A research and development (R&D) tax credit can reduce a robotics startup’s tax burden.
Robotics startups are paving the way for the future. It’s important that young, innovative companies take advantage of every resource available, like R&D tax credits. Taxes are a hefty financial burden for a startup, but thankfully these credits can reduce that strain. Keep reading to discover how R&D credits can allow you to minimize your company’s financial pressures.
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What is an R&D Tax Credit?
First introduced in 1981, American businesses have long been aided by R&D tax credits. These credits reward companies for pursuing innovative applications here in the U.S.; however, this credit is not open to all companies. There are strict requirements that a company must meet in order to be eligible. Let’s take a look at those requirements now.
Federal R&D Tax Credit Eligibility
You may be eligible for a federal R&D tax credit, but you must pass this short test. Has your robotics startup:
- Developed a new product or process or improved upon existing functionality?
- Dealt with some form of uncertainty in the development process (appropriateness of design, method used, etc.)?
- Utilized a process of experimentation to eliminate uncertainty (modeling, prototyping, trial and error or other testing)?
- Conducted experimentation which relied on engineering, biological, physical or computer science?
- Employed all or a portion of your workers within the United States?
If you answered ‘yes’ to the above questions, you can apply for a credit. Companies that are able to apply for the credit will need to determine which R&D activities count towards the credit calculation.
What is R&D in Robotic Startups?
Research and development is a very broad category, but under the rules of the federal R&D tax credit program, R&D has a very limited definition. To help you better understand what elements of your company’s operations can count towards your credit calculation, examples of qualified research activities have provided below.
As reported by the IRS, you can only use three items to calculate your credit. Here, you can see what counts as QRE for your credit calculation:
- Wages – The pay of W2 employees who are conducting qualified research, supervising the qualified research, or directly supporting your company’s qualified research
- Supplies – The cost of disposable supplies directly used for your company’s qualified research activity.
- Contract research expenses – The wages and/or expenses paid to U.S. – based contractors conducting qualified research or development for your company.
Recognizing what counts as a QRE is crucial for your credit estimation. For example, hiring an external marketing team to create QA surveys of your new product is not a QRE. Of course, if you hire an outside contractor to help build a prototype of your product, that is a QRE.
Is the R&D tax credit for Robotics Startups Worth the Effort?
Applying for an R&D tax credit may be time consuming, but it is certainly worth the effort. A federal R&D tax credit could help your company dramatically reduce your tax payment. Let’s say that you paid your team of three robotic engineers $263,991 collectively. Your company also had to purchase about $25,000 in disposable materials. You could receive a credit that is as much as $1,625.00. Use our free R&D tax credit calculator to see how much your credit could be. Qualifying companies can expect to receive 7-10% of R&D costs back in the from of the credit. The money saved via these credits can be used however you see fit.
It’s important to note that the federal R&D tax credit, isn’t the only incentive program you can make use of to reduce your tax burden.
State R&D Tax Credits
Texas R&D tax credits, and those of other states, can be added to your federal credit for even larger savings. Remember that while most states that offer these programs generally follow the IRS guidelines, each program has its own rules and regulations. There are also states that don’t offer these credits at all. These states include:
- North Carolina
- South Dakota
- West Virginia
Living in the above listed states, doesn’t preclude your company from being eligible for a federal R&D tax credit. No matter where you live in the United States, as long as you have met the requirements of the five part test, you can apply for a federal R&D tax credit.
In Review: R&D Tax Credits for Robotics Startups
Your robotics startup could receive a credit equal to 7-10% of your QRE in addition to a state R&D tax credit, depending on where your company is based. With these credits, you can reduce your tax burden and use the saved money to reinvest in your company, save for retirement, and more. If your startup qualifies for a federal credit, don’t wait to start your application. Contact a tax credit expert today and get the credit you deserve.