Small businesses and startups in the IT sector play a crucial role in the economic growth of any country. In addition to this, they also offer employment to a number of people. But running any software company requires a lot of investment especially for the R&D work.
In order to arrange funding, several startups in the US rely on the R&D tax credit program which provides them with up to $250,000 per year for developing new or improving existing products, technologies and applications.
How does the R&D tax credit program work?
Let’s say your software development team consists of six developers at an annual salary of $600,000 and they are exclusively focused on building new applications or adding features to existing applications, you could potentially get $60,000 as a refund check from the IRS.
The Federal R&D tax credit program provides approximately 10% of your qualified research and development costs. In addition to the Federal program, every State has its own R&D tax credit program as well.
What activities qualify for the R&D tax credit?
Some areas of research and development in startups include:
- Develop new applications, make improvements or add new features to existing applications.
- Incur costs related to a process, project, or prototype that is incomplete because of unresolved technical problems.
- Integrate various databases or applications that were not designed to communicate.
- Improve application, response time, throughput of applications
- Work on Artificial Intelligence, Machine Learning, Blockchain, Crypto or any new innovative technologies.
Essentially, your research and development activities need to meet the 4-part test below in order to qualify
- Develop new or improve existing functionality, performance, reliability, or quality of a product, process, technique, invention, formula, or computer software for the purpose of sale, lease, licence or use in your business.
- Eliminate uncertainty during the research and development process that you couldn’t resolve using publicly available information.
- Utilize a systematic process of experimentation to evaluate one or more alternatives in order to eliminate uncertainties and achieve the desired end result.
- Utilize principles of engineering, computer science, or physical or biological sciences.
What expenses can I claim for the R&D tax credit?
Salaries of employees who perform or directly supervise or support qualified activities in the US, contractors expenses provided they perform the work in the US and your company retains the rights to the associated intellectual property resulting from their work, patent costs, and hosting costs such as Google Cloud, Amazon Web Services, Microsoft Azure, etc.
What does the R&D tax credit application involve?
The R&D tax credit application process is complex and time-consuming, requiring you to: identify eligible projects and expenses per the IRS tax guidelines, write technical narratives for the projects, prepare project financials, compile supporting documentation and evidence, and fill out the associated tax forms.
This can be a huge distraction for startups who need to focus on running their business and releasing software. Boast.AI R&D Tax Credit Software streamlines and automates the process by reducing the manual work as well as the audit risk. Boast only charges its fee once its customers receive their money from the government, thereby enabling startups to get funding without the risk and effort.