For Startup Companies: If your business has less than $5 million in annual revenue, and it's been less than five (5) years since your first gross receipts/sales, you can frequently reduce your Social Security Payroll tax liability under the PATH Act R&D credit. If you do not qualify under the PATH Act R&D Credit, you can take regular R&D Credit against income taxes (rather than against payroll taxes).

Qualifying R&D expenses and/or activities are those which pass this four-part test:

1. Qualified purpose. The purpose of the activity must be to create a new or improved product or process, including computer software, that results in increased performance, function, reliability, or quality.

2. Technical Uncertainty. The activity is performed to eliminate technical uncertainty about the development or improvement of a product or process, which includes computer software, techniques, formulas, and inventions.

3. Process of experimentation. The activities include some process of experimentation undertaken to eliminate or resolve a technical uncertainty. This process involves an evaluation of alternative solutions or approaches and is performed through modeling, simulation, systematic trial and error, or other methods.

4. Technological in nature. The process of experimentation relies on the hard sciences, such as engineering, physics, chemistry, biology, or computer science.

Unlimited, if applying the R&D credit against income taxes. These credits can range between 5% and 15% of qualifying R&D costs. If taking the PATH Act R&D credit, a company can receive up to $500k* against payroll taxes and take the remainder against income taxes.

As an example, for an unprofitable 5-person tech startup that has less than $5M in annual revenue with roughly 80% of time being spent on qualifying R&D activities, and average salary of $100k/year, the credit might be between $20k to $60k. Tax Prep Advocates’ fee is a small percentage of the total qualifying R&D expense and easily pays for itself by securing the R&D Tax Credit for you.

*$500,000 for 2023 tax year, $250,000 for 2022 tax year

Yes, we can help you file an amended tax return to claim the R&D credit for previously filed Income Tax returns (past 3 years), but you cannot take the PATH Act R&D credit on an amended tax return

We help businesses with all aspects of claiming these R&D Tax Credits. Tax Prep Advocates will:

✓ Identify and calculate qualifying R&D expenses.

✓ Prepare Forms 6765, 8974, and 941 to gain IRS approval of credit. If you use Tax Prep Advocates, we’ll file on your behalf as well.

✓ Prepare all required supporting technical and financial documentation, including documentation of research time, R&D payroll expenses, etc. This is an important pre-requisite to support an IRS audit in case that happens.

✓ Coordinate with your tax preparer, payroll provider, and accountant to ensure your books and taxes are accurate.

✓ Continually ensure the credit is applied correctly against your payroll liabilities.✓ Email and phone support with R&D credit experts.

Yes, absolutely, we can help support you in the case of an audit..

Tax Prep Advocates recommends anyone who claims the R&D credit to get a study done. An R&D study determines the total amount the business should claim and collects the necessary documentation to support that claim.

When filing for the R&D tax credit, you must submit the relevant tax forms to the IRS. However, you must also have the technical and financial justification of what you were claiming prepared in case the IRS audits your claim. If the IRS audits the claim and you can’t produce technical and financial evidence behind what you claimed, you will need to return the money and potentially pay a penalty. 

Yes, we’ll calculate the R&D tax credits and provide the necessary documentation for your tax preparer to file. If you use Tax Prep Advocates, we’ll take care of the full process and file the necessary tax paperwork on your behalf as well.

33 states currently offer an R&D credit. Generally, the states follow federal guidelines on what constitutes qualified R&D expenditures with few exceptions. Tax Prep Advocates will provide guidance on state level credits. For example, the CA R&D credit is non-refundable which means it cannot be taken against payroll tax. Work must be done in CA to be considered qualified and CA credits can carry forward indefinitely until exhausted.