As tax season rolls around, it is important to keep an eye on the tax credits that are available to startups. These credits are easy to forget because it is not something that just anyone can claim on their business tax returns. But as startup company or an existing business building software that has a risk of failure, the government wants to provide financial incentives you to build it within the United States.
Each year, one of the better credits that are available to companies commissioning a custom software development project is the Federal Research & Development Tax Credit. The IRS publishes its Audit Guidelines on the Application of the Process of Experimentation for all Software.
Activities and costs that can be claimed
Covers research that
- Creates new or improved business components
- Is technological in nature
- Has an element of uncertainty
But not expenses related to
- Research conducted after the beginning of commercial production.
- Research adapting an existing product or process to a particular customer’s need.
- Duplication of an existing product or process.
- Surveys or studies.
- Research relating to certain internal-use computer software.
- Research conducted outside the United States, Puerto Rico, or a U.S. possession.
- Research in the social sciences, arts, or humanities.
- Research funded by another person (or governmental entity).
State Tax Credits
Your state may have additional tax credits designed to encourage small businesses, such as your startup company. For example, in Georgia there is a generous Angel investor tax credit available that is worth investigating. You can read about it at Georgia: Small Business Incentives.
A tax credit is better than a business expense because it reduces the total amount of your tax bill dollar for dollar.
Because Rietta and its team members are located within the United States, the cost of the development work that we perform for your company may qualify for this credit depending upon the stage that your startup is currently in. Be sure to check with your tax advisor and apply for this credit if it is applicable to you.
Confirmed with my tax accountant
Before publishing this article, I double checked the facts with my company’s accountant, Alan Bradford of Acuff Accounting & Tax Service. If you are in the metro Atlanta area and are looking for some help with your taxes, give him a call at 770-554-8344.
- Audit Guidelines on the Application of the Process of Experimentation for all Software (2013) – Internal Revenue Service
- There’s a war over R&D tax credits. And companies keep winning. (2014) – Washington Post
- Eight Myths That Keep Small Businesses From Claiming The R&D Tax Credit (2013) – Forbes
- The R&D Tax Credit Explained for Small Business (2011) – Bloomberg BusinessWeek