NV tech startups taking advantage of research and development tax credits
R&D Tax Credit criteria
To be eligible for the credit, a company’s R&D activities must meet each of the following criteria, known as the four-part test:
1. Permitted purpose: The purpose of the activity or project must be to create new or improved performance and functionality of a business component.
2. Technological in nature: Experimentation must use principles of science connected to engineering, physics, biology or computer sciences.
3. Technical uncertainty: The taxpayer must demonstrate that its attempted to eliminate uncertainty about the development or improvement of a product of process.
4. Process of experimentation: The company must demonstrate — through modeling, simulation, systematic trial and error — that its evaluated alternatives for achieving the desired result.
Source: Moss Adams
RENO, Nev. — For Daniel Price, it was an eye-opener.
A year ago, the CEO and co-founder of Breadware, an “Internet of Things” (IoT) product development company, learned about the federally backed Research & Experimentation Tax Credit — or R&D Tax Credit, as it’s more commonly known.
Nevada Industry Excellence helped introduce the Reno-based startup to the program. Enacted by congress in the Economic Recovery Tax Act of 1981, the R&D Tax Credit was initially designed to incentivize risk for growth and retention of high-tech jobs and advancement in technology in the United States.
In its current iteration, the R&D is now a tax credit to incentivize U.S. companies to keep higher wage jobs — that create or improve products, process or software — in the country.
In a nutshell, the tax credit is for companies that incur research and development costs in the U.S.
Breadware, Price found, fit the bill.
“Breadware’s whole business model really is R&D,” Price said in a phone interview with the NNBV. “So it’s something that is pretty compelling based on our business model, which is inherently research and development, both internal and external.”
‘Cash is king’
Qualified research expenditures include wages, supplies and contractors, according to RnD Consulting, a Cleveland-based firm that helps businesses “identify, capture and defend” the tax credits, according to its mission statement.
Specifically, startups and small businesses can offset employer social security tax, said Tony Hnyp, of RnD Consulting, who led an R&D Tax Credit Class at the UNR Innevation Center in June.
However, Hnyp explained, the company cannot have had more than $5 million in revenue and annual gross receipts for more than five years. If qualified, a startup can offset up to $250,000 ($7,347 per employee).
“Basically what this means for a startup that’s burning $250,000 a month in expenses, this is like a whole free month,” Hnyp said. “Because you’re reducing your payroll by that much in one year, so it’s a real boon. It’s one more month of cash-flow for any rapidly growing startup.”
This was music to Price’s ears.
“As a startup, cash is king,” Price said. “You live and die by it. So when you can find wins for things you would have had to pay money on, they’re worth looking into a little deeper. So the R&D Tax Credit is a pretty big win for us.”
What’s more, startups can carry the tax credit over and use them once the company hits profitability, said Price, adding: “So once you hit profitability, you can soften your tax blow.”
Sooner the better
Michael Gillette, co-founder of Nevada Jumpstarter and Oxysensors, attended the NVIE-hosted R&D Tax Credit Class at the Innevation Center in June. Gillette was trying to glean if his startups could qualify for R&D Tax Credits.
“We don’t have a lot of money coming in, so anything we can save is good,” Gillette said.
Both started in October 2017, Nevada Jumpstarter is a prototype consulting company, while Oxysensors is an IoT company that monitors pressurized CO2 and oxygen tanks.
“A lot of what we do is R&D,” Gillette said. “There are definitely some things that we haven’t looked at. So, we’re going to try and reevaluate how we’re doing our taxes.
With that in mind, Hnyp said companies that qualify for R&D Tax Credits cannot use them to offset payroll tax until the quarter after it filed their taxes. In other words, the earlier startups file their taxes, the more of the year the credits can be used.
“If companies are waiting until September 15 to file their taxes, they won’t be able to use them until October 1,” Hnyp explained. “Otherwise, if you filed in March, you can use the next three quarters to offset payroll taxes.”
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