Startups are the lifeblood of any growing economy and good software developers are one of the essential ingredients of a successful startup. However, finding good developers can be expensive and challenging.
While there are several grant programs available to enable startups to hire and retain developers, one of the key funding programs that helps startups hire and retain developers is the US R&D tax credit program which provides up to $250,000 per year.
How does the R&D tax credit program work?
Let’s say your software development team consists of five developers at an annual salary of $550,000 and they are exclusively focused on building new applications or adding features to existing applications, you could potentially get $55,000 as a refund check from the IRS.
The math works out to approximately 10% of your qualified research and development costs that can be recovered through the Federal R&D tax credit. In addition to the Federal program, every State has its own R&D tax credit program as well.
What is the R&D Tax Credit qualification criteria?
In order to qualify for the R&D tax credit, your research and development activities need to meet the 4-part test below:.
- 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.
Some areas of research and development in software companies 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.
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.
- Contract development expenses It is important to note that the contractors need to be working in the US and your company needs to retain the rights to the R&D and associated intellectual property resulting from their work.
- Hosting costs related to the R&D work, example, Google Cloud, Amazon Web Services, Microsoft Azure, etc.
- Cost of supplies used in qualified activities, including extraordinary utilities, excluding capital items or general administrative supplies such as travel, shipping, or royalty expenses. E.g. prototypes and testing materials.
What is the R&D tax credit application process?
The R&D Tax Credit application process is cumbersome, 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 stressful and a big distraction from your business. 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 businesses to get funding without the risk and effort.