How to Get Free Money for Your App Startup (We’re not Lying)
March 31, 2017
What if you were sitting on top of thousands of dollars and didn’t realize it? Well, with the R&D tax credit you might be.
Only 1 out of every 20 eligible businesses takes advantage of this opportunity because they don’t know it exists. So if you’ve been trying to find ways to save on expenses, look no further than the R&D Tax Credit.
The Research & Experimentation Tax Credit or R&D Tax Credit is a general business tax credit under Internal Revenue Code section 41 for companies that incur research and development costs. The intent behind this tax credit program is to encourage innovation and to create more jobs and give the economy a boost in the process.
Introduced in the Economic Recovery Tax Act of 1981, the R&D tax credit has been leveraged by tech startups and small businesses across the U.S. Back in 2005, 17,700 corporations claimed $6.6 billion in credit alone. But again, only 5% of eligible business’ actually go through the process.
Almost every industry and business is eligible for this credit, including app developers and startups, if they qualify. There’s one set of qualifications you need to meet before you can claim credit, the four-part test.
If you meet all of the characteristics mentioned above, you can then take the four-part test. Eligibility is predicated on the following four criteria:
Source: Apex Advisors
1. New or Improved Business Component: The research must be conducted in an attempt to create a new or improved product or process, resulting in increased performance, function, reliability, quality or cost reduction.
2. Elimination of Uncertainty: You need to demonstrate that you’ve attempted to eliminate uncertainty about the development or improvement of a product or process.
3. Technological in Nature: The process of experimentation needs to rely on hard sciences, such as engineering, physics, chemistry, biology or computer science.
4. Process of Experimentation: You must demonstrate, through modeling, simulation, systematic or trial and error, that you’ve evaluated alternatives for achieving the desired result. You must also be the person at risk if the experiment fails.
You’ll find exactly what you’re able to receive by working with a tax professional, but here are four potential expenses your app startup could have reimbursed.
Wages: If one of your employees spends 80% of billable hours on research and development, you could get a refund on 100% of their salary.
Third Party Contractors: You can claim up to 65% of what you pay to agencies. Make sure you own the product/service researched, and you are the person at risk if the experiment fails.
Supplies: You can claim the cost of any raw materials used for prototypes and testing. (laptops, desktops, testing equipment, etc.) Excluding utilities and depreciable items.
Payroll: You can offset up to $250k in payroll taxes every year.
App Startups that create new technologies are great candidates for R&D Tax Credit because to stay competitive in the ever-changing App Store; they need to constantly develop and implement new releases, features, and processes.
If your app meets all of the qualifications mentioned above, we highly recommend you find a reliable tax professional with R&D tax credit expertise to obtain that credit as soon as possible. According to AccountsNet, the average claim is around $52k, which businesses get back as a cash sum within eight weeks. Are you going to let free money go unclaimed?
If you want to learn more about R&D credit, watch “Understanding the R&D Tax Credit – A Guide for Tax Practitioners & Advisors” by BKD CPAs & Advisors, below.