Accelerating Startup Growth: The Power of Tax Credits
Unlocking Tax Credits: Your Startup’s Secret ‘Coupon Code’ for Savings
Think of tax credits as your business’s secret ‘coupon code’ – the more you use them, the more you save, and unlike those elusive discount emails, they’re always in your inbox! Tax credits are incentives that reduce the tax liability of start-up companies. And unlike tax deductions that lower taxable income, tax credits directly offset taxes owed, leading to potential cost savings.
From R&D costs to marketing and hiring expenses, start-ups often incur significant expenses in their early stages. By recognizing and understanding the tax credits available, a founder can leverage their early-stage expenditures to their advantage. Below I outline a few tax credits and recommendations to discuss with your tax advisor.
Tax Credits for Start-Up Companies
Tax credits are available based on specific qualifying criteria and may vary depending on the jurisdiction and industry.
1. Research and Development (R&D) Tax Credit
The Protecting Americans from Tax Hikes (PATH) Act made the $250,000 R&D federal tax credit permanent in 2015. It allows start-ups to utilize up to $250,000 in credits to offset their payroll liability each year. The start-ups must have generated revenue for less than five years and have annual revenue of less than $5 million without achieving profitability.
The expenses covered by the R&D tax credit may include developing or improving existing products, scientific-based trials like clinical trials, laboratory testing, or developing new drugs or therapies.
To qualify for an R&D tax credit, the Internal Revenue Service (IRS) needs detailed documentation of all the activities related to the expenses to be claimed. The expenses include payroll records for all the employees, third-party payments for supplies and equipment, prototypes, designs, patents, and blueprints from the research process. This is a huge tax savings when it comes to the new rules of capitalizing R&D expenses under Section 174, which outlines the guidelines for businesses to deduct costs incurred in research and experimentation activities as business expenses.
We’ve observed the utilization of this credit in action for several clients. For instance, we assisted an engineering service client in evaluating potential expenses subject to capitalization under Section 174. In this role, we resemble a flag marshal at a car race, signaling crucial messages to the racers on the track. Our expertise enabled us to guide our client in understanding the specific expenses or credits requiring strategic planning.
2. Cost Segregation
This tax planning strategy involves segregating the costs of a building or property into various components with different depreciation periods. As a result, start-ups can front-load depreciation deductions, leading to immediate tax savings and improved cash flow.
Start-up companies that own or invest in real estate assets can benefit from cost segregation. Real estate assets, such as buildings or improvements, often have components one can classify as shorter-lived properties with accelerated depreciation periods. Examples include electrical systems, plumbing, HVAC systems, and specialized equipment.
Start-up founders should consult with qualified professionals to perform a comprehensive cost segregation study to determine the appropriate reclassification of assets and ensure regulatory compliance.
3. Everything Electric
Start-ups leveraging the manufacturing, distribution, or utilization of EVs can leverage the electric vehicle tax credit to reduce the cost of electric vehicle purchases and promote their adoption.
Start-ups involved in renewable energy systems or technologies can also take advantage of the energy investment tax credit (ITC). This support can accelerate innovation, drive technological advancements, and position start-ups as leaders in the evolving clean energy landscape.
4. General Expenses of Operating a Business
Start-up companies can leverage the following tax credits for general operating expenses to reduce the tax burden.
- Employee hiring credits: Available for specific groups of employees, including veterans, vocational rehabilitation referrals, ex-felons, summer youth, those in designated empowerment zones, and supplemental security income (SSI) recipients.
- Technological expenses: Start-ups investing in technology-related expenses, such as software development, hardware, or cybersecurity measures, may qualify for tax credits.
- Marketing and promotion: Start-ups can claim credits for costs incurred in promoting their products or services, expanding their reach, and building brand awareness.
- Insurance: Certain insurance premiums, such as workers’ compensation or employee health coverage, may be eligible for tax credits.
- Legal expenses: Tax credits may be available for legal fees incurred in situations such as intellectual property protection or regulatory compliance.
- Retirement Plan: Setting up a qualified retirement plan for employees in a startup business could be eligible for $5,000 of tax credits for three years.
By maximizing tax credits for general business expenses, start-up companies can reduce their tax liabilities, improve cash flow, and allocate resources strategically for growth and development.
How to Claim Tax Credit
Successfully claiming tax credits requires a systematic approach and adherence to specific guidelines. Here’s how start-up founders can navigate the process:
- Research and identify eligible tax credits: Start-ups should identify the tax credits applicable to their industry and business activities.
- Determine eligibility: Founders should assess whether their business meets the eligibility requirements for the identified tax credits
- Accurate calculation: Properly calculate the amount of tax credits the start-up can claim.
- Complete relevant tax forms: Start-ups must complete the required forms to claim the identified tax credits.
Tax laws and regulations surrounding credits are subject to change.
Unlock Expert Guidance for Tax Credits
Filing for tax credits with errors or inaccuracies can lead to delays in processing, claim rejections, or legal consequences. Founders must review and verify all information before submitting tax credit claims. Double-check calculations, ensure accurate completion of forms.
Tax professionals can provide start-up founders with updates and advise on adapting their tax credit strategies accordingly. They can offer invaluable insights, ensure compliance, and help maximize tax credit opportunities.
Solyco Capital is a private equity group offering capital solutions for late-stage startup and growth companies to drive financial growth and success. We offer customized tax credit strategies, tax credit analysis, and expert guidance and documentation. Don’t leave money on the table. Contact us to maximize your start-up’s potential and unlock significant tax savings.Share On LinkedIn More News & Views