Startups and new small businesses often face high uncertainty.
While this uncertainty often induces a lot of anxiety, particularly at the early stages, investors must take advantage of every available opportunity to survive (and thrive).
What’s more, all startups, including those that don’t show a profit, can qualify for these incentive programs. Two of the most popular programs that help startups remain competitive are ERC and R&D tax credits.
The R&D tax credit provides a compelling incentive (especially to software startups), helping them reduce the financial risks associated with innovation. ERC, on the other hand, provides start-ups with a tax credit in accordance with the CARES Act.
This post will discuss everything you need to know about ERC and R&D tax credits, emphasizing how they give startups a competitive advantage.
Understanding the Employee Retention Credit (ERC)
Introduced under the CARES Act in April 2020, the Employee Retention Credit, abbreviated as ERC, is essentially a refundable payroll tax credit for wages or qualified health plan expenses paid by an eligible employer.
The tax credit is designed to help qualified startups – startups that fully or partially suspended their operations or saw their revenues reduce drastically due to Covid-19 – offset their payroll taxes. This makes it a critical lifeline for small businesses and startups that were severely hurt by Covid-19-related government orders.
Startups and small businesses that qualify for ERC might receive up to $7,000 of tax credit per employee, assuming they paid at least $10,000 to that employee.
The ERC program has been changing since its inception, where the tax credit was capped at $50,000 per calendar year. As such, qualifying startups with 7 or 8 employees could qualify for a $100,000 tax credit to equalize payroll taxes.
Notably, there are several requirements that your startups must meet to qualify for these tax credit benefits. Generally, the startup must have an average of up to $1 million annual gross receipts, started on or after February 25th, 2020, and employed at least one employee other than 50% of owners.
If you are trying to figure out if your startup is eligible for Employee Retention tax credits, your CPA firms should help you assess with little to no effort. So, consider conducting them.
Importantly, although ERC has ended, qualifying startups and businesses can proactively apply for the next couple of years.
Understanding R&D Tax Credit
Established in 1981 under the Economic Recovery Act, the R&D tax credit is a widely recognized program that has been helping qualifying startups recover from various forms of crises. The goal of this tax credit program is pretty straightforward – to increase research activities and help the US retain leadership in technology and innovation.
With this program, startups and businesses with revenue of less than $5 million and within five years of their first gross receipt can qualify for up to $250,000 tax credit to offset their payroll taxes. This means eligible businesses may qualify for up to 1.25 million of the R&D tax credit if they apply for these benefits each year.
Surprisingly, despite this program’s liberal qualification criteria and considerable benefits, many startups do not claim the tax credit — Businesses do not need revenue or to be paying income tax to be eligible.
That said, if you are considering applying for the R&D tax credit, it is extremely important to note that although the program is very beneficial, it can be tough to navigate. You can bypass this challenge by working with a qualified and experienced R&D tax credit consultant.
The best thing about qualifying for R&D credit as a payroll tax offset is that your startup does not necessarily need to be a research firm. Even better, it doesn’t need to have employees at the time you’re applying for the benefits.
With research and development credit, contractor payments, as well as supply expenses, can stand in place employees, and you could also carry the credit forward for up to 20 years.
Final Thoughts
Startups and small businesses can establish themselves by leveraging wage-based credits like ERC and R&D tax credit.
However, considering that the US tax code has never been simple, startups need to work with a qualified partner who fully understands these tax credits. A qualified tax consultant, like the professionals at Tri-Merit, helps startups maximize benefits while remaining compliant with credit requirements.
If you’re ready to take advantage of all credits available to your startup — schedule a consultation today.
