Small Businesses Can Now Qualify to Claim the Research Tax Credit

Small start-up businesses finally get a tax break! In December 2015, Congress made changes to the federal research tax credit rules that enable many small, start-up companies to qualify for the credit  which they would not have been able to take advantage of in the past.

Almost 16,000 businesses of all sizes claim the research tax credit each year. The research tax credit rewards businesses for developing new or improved products in the United States. Historically, the credit could only be used by companies making money and paying federal income taxes. The new change will allow small, start-up companies to offset up to $250,000 in payroll taxes instead of income taxes, meaning it is no longer necessary to be profitable to claim the credit.

Example: ABC Company is a small, startup company developing a new type of flashlight. The flashlight can be charged during the day via solar cells, and can also be charged via a USB cable. Previous attempts at creating a similar type of flashlight were considered too weak and the charge did not last very long. Even though ABC Company is not making money, it is paying wages to employees to assist in the design and development of the flashlight. Assuming ABC identified $100,000 in research expenses associated with the development, it could qualify for a federal research tax credit of up to $6,500. Under the new start-up rule, ABC would be able to apply this $6,500 credit against its payroll tax obligation. The credit increases as spending increases, so if a company identified $1 million in research expenses, the credit would likewise increase to around $65,000.

We Can Help

It is important to follow IRS rules when claiming the R&D credit. Elliott Davis Decosimo tax specialists have many years of experience working with companies to ensure that they claim the research credits available to them, while preparing the documentation necessary to support the claim. Please contact an Elliott Davis Decosimo tax advisor at if you would like to discuss further.

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