Tips for software companies to learn R&D Tax credits

Software is eating the world as every conceivable industry today is using software in some business function or the other to drive operational efficiency.

To help software companies innovate faster, the US government has https://boastcapital.com extended the accessibility of Research and Development tax credits, offering a considerable return on development expenses.

Research and Development expenses incurred by software companies that are eligible include, wages for software developers, charges for cloud computing services, and contract development expenses.

Even a startup company can benefit by applying R&D tax credits to offset payroll taxes.

Below is an overview of the Research and Development Tax Credit program, as well as insight into how software companies may qualify.

Research and Development Overview

For software companies that meet the R&D tax credit criteria, the Federal government R&D tax credit is approximately 10% of qualified expenses. Numerous states also provide R&D tax credits that can be used to offset state income taxes.

For example, a software company with $350,000 of qualifying research and development expenses, could receive an R&D tax credit of $35,000 or more.

Payroll Tax election

A significant boost for startups, the Federal R&D tax credit also provides benefits for companies that aren't yet profitable.

Startups that have gross receipts/revenues of less than $5 million for the current tax year, and have gross receipts/revenues for five years or less, can use the Federal Tax Credit to offset up to $250,000 per year in social security taxes. This comes as a refund check from the IRS.

Software development activities that qualify

Some areas of qualifying work in software companies include, developing new software, adding new features to an existing product, connecting applications that were not designed to integrate, improving software application speed and response time, artificial intelligence and machine learning algorithms, developing blockchain technologies, etc.

How to apply

Preparing the R&D tax credit application on your own can be a stressful and time-consuming process as you first need to identify all the research and development projects and tasks you worked on in the tax year that would qualify per the tax law. Then you need to identify employees that worked on those tasks and prepare time estimates for them. You also need to identify other associated research and development expenses and have evidence that they were required for the R&D tasks. Lastly, you need to prepare necessary supporting documents and tax forms.

There is a lot of money at stake here and we recommend using an R&D Tax Credit Software or a tax credit expert.