Startups give your tax and business professionals a hug sometime. We know you guys are the geniuses that are making the world a brighter place, but us bean counters and knuckle dragging contract writers really do keep the lights on. Show some love!
Startups are great. They foster ingenuity, jump-start the job market, and even make people billionaires overnight. Startups are simply awesome, big ones, littles ones, even the teeny tiny ones, each has their own greatness.
The problem with startups though is that while the geniuses that begin them are quite brilliant at what they do, they often don't realize the business and tax concerns that must be addressed. For instance, have you heard of the R&D Tax Credit? While taxes are generally considered a leech on the creativity and talent of those attempting business greatness this credit is actually designed to spawn ingenuity. Unfortunately it is also often overlooked and that's just plain unfortunate.
The fact is that this credit is useful for many businesses in differing industries who never even thought they would be eligible for "R&D". The research does not have to be revolutionary or incredible; you just have to be working to improve function, performance, quality of a product or a process. The research has to be "qualified" in that it must be technological in nature. Therefore research into arts, history, or social studies doesn't count. There need be some measure of "uncertainty" that such a project will eliminate, which while sounding fancy and daunting is actually a pretty easy requirement (will changing the packaging of your meat from paper to plastic make it stay fresh longer, hmmmm let's see... This is enough uncertainty!).
Now to the paperwork. The paperwork is the worst, it actually IS wildly involved for the "traditional" R&D credit requirement. You need to store enough paperwork, analysis and calculable documentation as far back as the 80's. There is another way, the "alternative simplified credit" or "ASC", which actuallyis simplified. It's so simplified that there's actually been exciting news for this method recently which I will get to. The method reduces the long term record keeping and documentation that is required for the traditional credit by stating that if your business is new (ahem startups pay attention) then you can claim a 6% research expense. If the business is over three years old you take the average over the past three to five years, halve it and then take 14% over that base amount. So if you spent $10,000 on R&D on average, halve it to $5,000 and anything you spend over that amount you can apply a 14% credit to. This can be serious money needed to underwrite the next stages of your growing business!
Now for the really good stuff. New IRS rules allow for businesses employing the ASC method to apply for it on Amended Returns. So what? SO WHAT? Now each business gets greater flexibility in their election because instead of having to know definitively before the election what your R&D expenses were, and for how long you would need them and for what etc etc. NOW you can amend your previous returns and qualify for the incredible tax credits retroactively! So a business that may have overlooked the credit for years because of minimal benefit and maximum pain in the preparation can now see a potential windfall from good bean counting. This is especially good for startups who begin their existence not really knowing where their brilliance will take them. Now their trusted tax professionals can help them fund a brighter future with their own money.
So give your tax professional a hug and talk to them about IRC § 41 and Treasury Regulation 9666 you'll be glad you did. Side effects may include falling asleep and drooling but the benefits are like running though a meadow holding hands with a pretty girl (or guy). Or better yet just call me, as I said I love short shorts, ahem, I mean Startups.
(Fine print: These tax sections are not for everyone, tech companies, software developers, software service providers, biotechnology companies, and cloud-based technology or services businesses shouldseriously consider using them though. This is not a complete coverage of IRC § 41 or TD 9666, there are other recent resolutions of the proper tax treatment of expenditures that may apply to you, speak to your tax professional for more information or if you develop hives or feel bloated because that's odd and has nothing to do with this tax credit. On second thought if that happens see a doctor.)
Benjamin Goldburd is an Associate at Goldburd McCone LLP a boutique tax law firm in New York City.
For more information on these and other tax issues feel free to contact our offices at 212-302-9400, or on the web at www.goldburd.net.