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Updated 02/01/2022

Frequently Asked Questions

What is the R&D Tax 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.

How do I know if I qualify?

Because of the broad definition for qualified activities, businesses from almost every industry have claimed R&D tax credits. If you have employees or contractors in the United States who spend any time developing new or improved products, processes, software, algorithms, formulas, or inventions, then you likely qualify for the R&D tax credit. 

How much can I get from the credit?

You can get about 10% back on qualifying expenses such as wages, contractor costs, hosting and infrastructure, and supplies. You can receive up to $250k per year for up to 5 years - that is $1.25M!

But my startup isn’t profitable…

Even if your company does not owe any income taxes, you can claim the R&D tax credit to reduce your payroll taxes, as long as your business earned less than $5 million in revenue in the credit year, and did not earn any revenue or interest income in any year preceding the 5 year period ending with the credit year.

What activities qualify?

The payroll-tax offset allows companies to receive a benefit for research activities even if they aren’t profitable.

To be eligible for the credit, companies must meet the following qualifications:

  • Have gross receipts for five years or fewer—interest income counts toward gross receipts
  • Accumulate less than $5 million in gross receipts in the year the credit is elected
  • Conduct qualifying research activities and expenditures
  • Determine they have payroll-tax liability

Regardless of industry, companies are potentially eligible for the R&D credit if their activities meet the following requirements, known as the four-part test:

  1. Technical uncertainty. The activity is performed to eliminate technical uncertainty about the development or improvement of a product or process, which includes computer software, techniques, formulas, and inventions.
  2. Process of experimentation. The activities include some process of experimentation undertaken to eliminate or resolve a technical uncertainty. This process involves an evaluation of alternative solutions or approaches and is performed through modeling, simulation, systematic trial and error, or other methods.
  3. Technological in nature. The process of experimentation relies on the hard sciences, such as engineering, physics, chemistry, biology, or computer science.
  4. Qualified purpose. The purpose of the activity must be to create a new or improved product or process, including computer software, that results in increased performance, function, reliability, or quality.

Additional thresholds may apply if a company develops software for internal use. Activities must be performed in the United States and can’t be funded by another party.

Do I need to be working on groundbreaking innovations?

No. The criteria for qualified research activities and expenses is very broad, and certain types of companies (i.e. software, hardware, science, construction, beauty, startups, etc.) are extremely likely to qualify for at least some amount of credit. 

Additionally, your projects do not need to succeed in order to qualify. Even if a project fails or is put on hold, you can still claim project expenses if they meet the criteria for qualified research.

What expenses can I claim?

You can claim the following expenses for qualified activities:

  • Employee wages
  • Payments to contractors
  • Cloud hosting and infrastructure costs
  • Cost of supplies

How soon can I start getting money back?

The payroll-tax offset is currently available for qualified expenses incurred during the prior tax year. The R&D credit must be calculated and shown on a taxpayer’s federal income tax return with the portion of the credit applied to offset payroll taxes identified and elected when the original tax return is filed.

The offset is then available on a quarterly basis beginning in the first calendar quarter after a taxpayer files their federal income tax return. For example, if you file for the credit in Q1, you will receive a credit to offset your payroll taxes beginning in Q2, and for every quarter until the credit has been fully consumed. However, the exact timing and method of payment depends on your payroll provider.

How do I file my R&D Tax Credit Claim?

It needs to be submitted along with your annual corporate tax filing and you need to file:

  • Form 6765, Credit for Increasing Research Activities
  • Form 3800, General Business Credit. This form has a line that asks for the amount of Credit for Increasing Research Activities
  • Each state will have its own form if it offers a state R&D tax credit program. If you qualify for the payroll tax offset, you will need to make sure you account for it on Form 941, Employer’s Quarterly Federal Tax Return. You will also need to fill out and attach Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities
  • Documentation requirements as stated in I.R.C. § 41

What if I already have a CPA?

That is great! When your claim is complete we can send access to your forms to just you or also include your accountant, along with filing instructions. We are always happy to jump on a call with your accountant as well to answer any questions they may have.

Will I get audited?

As long as your filing does not contain errors, you are guaranteed to receive a credit based on the expenses you claimed. However, the IRS may request documentation to prove that your expenses meet the criteria for qualified research. 

Many businesses miss out on R&D credits that they are entitled to because they are afraid of being audited. It’s important to note that claiming an R&D tax credit will not increase your chances of being audited. In fact, the credit is so beneficial that it would be unusual for certain types of companies (i.e. software, hardware, beauty, startups, etc.) to not claim the credit.

What happens if I get audited?

We make sure your R&D Tax Credit is super kosher and transparent, so that even if the IRS disagrees with the amount of your credit, they won’t charge you penalties or interest, just the difference in calculation. Plus, we provide a study with your tax forms and we have a former IRS Agent pre-audit each one before filing.

What documentation is needed to support my claim?

If you are audited, the IRS will request documentation to prove that your expenses meet the criteria for qualified research. If you use our platform to create your claim, then in addition to providing the documents required to file the claim, we will also provide a write-up to help substantiate your eligibility to the IRS if audited.

When an audit occurs, you can use your own testimony as evidence, but the IRS strongly prefers contemporaneous documentation. This refers to time-stamped documentation that is generated at the time that expenses are incurred, and as R&D work is being done. Examples include timesheets, meeting minutes, calendar events, and invoices. We recommend gathering as much documentation as possible to help defend your claim in the event of an IRS audit.

What is the difference between the payroll R&D Credit and the regular R&D Credit?

The R&D tax credit is available to companies developing new or improved business components, including products, processes, computer software, techniques, formulas or inventions, that result in new or improved functionality, performance, reliability, or quality. It’s available at the federal and state level, with over 30 states offering a credit to offset state tax liability.

It’s a dollar-for-dollar tax savings that directly reduces a company’s tax liability. There’s no limitation on the amount of expenses and credit that can be claimed each year. If the federal R&D credit can’t be used immediately or completely, then any unused credit can be carried back one year or carried forward for up to 20 years. Each state has its own carryover rules.

The R&D tax credit regularly provides a wide range of businesses with a source of extra cash—up to 10% of annual R&D costs for federal purposes and much more when state credits are factored in.

The R&D Payroll Credit was created by The Protecting Americans from Tax Hikes (PATH) Act of 2015, which made the R&D credit permanent and expanded its application to create a potential tax benefit for small businesses and start-up companies.

Start-up companies and small businesses may be eligible to apply up to $1.25 million—or $250,000 each year for up to five years—of the federal R&D credit to offset the Federal Insurance Contributions Act (FICA) portion of their payroll taxes each year.

To be eligible, a company must meet two requirements:

  1. Have less than $5 million in gross receipts for the credit year
  2. Have no gross receipts or interest income dating back more than five years

The R&D credit is calculated on the federal income tax return as usual and may be applied against payroll taxes starting the quarter after the credit is elected. For calendar-year taxpayers, the R&D credit can be applied against payroll taxes as early as April of the following year.

Key Dates to be aware of!

January 24th – 2022 Tax Season begins!

January 31st – Form 1099 –NEC (Nonemployee Compensation) is due for US Contractors. In general, the total on this form should match a qualified contractor’s pay included in the product.

January 31st – Last 2021 Quarterly Payroll Form 941 is due. (Form 8974 should be attached)

February 15th – Form 1099 MISC (Miscellaneous Income).

March 31st – Deadline for a customer to file (Form 1120) in order to receive Q2 R&D payroll offset.

April 18th – 2021 Form 1120 Corporate Tax Returns or a 6-mon. tax extension is due.

April 30th – First 2022 Quarterly Payroll Form 941 is due. (Form 8974 should be attached).

June 30th – Deadline for a customer to file (Form 1120) in order to receive Q3 R&D payroll offset.

July 31st – Q2 Payroll Form 941 is due. (Form 8974 should be attached).

September 30th – Deadline for a customer to file (Form 1120) in order to receive Q4 R&D payroll offset.

October 17th – Final deadline to file a timely Form 1120 Corporate Tax Return if an extension was filed by April 18th.

October 31st – Q3 Payroll Form 941 is due. (Form 8974 should be attached).

What does Neo.Tax charge?

Our fee is 2% of the total qualifying R&D expenses we find and claim for you. This is roughly 20% of the total tax credit you receive. Why do we charge based on your expenses and not your credit?  According to the IRS, a fee based on inputs (your qualifying expenses) is ok, but a fee based on outcome (your credit amount) is dangerously close to a “contingent fee” which is expressly disallowed by IRS regulations.

  • No upfront commitment. You won’t pay anything until you receive everything you need to file
  • Fee includes all required forms as well as your personalized R&D study.
  • We offer flexible payment options where you can pay all at once (and receive a discount) or spread out over 12 months.