How Startup Technology Companies Qualify for the R&D Tax Credit

If You’re a Tech Founder, You’re Leaving $100k on the Table 

If you own a business that develops software or is in the tech industry, and you’ve never heard of the R&D tax credit, then you are leaving $10k+ on the table. 

Maybe even $100k+ on the table if you have raised a series A or series B round. 

Every time I mention this tax benefit to business owners (even CPAs too), they always tell me “I’m not doing any R&D” or “I have a CPA, I’m sure she’s taking care of it.” 

I always tell business owners that the tax code definition of R&D is very different than the traditional definition of R&D. Also, if you have never heard of R&D before, and think your CPA is claiming it already, then I can almost 100% guarantee that you are not claiming this benefit. 

Even if you don’t pay income taxes because your startup isn’t profitable yet (i.e., most startups), you might be able to use this tax credit against payroll taxes instead.

Who Even Qualifies for the R&D Tax Credit? 

If you are using the principles of engineering, computer science, chemistry, physics, or biology to develop a product, process, or software, then you are most likely a great candidate for the R&D tax credit. 

Almost every startup technology business that we have worked with is a great candidate for this tax credit because they are all developing a product or software and hiring engineers to build the product. These engineers inherently rely on the principles of engineering or computer science during the daily course of their work. 

The above logic is a good “measuring stick” to figure out whether you want to explore the R&D tax credit further. So how do you decide how much money you can actually save on your taxes? 

Ok, I Think I Do R&D. So, What Expenses Can I Actually Include? 

Finding out whether your business is qualified to claim the R&D tax credit is an easy task. The more difficult task of finding which expenses qualify for the R&D tax credit is the tricky question.  

The TaxRobot software walks you step by step to help you find all eligible expenses for your business and calculate your tax credit.  

The four main buckets of expenses that can qualify for R&D are the cost of W2 wages, contractor expenses, supplies, and computer rental or cloud computing services. We call these qualified research expenses (QREs). 

Any W2 wages paid to engineers, programmers, developers, etc. to help develop your product or software is a good place to start. You can also claim expenses for those who are directly supporting or directly supervising the R&D work. For direct support, think of programmers who are simply building and coding features of the product or doing quality assurance testing. A direct supervisor activity could include a VP of Engineering overseeing and lending technical expertise to the engineers doing the R&D work. 

Contractor expenses include any expenses paid to outside businesses or freelancers who are developing the product or software. There are several nuances regarding the analysis of whether contractor expenses qualify, but if you make sure the contractor is US-based and working on an hourly or time and materials contract, then the expenses can qualify. However, these expenses are taken at a reduced rate because Congress wanted to incentivize businesses to hire full-time employees at the time of creating the R&D tax credit. 

Supply expenses can also qualify for the R&D tax credit, provided you are making a physical product. The term “supply” means any tangible property other than land, improvements to land, or property that can be depreciated in your hands. Supplies typically include physical expenses for creating or testing any prototypes or pilot models. Most software companies don’t have any supply expenses. 

The last bucket of cost is for computer rental expenses. The original name for this bucket is extremely outdated, as nobody “rents” computers anymore as they did in the 1980s. But the definition of computer rental expenses includes computer cloud rental expenses. If your business has been spending a lot of money on Microsoft Azure or Amazon AWS cloud computing expenses to develop and test your software, then this is a bucket of costs that you cannot ignore. 

How Can I Find Out How Much I Am Owed? 

After you have figured out that you are qualified for the R&D tax credit and have found that you do have QREs, then you need to calculate the credit. Schedule a call with a TaxRobot R&D expert here to discuss the next steps, find out how much you are owed, and use our software to automate, calculate, and claim your R&D tax credit.