Owners of new companies often seek out a CPA who understands startups, someone who knows how to navigate the complex tax scenario that includes doing tax planning for startups. Because new organizations typically have low revenue and unique, one-time expenses, exact record-keeping is essential. Nowhere is this kind of ability more helpful than in the area of uncovering R&D tax credits for startups.

A Short History Of R&D Tax Credits

Beginning in 1981, Congress wrote new rules that allowed for R&D tax credits for startups. The primary mechanism of the credit was to allow eligible R&D expenses for newer companies who engaged in a wide range of research, not necessarily of a scientific nature. Entrepreneurs could cut their Social Security tax burden by significant amounts for the first five years of their existence. They could even carry the credits forward for up to 20 years.

Of course, the rules were popular with the public and were renewed more than a dozen times before becoming permanent in 2015's PATH Act. Now an ensconced part of the tax planning landscape, startup owners are wise to keep an eye out for potential credits.

Rules For Taking the Credit

One of the central aspects of proper accounting for startups involves the correct application of the rules for taking R&D credits. The IRS allows wide latitude when it comes to defining "R&D," but it's still imperative for companies to maintain detailed records of projects for documentation and audit purposes.

In general, you can reduce your firm's Social Security tax burden with a direct write-off of research and development expenditures in the amount of 10 percent of total R&D investment in a given year. There's a $250,000 per-year limit on the amount of the credit you can take. However, any valid, excess credits can be carried forward for up to 20 years.

Another stipulation, which is even more clear-cut than the definition of R&D, is the timing rule. The credit is only available to companies during their first five years of existence, or during the first five years that they have any revenue.

Possible Complications

There have been several legal cases in which the IRS challenged a company's definition of R&D expense. It's not enough for the expenditure to be valid; you need to have supporting documentation from day one that shows how and why the expenses are within the category of research and development. Things like lab results, projects lists, project notes, payroll records, expense detail from the general ledger and others are typical kinds of evidence the IRS accepts.

One of the challenges for owners is knowing what types of records to maintain for various kinds of research projects, understanding when to file for the credit, and applying consistent standards from year to year. Bookkeeping for startups can be fraught with pitfalls and missed opportunities. The R&D credit is not a simple concept because the law has so many moving parts, applies to multiple situations and often faces legal challenges from the IRS.

Where to Begin: Accounting For Startups

Here at Fusion CPA, our team of experienced accountants can help navigate through how your company can take R&D tax credits on qualified expenditures. You'll have access to a CPA who understands startups and has a strong background in tax planning for start-ups and bookkeeping for startups. Our team will be able to show you how to minimize the risk of facing potential IRS penalties, carry any excess R&D credits forward and accurately document eligible activities that qualify for the credit. You can learn more about our services by clicking the button below to schedule a complimentary discovery call today!


This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive