Tax Day 2023 is arriving at a precarious moment for innovative American companies. The last year has seen a wave of layoffs and a loss of value for many companies in industries like tech, manufacturing, and many other sectors. On top of that, changes to tax law with regard to R&D Capitalization have massively changed what companies will owe the IRS in April or October. That’s why it’s never been more beneficial for innovative companies to claim the R&D Tax Credit. 

The federal R&D tax credit is a 10% cash-back credit for product development expenses. Startups with <$5M revenue and <5 years of revenue can apply up to $250k against payroll taxes. All companies can apply it against income taxes or carryforward. Neo.Tax has built a software solution that maximizes your credit and prepares your filing in <30 minutes. 

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But how much is an R&D credit really worth to your business?

Here are four examples based on real companies to give you a better sense of the massive value of filing for the credit with Neo.Tax.

A reminder from Neo.Tax:

Based on new guidance from the IRS, it seems likely there will be a more stringent view of amended returns — the burden of proof is on the company and will need to be even more detailed — which means waiting to amend the returns may become more expensive and cumbersome going forward.

So, make sure to file your credit with your taxes (or to file an extension so you can get your R&D credit for this year). Book a call and we can walk you through all the ways to make R&D spend valuable for your innovative company!

Even though R&D Capitalization was passed into law back in 2017 as a part of Former President Donald Trump’s Tax Cuts and Jobs Act (TCJA), almost everyone expected the massive tax law change to be repealed before it ever took effect. But for the last year-plus, we’ve been preparing for the possibility — which has become a reality — that R&D Capitalization is here to stay (at least for now).

Since September, we’ve written a collection of articles explaining The What, The Why, and The How-the-Heck-Do-I-Keep-My-Tax-Bill-Low of R&D Capitalization. We’ve also spent the year building the only software solution that solves for both R&D Tax Credit Filing and R&D Capitalization. So, book a call and we can talk you through any specific strategy questions. 

Without further ado, Neo.Tax presents: Your Definitive Guide to R&D Capitalization…

What is R&D capitalization?

The TCJA changed the way that R&D expenses can be deducted by American companies. Up until this Tax Year, R&D could be deducted all at once, meaning that innovative companies who spent on R&D would appear in the red both in their books and in the eyes of the IRS. However, the new law states that R&D expenses must be amortized over 5 or 15 years (depending on if the expenses are domestic or international). Therefore, only a fraction of a company’s R&D expenses can now be deducted in a given year. 

All of a sudden, pre-revenue startups will begin to appear in the black in the eyes of the IRS — so what would have been a valuable NOL will now be a hefty tax bill. And startups are not the only ones affected: CFOs from the largest American companies have warned Congress that this change will stifle innovation. Yelp’s effective tax rate will jump 20 percent this year compared to 2019 due to R&D Capitalization!

Do we have to capitalize?  

We’ve heard from many companies who are confused by the change. They ask: if we don’t file an R&D credit, do we still have to capitalize our R&D expenses? The short answer is YES. An accountant is responsible for making sure your filing is compliant with the law. R&D Capitalization is the law (at least for now). So, not amortizing your R&D expenses is not an option. In the event of an audit, the IRS may be inclined to disallow any R&D credit and/or re-calculate the expenses claimed.

So, as of now, any expense that can be categorized as an R&D expense must be amortized over 5 or 15 years whether or not you file for the R&D credit. Therefore, companies that forgo the money they’re owed in the form of a credit will simply be burdened with an even higher tax bill this year.

The true effect of the change is that it makes it imperative for innovative companies to commit to Tax Strategy year-round to minimize the impact on their tax bill. R&D expenditures that are considered “qualified expenses” can be claimed on an R&D credit; those that are not “qualified” now must be amortized. The difference between qualified and not qualified R&D spend come Tax Day? Almost 10x.

What is a qualified vs. non-qualified research expense?

Okay, so, clearly it’s essential to maximize “qualified” expenses and minimize “non-qualified” R&D costs. But what is the difference between the two?

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IRC §41 (Section 41) defined a “qualified” expense that can be claimed via the R&D Tax Credit as any R&D expense that passes the Four-Part Test: Permitted Purpose; Elimination of Uncertainty; Process of Experimentation; Technological in Nature. You can read more about the Four-Part Test here, but basically, these are expenses directly related to the creation of new products or novel uses of existing products (that includes wages, research expenses, supplies, and even cloud computing costs). 

Now, IRC §174 (Section 174) defines the way companies must deal with all R&D expenses: both “qualified” and “non-qualified”. But obviously, the larger the percentage of your R&D spend that “qualifies” for an R&D credit, the smaller the amount that you’ll need to amortize. Examples of R&D costs that are not qualified (aka do not pass The Four-Part Test) include: R&D after commercial production; research for internal use only; research funded by a grant; and most research tied to social sciences, arts, and humanities. 

To be an innovative company, R&D spend is essential. So, the key now is maximizing the percentage of that spend that qualifies for an R&D credit and minimizing the spend that must be amortized over 5 or 15 years. 

Why do we have to include foreign expenses?

As long as you’re a company doing business in the United States, you have to pay taxes in the United States. In many ways, the reason for this massive change to R&D taxes is an effort to move more research jobs and spending back into the United States. 

The amortization structure is designed to punish R&D spend made outside of American borders. A quick example to explain why the 15-year amortization is so much more punitive than the 5-year amortization:

In its simplest form, a deduction can be thought of as an expense that is subtracted from taxable income. So, if you made $10M in revenue and spent $5M on R&D, deducting that amount would make your taxable income $5M ($10,000,000 minus $5,000,000). But under the new R&D capitalization rules, the amendment means the deduction must be amortized, or in simpler terms, spread over 5 or 15 years, depending if the expense is domestic or international, respectively. On top of that, Year 1 can only be amortized as half a year, so that means only one-tenth or one-thirtieth of the R&D expenses can be subtracted from the taxable income that first year. 

So, if your company’s R&D occurred in the States, the equation becomes $10 mil minus $1M; if it’s done abroad, the equation becomes $10M minus $333,333.33. Eventually, over the 5 or 15 years, you will technically be able to deduct the same amount as before, but this obviously increases your tax bill in the near term by quite a bit. For the company that spent exclusively in the States — that’s a $9M taxable income; for the company that did R&D abroad, that’s $9.67M. With the 21% corporate tax rate, for Year 1 taxes, that’s an extra $140K!

Will capitalization be repealed?

This is the big question, and for now, the only responsible answer is: NOT YET.

For the last six months, there have been rumors that a deal is close, but none have come to fruition. Many CEOs, CFOs, and even accountants are keeping their fingers crossed, but, unfortunately, the Crossed Fingers Method is not IRS-compliant.

So, the safest route forward is to either file now and hope the law is repealed and companies are retroactively made whole for their 2022 or to file an extension, pay your quarterly taxes as if the law is still on the books, and then hope that your quarterly taxes are refunded if the law is eventually overturned. Either way, make sure to file an R&D credit when you file your taxes — they cannot be filed retroactively.

As anyone who has watched Washington these last five years knows: betting on compromise is a longshot wager. So, plan as if the law on the books is the law of the land, and get your books in order. And, remember: we’re here to help! So, book a call today.

The Takeaway

If you’re a company involved in software, manufacturing, architecture, engineering, food, or construction, it’s very likely that you qualify for an R&D credit. It’s just as likely that you have expenditures that can be considered R&D spend. 

Two things to remember… 

1. Any company with R&D expenditures needs to amortize their deduction to be compliant with the new R&D Capitalization rules. 
2. The best way to offset that cost and extend runway in a non-dilutive way is to claim your R&D credit. It’s the closest thing to free cash for innovative companies. It’s written specifically for companies like yours. So, don’t leave that money on the table! 

Neo.Tax is the only software solution that solves for both R&D Capitalization and for R&D credit filing. Let us help you navigate this massive change. We’ve been deep in the weeds on this for 12 months; we’d love to walk you through the best way to maximize your credit and minimize the impact of capitalization!

Some exciting news ahead of Tax Season: Neo.Tax just partnered with Bench, the accounting solution for startups!

So, what does that mean for you? 

With Neo.Tax x Bench, you'll have everything you need in one place. From tax calculation and preparation to financial management and bookkeeping, we've got you covered. Our solution is designed to streamline your tax process and help you make informed financial decisions with confidence.

And there's more! Our R&D tax credit optimization tools can help you claim all eligible R&D tax credits and maximize your tax savings. With Neo.Tax x Bench, you'll have access to a team of tax experts who will guide you through the process and help you claim all the credits you're entitled to.

Bench offers bookkeeping, income tax prep, and filing done by experts so you can focus on growing your business. By partnering with Neo.Tax, Bench customers also get access to the only software solution that solves for both R&D filing and R&D Capitalization. Basically, Neo.Tax x Bench means your tax season just got a whole lot less stressful and a whole lot more valuable for your startup. 

Extending runway has never been more important than at this precarious financial moment. And changes to the tax code that just went into place mean that tax strategy will be the difference between massive bills and valuable credits this April. Good accounting is an essential part of building a valuable innovative business. Neo.Tax x Bench can make it effortless for you!

We couldn’t be more excited to announce that Neo.Tax has been named a Top FinTech Product in the 2023 Product Awards. The Product Awards, presented by Products That Count in partnership with Mighty Capital and Capgemini, is the only awards show designed to celebrate the tools that help Product Managers build great products. 

Nominees are chosen by Products That Count’s product manager network, and winners are chosen by an independent Awards Advisory Board composed of top product leaders. This year’s Board included product leaders from companies like Intuit, Oscar Health, and Macy’s.

Neo.Tax is the only software solution that gives companies a 360-degree view of their R&D expenditures — we’ve solved for everything from R&D Credit filings to R&D Capitalization. By giving innovative founders, CFOs, and CPAs the ability to understand the true cost of spending on R&D, Neo.Tax can make sure innovation remains a valuable tool for American companies committed to building the future.

“The bar for what makes a great product gets higher every year,” said SC Moatti, founding CEO of Products That Count. “Neo.Tax is a testament to that. We expect them to keep defining what it means to be at the cutting edge of product, not only in 2023 but also in the years to come.”

“This is particularly exciting for us for a number of reasons. First, I'm a product manager turned founder, so product is really at the core DNA of what we do at Neo.Tax and we take great pride in building our product. It's awesome to get that kind of recognition from folks that really know great product,” said Neo.Tax cofounder and CEO Ibrahim. “Secondly, because our product helps other product companies build great products by allowing them to get a credit for any investments that they made in developing new products and new features, this is doubly cool. Thank you so much for this award!”

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SAN FRANCISCO–Neo.Tax, an early leader in simplifying and automating taxes for startups and businesses, today announced the launch of Neo.Tax 2023, a new software update to its signature platform. Specifically designed to address this year’s new federal tax codes, the platform will help to ensure that businesses not only remain in compliance but are able to maximize R&D deductions and optimize their tax strategy. 

Neo.Tax 2023 was built in response to The Tax Cuts and Jobs Act of 2017, which was signed into law and included a five-year provision that would completely change the way R&D expenses could be deducted. Officially in effect as of January 1, 2022, for tax year 2022, which companies will file taxes for in 2023, this change means that R&D expenses can no longer be subtracted from revenue and must be spread out over a period of time - five years for U.S. domestic-based activity and 15 years for international activity. This change impacts all businesses and startups, who can no longer deduct expenses in the year they were incurred, and now may be left with a tax bill despite not yet reaching profitability. 

“While we’re disappointed in congress’ failure to stop this tax change from going into effect, our customers are grateful that we’ve anticipated this tax change and built a solution to optimize it. The good news for businesses is that there is a solution to this – and it’s quite good,” said Ibrahim, co-founder and CEO of Neo.Tax. 

Neo.Tax 2023 ensures that its platform is not only compliant with these changes but is able to optimize R&D tax credits and save businesses money. Prioritizing accuracy and ease of use, Neo.Tax 2023 guarantees that all claims are reviewed by the Neo.Tax tax experts so they can be filed with the confidence of knowing that these returns are accurate. These tax credits were historically more relevant for smaller startups, with less than $5m in revenue, but are now valuable and relevant to all companies with sizable R&D spend – primarily technology businesses.

“We’ve spent a lot of time planning for the eventuality of the new R&D tax rules and we are excited to share it with business owners,” said Ibrahim. “Our goal is to offer solutions that not only address the new tax change but will optimize a company’s tax strategy against it and give businesses an easy-to-use simplified product with the accuracy that business leaders deserve.”

Since its inception, Neo.Tax has automated preparing the R&D Tax Credit for startups and accountants. Their software has simplified the complex process of applying for Federal and State R&D Tax Credits, saving businesses tens of millions of dollars.

we’ll give you the bad news first

startups can no longer deduct (aka subtract) r&d expenses from revenue.
for software or product development costs, you now have to capitalize (aka spread them out)
over 5 years if they’re domestic, and over 15 years if they’re foreign (aka offshore).
because of something called the ‘mid-year convention’, year 1 counts as only half of a year.
so functionally, you can only deduct 10% (not 20%) of domestic r&d expenses
— and only 3.33% (not 6.66%) of foreign expenses — in the first year, 2022.
this creates a substantially larger “computed” taxable income → an actual tax liability.

you may be thinking “whatever i’ve got NOLs” — but even those have been neutered:
you can now only use NOLs to offset up to 80% of your “computed” taxable income.
“hey you have a big tax liability now — and oh you can’t really use your NOLs to wipe it out.”
all the while, this added tax burden means it’ll become harder to stockpile NOLs like before.
it’s a combo fucking judo move if i’ve ever seen one.

now the good news:
you can solve this with e2e tax strategy

all of a sudden, you can no longer separate NOLs and R&D in your thinking.
your startup’s revenues and expenses, NOLs, and the new tax code need to be baked together.
even future headcount planning and revenue projections roll into your complete tax strategy.

the semi-good news is that your startup likely already has a very healthy reserve of NOLs,
so you'd only really have to worry about covering the remaining 20% with r&d credits.
aka optimize the allocation of r&d expenses such that whatever is capitalized
— ironically the same (ish) type of expense used to generate an r&d credit —
creates a taxable income just big enough to have 80% of it wiped out by NOLs.
the remainder will get taken care of by the income tax r&d credits.

plus, if you model out + expect future years to have computed taxable income,
you can be sure to build up a healthy enough reserve of deferred tax assets.
you'd only need 1/5 the tax credits since they'd offset the tax burden itself,
as opposed to the NOLs which only offset computed taxable income.

why startups can’t just do r&d credits anymore

apart from often being inaccurate, this method presents a new problem under the new rules:
the well-known strategy of ‘throwing in the kitchen sink’ to maximize your r&d credit
will create a larger tax bill in its wake than the credit it alleges to claim for startups.

instead, startups need to start planning and optimizing their tax strategy,
while optimizing — not maximizing — their r&d tax credit along the way.

By Neo.Tax Team

So you’re a startup and believe the best way to get the help you need to build your company is with independent contractors... hmmm, interesting.

It’s your company, so we’re not here to tell you how to run it, just that you’re missing out on up to $250,000 in research and development tax credits by not setting up payroll.

Yup, you heard that right. You could miss out on hundreds of thousands of dollars because you either haven’t set up payroll or you've set it up incorrectly.

Imagine what you could do with that money. Maybe:

• Extend your runway
• Help continue necessary R&D
• Reduce burn

Have no fear, Neo. Tax is here!

Check out our guide to setting up your payroll taxes as a startup or new business.

Why not Independent Contractors?

Let’s be clear: you can report independent contractors on your R&D tax credit claim.

The credit is a percentage of your QREs, also known as qualified research expenditures. These expenditures include in-house research expenses and contracted research expenses. Contract research expenses are handled a bit differently than in-house research. Only 65% of contractor research can be claimed–here’s an example of what that means:

Say I want to research sneaker materials as I’m developing an innovative new style of lifestyle shoe with posture support. I need to get some research from an outside firm; the cost is $100k. When reporting this expense for your R&D credit, only 65% of that independent contractor’s payment will count toward your credit claim. Essentially, $65k of this firm’s bill.

Now, let’s say you realize your needs exceed just research on materials and you contract the same firm to conduct an analysis of the sneaker market and who the target audience for the shoes will be at the same time. The cost is $250k; $100k for research on materials and $150k for the marketing analysis. Typically, marketing expenses are not qualified expenses for the R&D tax credit. This means you can only claim 65% of what you paid to the firm for R&D only–which, in this case, amounts to $100k of the $250k final bill.

The same calculation applies to percentages of time as well. Let’s say the firm bills hourly and states they dedicated 200 hours to R&D at $500/hour, which is one part of the final $250k bill from the firm. It’s then up to you to calculate 65% of those 200 hours that go toward your claim. Again, in this case, you could claim $65k of the firm's bill toward your R&D tax credit.

Remember: as a company that is not yet profitable, your R&D credit comes as a payroll deduction. This means that even if you’re employing independent contractors, you must set up payroll in order to receive your credit.

Where To Start?

If you’re already working with an accountant or accounting firm, then they can handle all your payroll needs.

If not, think about getting a payroll provider like Gusto, or learning the ins and outs of payroll yourself.

After you’ve set it all up, find trustworthy R&D tax credit software to help you seamlessly integrate your payroll and accounting information to claim your R&D credit.

Want to learn more about R&D software? Check out our post about what to look for.

More often than not, setting up payroll boils down to these steps:

1. Gather necessary documents like your company’s EIN, state or local Business ID, and your employee’s onboarding information, as well as their employee classification–if they’re part-time or full-time, etc.;
2. Choose your payment schedule or pay period;
3. And decide on a payroll system or provider.

Resources & Tips

Now that you’re setting up payroll, it’s a good time to pay extra attention to the details of all your records. The IRS can be fickle, so it’s always better to stay ahead of your payroll filings. Here are some resources to help you along your payroll journey.

Forms:

• Form SS-8: If you’re wondering how to classify employees and/or determine worker status for Federal Employment Taxes and Income Tax Withholding, this is the form.
• Form I-9: Your go-to form for employment eligibility verification.
• Form W-4: You’re probably familiar with this one. It’s your employee’s withholding certificate.
• Form W-2: Another familiar one is this–the wage and tax statement.
• Form W-9: If you’re working with independent contractors, then you definitely know this one. This is your request for taxpayer identification number and certification.
• Form 941: this form is the employer’s quarterly federal tax return.
• Form 940: and last, but certainly not least, the employer’s annual Federal Unemployment (FUTA) Tax Return.

Payroll can be one of the more complicated processes, making it extremely important to have a solid Payroll Dream Team that will help ensure your company payroll is done accurately and on time! If the ‘92 Men’s Olympic Basketball Team taught us anything, it’s that the Dream Team exists.

This is who you should have on your Payroll Dream Team:

• A trusted accountant or accounting firm,
• Accurate accounting software,
• Payroll software that integrates seamlessly with your accounting software,
• And, if you can swing it, a human resources manager, COO, or business partner.

Here are a few more tips for payroll:

• Make sure you pay close attention to your records and fill every form out correctly.
• Always, always, always file your payroll taxes on time. This not only ensures that you pay employees on time every time, but also helps avoid overpayments or any other mistakes. Here are some deadlines to mark in your calendar.
• Don’t forget to keep your records organized and remember to keep former employees' records for 3 years after separation from the company.

Payroll is a fundamental part of claiming your R&D tax credit as a startup or new business. Set it up and watch the R&D credits flow in.

Trust us, it’s worth it!

By Neo.Tax Team

5 min read

Stephen Yarbrough is the epitome of a founder who is walking the walk. And if you’re asking, can he talk the talk? Stephen is a veteran of The Big 4 and the IRS… enough said. Despite his resume, what really stands out most about him is his energetic laugh that makes you feel ‌you’re talking to an old college friend–even through the screen during a zoom call.

An openly out and proud gay man, Yarbrough is taking a “lead by example” approach to visibility, representation, and inclusion. As one of three ethnically and racially diverse founders of Neo.Tax, a tax automation software startup, Stephen believes that senior leadership’s responsibility lies in setting an example and following through. “It's much more empowering [to say] during work conversations, ‘hey, I'm gonna be out of the office for pride, or telling stories and being open about when you got married to your husband or same-sex partner.’ I think that level of openness actually has a bigger impact when it comes from senior leadership. It’s important for senior leadership to be open and comfortable.”

By the same token, Yarbrough acknowledges ‌it isn’t always that easy and that the choice of whether to be out at work shows a bigger cultural shift that needs to happen.

The reality of what employees have to go through takes Stephen back to a time when discrimination was all too real for him while working for a Big Four accounting firm–back when it was still called the Big 6.

“I was the only intern from my school that didn't get a full-time hire offer on the last day of our internship and it was very clear it was because I was gay. They said it was because I didn't know my target audience, ‘conservative accountants.’ They kept having events where they would ask us to bring our boyfriends or girlfriends, and I brought my boyfriend. And that was not cool back in 1997.”

Fast forward to 2022 and 40% of LGBTQIA employees stated they had witnessed homophobic harassment working at tech companies. A recent ICA & CalCPA study cited a lack of fair treatment, diversity, and inclusion were key reasons LGBTQIA+ identifying professionals are leaving the accounting profession entirely.

Visibility and cultural shifts go hand in hand. It’s not enough to see an underrepresented person in a position of power and leadership, it’s equally important to see shifts happen within the boots-on-the-ground, day-to-day, watercooler culture that is fundamental to everyday life in a workplace, be it remote or in the office. And for Stephen, affecting positive change in the Fintech space that Neo.Tax occupies is what motivates him. “I think leading by example is important. But I also recognize that organizations have difficulty doing this. You can't just say find the gay partner [at a firm] and push them out there to be open. When you have senior leadership that is open, it makes it easier for everybody else. And that translates into the culture here [at Neo.Tax].”

That ease around company culture and relaxed approach to inclusion are apparent in the interactions between employees, founders, and senior leadership at Neo.Tax. And especially with matters of the heart, love is love. “One of the interesting conversations ‌I had with Ibrahim,” another co-founder of Neo.Tax, “was about a second date I was going on with a Muslim man. I wanted to know which meats to avoid when picking a restaurant. So he gave me some advice. It didn’t matter who I was dating.”

Walking the walking is not always easy. And in Stephen Yarbrough’s case, it has meant moving across the country to find an environment where he could be himself and still work in what many consider a “conservative” profession. But with the power of visibility, inclusion, and respect in the workplace, it can mean that walking the walk, or rather putting action behind the words, makes it less of a singular, individual path and more of a collective journey.

Advice for founders? Take a top-down approach and remember being inclusive doesn’t have to be showy, as long as companies put inclusivity into action.

By Neo.Tax Team

5 min read

What's holding you back from filing for R&D Tax Credits?

With all the misconceptions around research and development tax credits, it’s no wonder that most small to mid-sized business owners don’t file–and it definitely doesn’t help how complicated it seems the IRS makes almost everything.

Before you completely write off the R&D credit, here are some common misconceptions about R&D Tax Credit that we had to set true.

Misconceptions #1: Scientific advantages or breakthrough medical technology are the only ‌businesses that qualify for R&D Tax Credits

Changes to the R&D Tax Credit expanded what types of companies qualify. These changes mean not only lab sciences are qualified, but also applied sciences. Applied sciences include areas like:

• engineering,
• computer science,
• technology,
• agricultural science and,
• food science, to name a few.

Don’t feel left out. Whether your company is in manufacturing, technology, agriculture, or even hospitality and catering, you could qualify for R&D Tax Credits.

Still skeptical? Here’s a quick and easy quiz to help you figure out if your business is sitting on a sweet, sweet R&D credit here.

Misconceptions #2: Only companies with substantial profits and tax liability can claim R&D Tax Credits

Wrong again!

The 2015 PATH Act, also known as the Protecting Americans From Tax Hikes Act, cemented R&D Tax Credits as a permanent part of the tax code. PATH also created a provision for startups and small businesses.

This provision allows small businesses to elect to use their R&D credit toward payroll taxes and claim up to $250,000 a year for up to 5 years of R&D expenses.

Not to mention qualified small businesses can carry forward their credit for payroll tax deductions to use in another year. For SMBs, carry forward refers to the application of tax credits to future tax years.

Thank you PATH Act.

Misconceptions #3: Any small to mid-sized business that claims R&D credits will face an audit

Just when you thought the IRS was picking on the little guy, here we come to bust that myth!

Yes, there is a chance that claiming your R&D Tax Credit might trigger an audit. However, claiming your R&D credit does not mean your company will get audited–and most definitely should not stop you from claiming your R&D credit.

When you're filing for your R&D credit, make sure your business is using a trustworthy source to prepare your credit, such as complaint automated software, that provides you with the almighty study to accompany your Form 6765. This study will outline all your qualified R&D expenses to make sure you’re covered in case of an audit.

Hot Tip: When you decide on software or an accountant for your R&D credit preparation, always ask if they will provide a study.

Don’t know what to look for in R&D software? Check out our post to help you find the best R&D software for your company.

Misconceptions #4: If you haven’t been in business long enough, you can’t claim R&D credits

No…not quite.

Once again, we have to give it up for the PATH Act. The Act ushered in a new era for businesses by extending the credit to startups and qualified small businesses. BPA (Before the PATH Act), businesses could only claim the credit if they were profitable.

Now, companies with under $5 million dollars of revenue can claim their R&D credit and apply the credit toward payroll taxes for employees who were integral to the first 5 years of research and development projects.

Hot Tip: The only requirement is that you have payroll tax ‌you are offsetting. If you are a startup using all consultants and they aren't on your books, then you are missing out.

Misconceptions #5: Your industry disqualifies your business from R&D credits

Yeah, not the case.

If your business is conducting qualified research and development, then it really doesn't matter which industry your business is in, as long as your projects and expenses qualify for the R&D credit.

The payroll-tax offset allows companies to receive a benefit for research activities, even if they aren’t profitable. In order to be eligible for the credit, there are a few qualifications that companies must meet, like:

• gross receipts for five years or fewer, and yes, interest income counts toward gross receipts;
• less than $5 million in gross receipts in the year you’re electing to use the credit;
• qualifying research activities and expenditures and,
• payroll-tax liability.

Hot Tip: avoid the dreaded audit at all costs by making sure your company’s activities are qualified for the R&D Tax Credit using the 4-part test.

Unsure if your startup qualifies? Here is a simple guide to figuring out if your company qualifies.

Changes to R&D Tax Credits expanded the industries that can claim the credit. By including applied sciences like those used in manufacturing, agriculture, and technology instead of making the credit only available to strictly lab sciences–more companies than ever could be eligible for the R&D credit.

Keep up with all things taxes, accounting, and tech by subscribing to our newsletter.

By Neo.Tax Team

5 min read

A recent study from ​​the U.S. Department of the Treasury, the Minneapolis Federal Reserve, and Dartmouth College found the IRS can automate between 62 million and 73 million tax returns–which represents over 45% of US taxpayers who would be eligible for auto-filing.

A survey of 344,000 individual returns in 2019 found that pre-populated returns for low-to-moderate earning taxpayers would not only be accurate, but would also save taxpayers time and money when filing every year.

Even though accuracy decreases as the number of itemized deductions increases, 90% of Americans qualify for standard deductions.

That said, let’s explore the other ways automated tax returns could help the average American.

1. Faster, Easier, Better

An automated tax system for taxpayers claiming the standard deductions means faster tax processes for everyone. Huzzah!

Automation would ease the burden on the IRS as they continue to deal with pandemic-related backlogs and slowdowns.

In countries where automated taxes filings are already standard practice, taxpayers can file in as little as 5 minutes–as is common practice ‌in Estonia. In Sweden, where taxpayers receive a text message to review and approve their tax filing, the process is even faster.

Not to mention the economic benefits for the 12 million people who currently are not filing taxes because of a lack of access to resources necessary for filing, for instance. An automated filing could mean money in the pockets of people who had never or rarely filed previously.

Who knew working smarter could mean more money in your pocket?

2. Stress Be Gone

Most Americans cite making a mistake and not getting their full refund as major stressors when filing their taxes. Not to mention the financial burden taxpayers face having to pay preparers when, in reality, a standard deduction and automated filing could suffice.

Tommy Lucas, a Financial Advisor At Moisand Fitzgerald Tamayo, told MSNBC “it would save so many people the stress and headache of figuring out what documents they need, or how they are going to pay for their return to be done.”

3. Increased Accuracy

Since 90% of Americans can take advantage of standard deductions–especially after a 2017 tax overhaul that doubled the standard deduction for taxpayers–a majority of taxpayers could take advantage of an auto-filing system.

This means that because there are fewer deductions, there will be fewer mistakes on a pre-populated filing. Allowing for pre-populated or automated filing to increase the accuracy of your taxes. More accuracy also means a smoother, more efficient process that sees you with your return faster than ever.

Coincidentally, Neo.Tax is working to automate taxes for small and medium-sized businesses. We are empowering founders and accountants with innovative, tech-forward tools to make preparing your business taxes faster and easier. Our automated R&D Tax Credit solution has expanded the reach of this tax credit, so it is no longer just a benefit for large corporations—by putting money back into the hands of the companies who fuel our diverse economy. We’re saving businesses and accountants time without charging exorbitant fees. It’s what automation is all about.

We will continue to update you on the progress of the automation of IRS tax filings as the story develops.

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