1. Q: Why are R&D Tax Credits so Valuable to the Startups since 2017?
Starting form 2017, for the first time, the R&D Tax Credits can be applied against regular Payroll Taxes. Start-up companies and small businesses may be eligible to apply up to $1.25M—or $250K 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.
That means that even if you don’t have any income tax liability to be offset by those credit, as long as you have payrolls, you can use those credits to reduce the payroll taxes.
To be eligible, a company must meet two requirements:
- Have less than $5 million in gross receipts for the credit year
- Have no more than five years of gross receipts
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 claimed. For calendar-year taxpayers, the R&D credit can be applied against payroll taxes as early as July of the following year.
2. Q: Are R&D tax credits only available to High Tech Companies ?
Not at all. It’s not only high-tech or life sciences companies with dedicated research departments that qualify for the R&D tax credit. Indeed, most companies don’t have R&D laboratories and instead perform R&D in their test kitchens or fields, wineries or distilleries, or on production floors. Wherever experimentation occurs, R&D may be found.
Please contact us to determine if your company’s activities could be eligible to take advantage of current R&D tax credit rules and regulations. We can then help you identify qualified R&D activities—including those that can be expensed immediately—and assemble documentation to defend your claim based on our extensive knowledge of the law and your industry.
3. Q: What is a 83(b) election ?
It is common for start-up founders and key employees to receive a standard “Restricted Stock Purchase Agreement” with a vesting schedule. Under this document, the company has the right to buy back these stocks if he or she is terminated or leaves the company. Section 83(b) election provides an opportunity to elect to be taxed at the time of the receipt of the property (e.g., grant date) instead of waiting for the property to become transferable, or no longer subject to a substantial risk of forfeiture (e.g., vesting date).
So basically, 83(b) election is a form you send to the IRS letting them know you’d like to be taxed on your equity on the grant date rather than the vesting date.
Section 83(b) election is applicable only for stock that is subject to vesting, since grants of fully vested stock will be taxed at the time of the grant.
4. Q: Why 83(b) Election is so important to startups ?
The 83(b) election is extremely useful and can result in great tax savings under this situation. Without an 83(b) election, a startup founder or key employees may end up with a large tax bill at a time when their stock is still illiquid. By selecting the election, ordinary tax rates (max 37%) on higher values at vesting periods can be prevented and will accelerate the holding period, which will allow for any gain at sale or liquidation to more quickly be recognized as capital (max 20%). Capital assets are subject to the favorable taxable rate if held for a year or more.