain: ‘I present facts; it's up to you to make a decision,” he says. “If you want my opinion, I'm happy to provide it because I always have an opinion. But first I present the facts. This is what you're spending. This is what the org is struggling with. This is where costs are compared to our competitors. Ultimately, those choices get brought up to the CEO and then eventually a board member.” 

Delegation Can Power Strategic Thinking

When Sachin first started as CFO at CRV, people kept asking him why he was always reading. He explained that to do his job well, he needed to dive deep into the weeds to fully understand as many aspects as possible of the core business. But now four years into his role, he’s come to understand the power of delegation. “It was really tough for me to be strategic because I knew I first had to learn the core business,” he says. “That’s why you have to rely on another partner. You have to rely on your controller. You have to rely on various controllers or people that are specialists.”

Today, Sachin works closely with two controllers: one who is a tax specialist and the other who is a portfolio analyst who is a data analyst. Each controller can focus full-time on their specialties, ensuring every aspect of their slice of the business is perfectly in order. “I have people that specialize in specific components because I can see the value of having experts in the weeds,” Sachin says. “They're going to be better at that than I am, quite frankly.”

Because Sachin worked in a controller role earlier in his career, he respects the value of great controllers. “It’s rolling up your sleeves. It’s ensuring the fact that your books and accounting records are in place, so there are no surprises at the end of the day,” he says. “They can allow the CFO to focus more on strategy, on thinking ahead, on tax savings, on thinking about how your portfolio is affected, and what the CFO can do to help out your portfolio companies. A great controller opens up a CFO’s mind to do more deep, strategic thinking.”

We aren’t breaking news to tell you that the language of taxes is remarkably obscure. There are tax code numbers, endless terms, numerous IRS tests, and so much more, which all become extremely important on Tax Day. 

You’re not an accountant, but for founders, CFOs, and CEOs, understanding the language of taxes can help you strategize from a position of strength. So, we’re proud to present “The Language of R&D Taxes, Translated”, a helpful cheat sheet from your friends at Neo.Tax :) 

Tax Lingo

Capitalization - capitalization can be understood as a limitation on the timing in which you can take a deduction. There are two different subgroups of capitalization: depreciation (for physical assets) and amortization (for intangible assets).

Deduction - a deduction can be thought of as an expense that is subtracted from taxable income. So, if you made $10 mil in revenue and spent $5 mil on R&D, deducting that amount would make your taxable income $5 mil ($10,000,000 minus $5,000,000).

Doing Business As (DBA) - a DBA is a name other than one’s legal name that a person or company does business under.

Employee Identification Number (EIN) - a nine-digit number assigned by the IRS, used to identify taxpayers who are required to file various business tax returns.

NOL - a Net Operating Loss means how much in the red you are in a given tax year. So, if your startup is pre-revenue or early-revenue, every dollar you spend on payroll, marketing, R&D, or rent over the amount brought in via sales would be counted as an NOL.

Unused NOL - if the loss is not fully used up in the carryback years, any unused portion of the loss may be carried forward for up to 20 years after the NOL year. Any NOL that is not used up in the carryover period is lost. 

Taxable Income - the portion of your gross income that's actually subject to taxation. Deductions are subtracted from gross income to arrive at your amount of taxable income.

Total Expenses - The cumulative sum of expenses from your accounting and payroll systems. 

R&D-Specific Lingo

R&D Credit - enacted in 1981 to encourage research and development (R&D) activities in the United States, the R&D tax credit reduces tax liability for organizations that perform certain activities to develop new or improved products, processes, software, techniques, formulas, or inventions. You can get about 10% back on qualifying expenses such as wages, contractor costs, cloud hosting and infrastructure, supplies, and legal costs.

Expenses allocated to R&D - direct expenditures relating to a company's efforts to develop, design, and enhance its products, services, technologies, or processes.

Qualified Expenses - these are the expenses covered by IRC Section 41. They are the expenses eligible to be claimed as part of the R&D Tax Credit (they must pass the IRS’s 4-Part Test to qualify), such as:

• W-2 Employees (W2, Box 1 Wages) - all taxable wages including bonuses and stock-option redemptions
• Payments to contractors
• Cloud hosting and infrastructure
• Patents
• Cost of Supplies

The 4-Part Test - for an R&D expense to qualify for the R&D Tax Credit, it must pass the IRS’ 4-Part Test. It must:

• work to eliminate a technical uncertainty.
• experiment via modeling, trial-and-error, simulation or other methods.
• use an experimentation process relies on a hard science.
• have the goal to create a new or improved product or system.

New or improved business component (product/process) - the first part of the 4-Part Test: The research must be focused on developing a new or improved business component for the company. A “business component” means any product, process, computer software, technique, formula, or invention held for sale, lease, or license or used in a trade or business. This can include improving the function, performance, reliability, or quality of an existing product or business component.

Technological in nature - the second part of the 4-Part Test: The research relies on principles of the physical or biological sciences, engineering, or computer science, including software development.

Attempts to eliminate uncertainty - the third part of the 4-Part Test: The research aims to eliminate uncertainty concerning the development or improvement of a business component. For example, the method or appropriate design is not apparent and not readily found in the public domain. Essentially, an uncertainty can be “How can we develop this new application?” or “Could this material make our product lighter without sacrificing durability?”

Process of experimentation - the fourth part of the 4-Part Test: The research must be a process of evaluation and generally should involve comparing alternatives looking for the best solution. This includes the iterative trial and error process inherent in version-controlled software development.

Non-qualified R&D (IRC Section 174) - these are R&D expenditures that DO NOT qualify for the R&D credit: 

• R&D after Commercial production
• Internal use software
• Foreign Research
• Funded Research 
• Social sciences, art, humanities

Deductible R&D - In years prior, companies were permitted to deduct R&D expenses in the year they were incurred. Beginning in tax year 2022, that is no longer the case. Instead, you are now required to amortize those expenses over five for domestic R&D or 15 years for foreign R&D.

Foreign R&D - R&D performed abroad by U.S.-located companies.

R&D Capitalization - as part of the TCJA, you can now only deduct a fraction of total R&D expenses. That means companies may now find that they have a taxable income, even through they are not yet profitable. The graphics below highlight this point:

Before these changes were written into law, 100% of your R&D spend could be deducted from your income. If you brought in $1M in revenue and spent $2M on R&D to develop your innovative product, you would end the year with $1M in Net Operating Losses (NOLs). Now, you have to spread the R&D deduction over 5 or 15 years depending on if the spend is made in the United States or abroad—this is called amortization. Worse than that, only 6 months of the first year of R&D spend can be deducted. So, if the $2M you spent on R&D is domestic, you’ll only have $200K to deduct from your $1M.

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How does someone become VP of Finance and Capital Markets at Ramp, the finance automation platform helping over 13,000 businesses save time and money? “Right place, right time,” Alex Song says. “It can look like everything was deliberate, but I kind of got lucky with this opportunity.” If you believe that, we have a bridge to sell you…

In reality, Alex rode a double major from Stanford and an MBA from Harvard into a series of positions where his unique brand of precision, accuracy, and academic rigor allowed him to thrive. His decade in the investment world taught him valuable tools that he now uses at Ramp as an operator. Most of all, the unforgiving natures of the public markets instilled one especially valuable lesson. “Across every job I've had in the investment world, there is a respect for rigor and hard work,” he says. “If you're intelligent and you have the aptitude, you're resourceful and you work hard, you should be able to get to the answer, whatever the answer may be.”

Thoughtful Work and Entrepreneurial Grit

After a few years at BlackRock and Morgan Stanley, Alex made the move to Bain Capital, where he worked as an investment analyst. Bain is based in Boston, far from Wall Street and its sales culture. “You weren't in the flow of things in New York City, where you have to contend with brokers calling you up and inundating you with all sorts of ideas,” he says. Instead, Alex had time in the office to dive deep into research, working through data to identify good investment opportunities. “I really liked the sheer academic rigor of that particular job. It was a large organization run by academically-oriented people, who were deeply thoughtful,” he says. 

Alex left Bain to pursue his MBA from Harvard and took a job at Crayhill Capital Management after graduating. The firm had just been founded by two portfolio managers from Magnetar, which is a $30 billion, well-established, 20-year-old hedge fund. He chose the firm because he would be the first employee at the burgeoning company. It was exciting to get in on the ground floor; he loved the startup energy. 

“That experience taught me two things. One: I’m drawn to more entrepreneurial experiences. And two: there’s real tangible value in entrepreneurial grit,” he says. “To succeed at a startup, you can't just be an investment manager; you have to build a business. I love the business-building component.”

He stayed at Crayhill for almost four years, and more than any other job, that was the one that most prepared him for his role at Ramp. “I joined Crayhill as the first finance hire, and wore many different hats while also being an investor,” he says. “When I first started, I had a specific set of mandates, but at a startup, the reality is: you also have to pay attention to the business-building stuff. You have to build a team, be able to communicate effectively, and be able to be a mentor and a friend to the people around you.”

Ramping Up

A decade into his career, Alex began to have the entrepreneurial itch to help build a business again. He was working at Sculptor Capital by then and had begun searching for the next opportunity. Always the analytic thinker, Alex realized that hedge funds were dwarfed in relative GDP share by companies on the operator side. “On top of that, accelerated personal and professional growth also mattered,” he says.  

In July 2020, when he joined Ramp, the company was barely a year old. Alex arrived with a mandate to build out a capital markets program and a strategy around the balance sheet. His years on the buy side gave him specific insight into how Ramp’s business should operate and how they should manage working capital. But his other important role was to bring Ramp’s financial reporting in-house. 

Alex had honed his entrepreneurial skills in his years at Crayhill and began to build a finance team at Ramp. Accounting was an important first step, and he knew he needed to create a dynamic finance operation. “As a leader, hiring is integral. There was probably one point when I was probably spending more than 50% of my time recruiting, interviewing, and sourcing candidates,” he says. 

But finding the right candidate is only the first step in team building. “I certainly place a lot of emphasis on nourishing and mentoring new talent,” Alex says.

Over his three years at Ramp, Alex has grown the finance team to 13 people — they are divided between strategic finance, FP&A, accounting, payroll, and capital markets. 

How Finance Can Superpower a Company

Alex recommends a book called The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. “The main thesis is that your job as a CEO or a management team is capital allocation and thinking through how to efficiently allocate capital,” he says. “Ultimately, that's the role that finance plays: as a startup, you are constantly making a series of short-term and long-term bets.”

Some companies lean towards instant ROI plays like Facebook ad buys, while others invest in hiring engineers for projects that may not ship for several quarters and may not monetize for multiple years. “The question really is, if you're trying to maximize long-term value for your stakeholders, what is the right decision there?” he says. “If you think about it, that capital allocation exercise is an investment decision. So, having the lens of an investor in an operating role is a valuable combined hybrid view.” 

For any company, capital-allocation decisions are paramount, but it’s especially important for a rapidly growing startup like Ramp, which more than doubled its revenue run rate in the first six months of 2022 and doubled headcount YoY. “It's kind of like chaos theory, where any initial bump can have unintended consequences years down the line. We want to make sure that we are curating and course-correcting constantly,” he says.  

That’s why Alex stresses that good reporting is table stakes for a growing business. “And I don't mean just accounting. Accounting is essential, but you also need good business intelligence, good internal reporting, and good metrics,” he says. “If you can't collect and measure good data, you can't make good decisions.”

At Ramp, he’s built a financial team obsessed with creating and leveraging clean, unbiased data. His years in investing demonstrated how advantageous good data can be. It’s helped Ramp grow into an $8 billion company in under three years. “In the hedge-fund industry, when you are collecting data, sourcing data, or buying data, it has to be statistically significant and it has to be accurate and unbiased. Those are the table stakes; you just need mastery over statistics,” Alex says. “I find that, by and large, most people, most of the time, work with very biased data sets and they don't even know it. They think they're making good decisions, but most of the time they're not.”

Hedge funds taught him the value of hard work and getting to an answer. He’s brought that same ethic to Ramp. “If you have questions that you want answers to, there's always going to be an answer,” he says. “In almost every other industry, you can just say, ‘Well, this data just isn't available’ or ‘I don't know who to ask for that’ or ‘that data probably doesn't exist.’ But in the hedge-fund industry, uniquely, there's a lot less respect for the status quo and a lot more respect for just sheer grit and hard work. If the data set doesn't exist, create it, or go buy it, or go partner with subject-matter experts and create that data together. The public market is unforgiving.”

Log onto LinkedIn or head to the business section of any bookstore and you’ll find an endless well of stories about the path to CEO. But the road taken to CFO is much less discussed. I’ve always been fascinated by the way finance leaders within companies progress through their careers and how that trail delivers insights into the way finance can be a strategic tool for a business.

For the first in our CF0to1 series, I spoke with Daniel Kang, VP of Finance at Mercury, the company more than 100,000 startups trust for banking. His career has taken him from banking to private equity to tech giant to fintech startups and has overlapped with some of the most fascinating companies and business minds in the space.

“During high school, my dream was to go work for the U.N. but then I read this book by Thomas Friedman called The World Is Flat and talked to a bunch of people who said, ‘Hey, actually, if you work for a business, look at all the positive impacts you can make,’ and my path changed,” Mercury VP of Finance Daniel Kang says. “I knew nothing about business or what I wanted to do within it. Business is such an abstract term, right?”

But Kang followed the vagaries of life in business to NYU, where he was deluged with young people convinced that a life in banking was the dream. Even by his early 20s, Kang was pretty sure he’d be on another path — while classmates wrestled for summer internships on Wall Street, he took a position with Pencils of Promise, the nonprofit that builds schools in Africa. Still, the realities of the world dragged him into banking; his degree wasn’t cheap. “I was like, ‘Crap, I have to get a proper job. I have all these student loans to pay back,’” Kang says. “So, I kind of got suckered into doing banking; the thing I’d told myself I wouldn't do.”

Growth from Discomfort

Two years at Bank of America led Kang to a job at Vista Equity Partners, where associates were thrown right into the deep end. “In management presentations, you’re grilling CEOs, talking to people who would have been your boss's boss when you were on the banking side, and talking with them about raising finances,” Kang says. “I was being thrown into situations where, as a 24-year-old, it's really easy to feel uncomfortable.”

Kang thrived in the discomfort — he learned he could hold his own during high-level discussions with executives at the portfolio company. Most of all, he realized he had a passion and a unique talent for problem-solving. As a student, he’d been drawn to philosophy before landing on the business path. “The largest impact of philosophy is the ability to dig deep into a problem, think about it from multiple angles, and try to come to a good opinion about a path forward,” he says. That skillset served him in PE dealmaking, but also in charting his own path.

Kang left Vista when he found himself, being in San Francisco, wanting to work with more innovative tech companies that were changing the world around him versus ones that made good buyout candidates. So, he decided to jump ship, and he picked the perfect time to do it. It was 2014. Uber, Airbnb, and Square were all still private, in their Series B, C, or D stages. “There was a lot of excitement about this new wave of tech,” he says. “I started looking around and Square really spoke to me.”

The Other Side of the Square 

What drew Kang to Square was a personal connection: his parents had run dry cleaners when he was growing up and he was inspired by Square’s mission to make the lives of small business owners like his parents easier and better. He joined the finance and strategy team a couple years before the IPO — the company was small enough that he was allowed to wear a lot of hats, which was perfect for Kang. “This was the first time that I worked with people from very different disciplines from me where everyone thought about problems through extremely different lenses,” he says. “I partnered closely with our payments team, our Square Capital team, and then also everything that our CFO was supporting. So, like risk, but also random stuff like helping our facilities team with lunch budgets.”

After three years, Kang being Kang went to then-CFO Sarah Friar and asked if he could switch to the accounting side. “It was less about, ‘Hey, I want to be a CFO in the future,’” he says. “It was actually much more so, ‘Hey, I'm working on the finance team. I know one aspect of it decently well. But there's this whole other side, on the accounting side, that I was curious about.’” People scratched their heads when they heard Kang was moving from the more glamorous strategic finance side to a junior role in accounting. But he’d heard the same questions when he left Vista for Square, so he trusted his gut. Luckily, he had a boss in Friar who was fully supportive — so, he spent a year as a revenue accountant. “I'm so happy I did,” he says. “For me, it's never been about role, title, and compensation. For me, it just comes down to the fact that I just want to learn stuff and want to be a master of the field I'm operating in.”

From 0 to 1 with Digit

After the IPO, Square grew and changed — for people on the finance side, the move from private to public alters the tenor of the work completely. Kang had learned a lot at Square, especially “that customer-oriented is the most important way to think about a problem, rather than purely from a finance lens.” But he decided he was ready to move again. This time, to somewhere much smaller. “I was really itching for that experience of building something from 0 to 1 or 1 to 2,” he says.

Ethan Bloch, the founder and CEO of Digit, approached Kang and asked him to come on. Kang was again drawn to the idea by his personal history. To create a product that made financial wellness effortless and non-judgmental spoke to him. “I come from an immigrant family. Managing personal finances and our household finance was a very important thing that was top of mind for us all the time,” he says.

But in his first month, he started to worry he’d left Square too soon. “It was not a calculated move. Digit was super early. They were doing probably like 2 million ARR at the time. 30 people,” he says. “It was a gamble but ended up being the best decision I could've made in the experiences gained and relationships built.”

By the time they sold the company in December 2021, Digit had grown exponentially: “We had scaled up revenue by like 50 million ARR, we had done a Series C raise from General Catalyst, and the team had grown a lot. We moved beyond just being a savings product to launch an investment product, and we launched a checking account product. I’m just really proud of what we had built over time.”

The Move to Mercury

After the deal closed, Kang knew he wasn’t ready to go back to working on the finance team at a public company. So, he started looking around again and had a conversation with Immad Akhund, the co-founder and CEO at Mercury, about coming on as VP of Finance. “Square and Digit spoke to me in very personal ways: the way I grew up, my family, and so on,” Kang says. “As for Mercury, it spoke more to my career experiences: At Digit, I ran a very lean finance team, so I was running payroll and all these things that were very much on the operational side. So, I know there's so much opportunity to build tools and products that can make lives easier for startup founders or startup finance teams.”

Kang joined Mercury in July and has loved having the opportunity to run accounting, finance, capital markets, and so on. “I get a lot of latitude with the rest of the executive team to kind of poke my head in a lot of product areas where your finance person probably typically wouldn't be poking their head in,” he says. 

His experience in banking, in PE, in accounting and strategic finance at Square, and being a jack of all trades at Digit all inform his work at Mercury. And one unexpected feeling has kept bubbling up: “It's kind of weird but there's a point where you feel like, ‘Man, all my life experiences have led me to this point.’” 

Why Finance?

So, why did a natural-born problem-solver who dreamed of working for the U.N., had a flirtation with philosophy, and didn’t even know what business meant find his way to a life on the finance side? Because Kang has been exhilarated by the fact the finance role is something like a mapmaker for a company. 

“I know this is a bit geeky, but the way I think about it is that there is the whole universe out there. There are a bunch of different forces at work within the universe and there's a standard equation that tries to formulate how the universe works into like very specific different factors and whatnot,” he says. “In a lot of ways, finance is similar. There's a lot of stuff going on within a business, all within the context of the macro environment. But how do you actually make sense of all that? If you want to navigate that universe, finance can be a map, charting a path forward and giving the best recommendations with the best available information.”

For someone drawn to fixing problems by understanding every side of the issue, the macro-elements of finance — the ability to make the intangible tangible — has natural appeal. “The thing that finance teams are uniquely positioned to do is actually stitch together what's happening across the company into a unified view,” he says. So, perhaps the young Kang wouldn’t have been so resistant to the vague idea of “business” if someone had explained it to him that way in the first place. 

“This isn’t an original thought but: the best finance leaders are great storytellers as well, in terms of how they understand and interpret the business and can actually tell a story about where it's going in the future as well,” Kang says.

His own career is a fascinating story. Where it’s going in the future? Only time will tell…

Neo.Tax’s mission is to use tax to turn finance into a strategic lever for growing companies. In our experience, the savviest finance leaders appreciate the novelty of our approach.

So, as we continue to build and grow our offering, we’ve made it a priority to cultivate relationships with these finance leaders. Neo.Tax is a tool to optimize and maximize the value of taxes for companies — by working closely with the savviest minds who truly understand companies’ financial needs, we can make our offering indispensable.

That’s why we’re so excited to announce the launch of our Neo.Tax CFO Advisory Council! The best tools are a symbiosis of great minds and great technology; so, we’re putting together an Avengers-level tax brain trust over at Neo.Tax…

We’ll be announcing the members of our Neo.Tax CFO Advisory Council over the next weeks in a series of blog posts charting their career paths and highlighting their unique insights. Our first post about Daniel Kang, VP of Finance at Mercury, will be publishing next week. Keep an eye out. 

Tax Avengers, assemble!

This whole year, founders, CFOs, and accountants have been staring down a new tax paradigm. When former President Donald Trump passed his Tax Cuts and Jobs Act in 2017, it included a five-year ticking time bomb that would completely change the way R&D expenses could be deducted. In earlier posts, we’ve outlined how changing R&D from a deductible expense to a capitalized one would cost companies of all sizes dearly on Tax Day.

There was hope that legislators could overturn this costly tax law before the 2023 tax year (and even pass a law that would undo the effect on the 2022 tax year), but the lame-duck Congress was unable to strike a deal. So, for the foreseeable future, R&D Capitalization is here to stay.

As we explained in our post “R&D Capitalization Has Arrived (For Now)—Here's What You Need To Know,” the new law changes the way R&D spend can be deducted, which completely changes the calculus for pre-revenue startups. Up until 2023, R&D spend could be deducted all at once, which allowed companies in the red to stack NOLs. Now, R&D spend must be amortized fractionally over the course of 5 or 15 years, depending on whether the expenses are domestic or international. That means, tax bills will rise and NOLs will become harder to compile; it’s bad news for innovative companies.

At Neo.Tax, we’ve been preparing for this eventuality. We view it as our duty to make taxes work for innovative companies, so we’re proud to say that Neo.Tax has the only software solution that can cover all aspects of R&D tax strategy: from credits to amortization, and everything in between.

We’re the only company on the market that specifically addresses this new tax change. Fortune 500 companies are treating this as a Big Forkin’ Deal, so it’s essential to get ahead of this before it’s too late. Get in touch today, or come to our weekly webinar to learn more about how to weather this coming tax storm!

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BECOME AN R&D CAPITALIZATION EXPERT:

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the world’s most unpopular tax change just went into effect.

but how, if both parties hate this law, did it still go through?

and why is everyone surprised that it actually happened?

and why does it affect businesses that aren’t profitable?

and what in the heavens can you possibly do about it?

we answer all of these questions and more below =]

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how did this happen?

something had to pay for trump’s ‘17 tax cuts.

a tax time bomb, scheduled to go off in 5 years.

a terrible idea, but it balanced the budget perfectly.

and having it go into effect 5 years later bought time.

more than enough time for congress to repeal or delay it.

if both sides could get their act together and work together.

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if everyone hates this law, how did it go through?

republicans + democrats agree this law had to be repealed.

but because both parties agreed on how terrible it is,

neither party could use it as a bargaining chip,

to get something else passed in return.

i wish i was joking — i am not =/

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what does this mean for businesses?

companies can no longer write off r&d expenses.

(costs related to building or improving products)

this hits technology companies particularly hard.

of all sizes! baby startups that aren’t profitable,

up to raytheon cutting cashflow by $2b. yikes!

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when taxes made sense, the math used to be:

$2m revenue - $5m expenses =  -$3m losses

the new math, starting tax year 2022, is now:

$2m rev - ($5m/5years → $1m) = $1m profit

worse, offshore r&d gets spread over 15 years:

$2m rev - ($5m/15y → $300k) = $1.7m profit

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doesn’t the government want r&d?

the government is being a little schizophrenic.

on the one hand, r&d is rewarded with r&d credits.

on the other hand, r&d is punished with capitalization.

and those rewards + punishments are to differing degrees,

depending on each company’s revenues, expenses, NOLs, etc.

sounds like an optimization problem to me! to balance all of that out.

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what can i do about it?

fortunately, this is the perfect problem for software to solve.

neo.tax connects to your accounting, payroll and business data,

then scans the universe of all possible tax outcomes for your situation,

to apply the tax strategy with the most optimal outcome for your business.

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don’t file an extension to deal with this later

can you imagine getting an estimated tax bill from the irs,

then going back in time to adjust your tax strategy,

way after the fact as if that isn’t suspicious?

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During the rollout of his signature corporate tax cut, the Tax Cut and Jobs Act of 2017, President Donald Trump argued that his plan would stop U.S. companies from offshoring their work overseas. But according to Reuters, it failed to curtail the flow of American jobs abroad:

“During the four years of the Trump administration, [the Labor Department] program certified 2,095 petitions covering 202,151 workers who lost jobs that moved overseas. That’s only slightly less than the 2,170 petitions approved during the last four years of the Obama administration, which covered 209,735 workers.”

Additionally, the TCJA included a provision that changed how R&D deductions can be taken by American companies—rather than being deducted all at once, R&D costs must be amortized over 5 years for domestic spending and 15 years for foreign expenditures. The change threatens to disincentivize American companies to invest in innovation. “In a letter dated Nov. 4, 178 chief financial officers, primarily from large U.S. companies, including Ford Motor Co., Raytheon Technologies Corp., Lockheed Martin Corp. and Boeing Co., said the new rules create a competitive disadvantage for American companies and will lead to job losses and thwart innovation,” an article in the Wall Street Journal explained. “They are asking Congress to move back to immediate deductibility before the end of the year.”

The CFOs argue that the R&D capitalization change will threaten American business and foreign policy interests; they argue that a country that stops prioritizing innovation will fall behind on the global playing field. “On a level playing field, the U.S. can compete for R&D investment with any country in the world,” they wrote. “Unfortunately, the current playing field is tilted against the U.S., and every day this policy continues to be in place makes it harder for the U.S. to remain a global leader in innovation.”

So, how does American R&D policy compare to competitors abroad? And what could we learn from their policies? Ernst & Young’s (EY) 2022 Worldwide R&D Incentives Reference Guide offers a fascinating look.

Past and Future Economic Superpower

Since World War II, the United States has functioned as the world’s economic superpower. Prior to that, Great Britain held that mantle, and many believe that China may soon surpass the U.S. and claim that title in the future. It turns out that both the UK and China have committed to a much more robust R&D investment than the current American plan—the two countries have “super deductions” for R&D expenditures, allowing companies there to deduct more than 100% of R&D costs from their taxes. According to EY’s Worldwide R&D Incentives Guide, mainland China-based companies can deduct 175% of qualified R&D expenses for purposes; manufacturing enterprises began deducting up to 200% of qualified R&D expenses starting in 2021!

Until a new R&D policy was announced this month, the UK had a more favorable (or, perhaps, favourable) R&D credit for all businesses, and was especially invested in domestic small-to-medium-sized enterprises (SMEs). SMEs could claim an enhanced deduction of 230% of qualifying R&D spend, as a deduction against taxpayers’ profits. If the deduction was more than the taxes, these SMEs could claim a cash credit at 14.5%, according to EY’s Worldwide R&D Incentives Guide.

The tax code in the UK and China is a demonstration of the way each country works to incentivize R&D, but taxes only tell part of the story. The UK also has a large number of public grants meant to spur innovation. For example, ​​Innovate UK, which gets funding from the Department for Business, Energy & Industrial Strategy (BEIS), works to get academia and industry working towards UK-based patents and products and gives around £1 billion in direct grant funding every year for company-run R&D projects.

The United States has a similar SMB R&D grant called the Small Business Innovation Research program, but most of the R&D spend is done by private industry. As the Wall Street Journal explains: “U.S. companies spent an estimated $532 billion on R&D in 2020, representing the lion’s share of what the U.S. as a country allocates to it, according to the National Center for Science and Engineering Statistics, a statistical government agency. A 2019 report from Big Four accounting firm Ernst & Young forecasts that U.S. R&D spending would be cut by $4.1 billion a year for five years because of the change and then by $10.1 billion annually for the subsequent half-decade.”

The change in R&D capitalization threatens to accelerate that reduction in industrial R&D spending. Without the public grants to buoy American innovation, it could lead America to fall behind in the global race towards innovation.

India as a Case Study

India is a fascinating case study in R&D tax law and its impact. During its rapid push to liberalize and modernize the economy, the Indian government introduced an R&D tax credit to stimulate innovation. From 2001 to 2010, the R&D tax deductions were worth 150% of any capital and revenue R&D spend by firms in qualifying sectors. Starting in 2010, the R&D tax deduction was increased to 200% and became available to every Indian company. That new structure helped make India one of the most tax-friendly countries in the world in regards to R&D. (Note: in 2020-21, the deduction was reduced to 100% of R&D expenditure.) Researchers at three universities looked at the effects and found a substantial rise in R&D spending and patent applications in both India and in the US due to the changes: “We find that the R&D tax credit scheme and its 2010-11 reform spurred firm innovation,” they wrote in their 2021 journal article R&D tax credit and innovation: Evidence from private firms in India. “In response, such firms became more innovative and more productive.”

The finding is intuitive, but it doesn’t make it any less striking when compared to the US policy toward R&D spending: lowering the cost of R&D through tax credits increases research spending, which leads to more domestic patents.

Learning from our Neighbor to the North

Canada has an interesting R&D policy that could be a valuable model for making R&D reform more politically palatable in the United States. The country offers a 15% federal R&D credit on all qualifying expenses. However, in addition, they offer an enhanced credit rate of 35% for R&D spend by small Canadian-controlled private corporations (CCPC) on their first $3 million of R&D expenditures each year. That 35% credit is 100% refundable.

The policy is specifically crafted to incentivize domestic small-and-medium-sized businesses run by Canadians. For a company to qualify as a CCPC, it must be privately owned and operated in Canada, and must not be controlled directly or indirectly by a nonresident or a public corporation.

The PATH Act, passed in 2015, is an example of an American law with a similar aim. It amended the R&D Credit so that it could count against payroll taxes rather than just income tax for pre-revenue and early-revenue startups. It meant that the credit could be claimed by the companies that were actually sparking much of American innovation over the last decade: technological startups.

The Way Forward

Clearly, as the letter-writing CFOs explained, the change to R&D Capitalization threatens to make America a country that disincentivizes domestic R&D. That could have stark consequences for the next generation of American business and American foreign policy. There seems to be bipartisan support for a change to the law, but it’s unclear if the political climate or economic moment will allow it to be prioritized. According to a recent piece in Marketwatch, the “bipartisan push on R&D tax break looks likely to flop.”

At Neo.Tax, we hope lawmakers will look abroad and realize there is a way to incentivize innovation. Perhaps a “super deduction” is not possible at this moment, but a model that allows SMBs to continue to innovate should be a no-brainer. Either way, we’ll do our part to make sure startups maximize their R&D credits and minimize their R&D tax burden; that’s why we built Neo.Tax, and our mission hasn’t changed.

Every pollster and cable news talkinghead predicted a Red Wave: the Republicans would take back the House and the Senate—the only question was by how wide a margin. But then, Election Day came, and the Democrats outperformed both expectations and the historical trends. Against all odds, they actually flipped one Senate seat and seem poised to lose the House just barely.

The Red Wave turning into more of a Red Trickle has potentially massive implications on who leads the Republican Party moving forward, as well as on the future of the courts and the fate of many pieces of legislation. But, for our purposes, we want to understand what it could mean for the changes to R&D Capitalization brought on by Donald Trump’s Tax Cuts and Jobs Act (TCJA).

As a general rule, it’s difficult to pass tax legislation in a divided Congress. If we assume that the current projections continue to hold, and that the Republicans will capture a small majority in the House, history tells us that R&D Capitalization may be here to stay for a couple more years. However, as the surprising midterm results have shown, this may be an ahistorical time. So, here are four scenarios and how they may affect R&D Capitalization rules.

Scenario #1: The Dems Hang On

If the Democrats somehow make a late push in the remaining races and retain a small majority in the House, they could repeal the R&D Capitalization rule by pairing it with an extension of the Child Tax Credit. The Child Tax Credit was a part of 2021’s American Rescue Plan, and it increased the per-child credit to $3,000 for kids under 6 and $3,600 for kids over 6 for qualifying families. There is bipartisan support for repealing R&D Capitalization and strong Progressive support for extending the Child Tax Credit, so pairing the two is viewed as a compromise to appease both business and progressive constituencies.

But, with all indications pointing to Republicans taking the House, this scenario seems unlikely.*

*Update: Late on Wednesday afternoon, the Republicans officially clinched the House, taking Scenario #1 off the table.

Scenario #2: A Bipartisan Compromise

The idea of bipartisan compromise feels like a fairy tale these days, but there is some signaling that the Republican Party may be moving away from its MAGA wing after the disastrous results of the midterms. If that’s the case, R&D Capitalization may be a place where bipartisanship wins out, because the center of both parties seems energized to repeal the Capitalization change.

If this were the case, Capitalization rules could be rewritten during the next session, which would mean the tax effects would still hit SMBs hard for 2022. Still, any repeal of R&D Capitalization would be a huge boon for innovative startups, so any scenario that leads to the change should be celebrated as a win for American businesses.

Scenario #3: A Lame-Duck Hail Mary

If the Republican lead in the House holds—and all indications are that it will—a busy lame-duck session will be coming for the Democrats. As CNN reported: “At a news conference Sunday, Senate Majority Leader Chuck Schumer warned of a busy lame-duck session, promising ‘heavy work’ and ‘long hours.’” It’s unclear if R&D Capitalization will be a priority during the frantic session, but the R&D Capitalization change paired with the Child Tax Credit is a real possibility. If that’s the case, the new law would go into effect before the next Congressional session begins, which would mean there is a small chance that the R&D Capitalization changes could be retroactively altered for 2022 before SMBs are hit with their massive tax bills. Here’s hoping that happens!

Scenario #4: Tax-pocalypse

Unfortunately, Scenario #4 is an all-too-likely outcome. If the Republicans take back the House and do not take the midterm results as a signal that voters want more compromise from Washington, we may see the same butting of heads between both parties that has become the hallmark of the last decade. On Tuesday, House Republicans voted Rep. Kevin McCarthy as the prospective next Speaker of the House over a far-right challenge from Rep. Andy Biggs. It’s a sign that the Republicans are not fully embracing MAGA any longer, but it’s far from a clear indication of a new path. Instead, it leaves us in a holding pattern for a bit longer when it comes to R&D Capitalization.

House Republicans may dig in their heels and refuse any compromise on R&D Capitalization that includes the Child Tax Credit; if Democrats do the same, the law may be on the books until one party controls both chambers of Congress. That very likely could happen in 2024, but with the speed in which the political winds have been changing, it leaves SMBs in limbo.

Because there is still so much uncertainty around R&D Capitalization, savvy founders should prepare as if the R&D Capitalization rules are here to stay. At Neo.Tax, we have best-in-class software and a team of experts who can help you prepare.

We continue to hope that Washington will come to their senses and overturn a rule that experts have explained as “a cynical gimmick.” Let’s hope lawmakers prioritize innovative American businesses over political wins.