How R&D Tax Credits Create Value for Your Clients

Gusto Editors

Are your small business clients eligible for Research and Development tax credits? 

Eligibility for R&D credits became more widely available after the 2015 Protecting Americans From Tax Hikes Act (PATH), but many small businesses are still uninformed about their own eligibility. Here at Gusto, we want you and your clients to know about any tax breaks and benefits available for small businesses, especially during financially difficult times.

After acquiring Ardius, a company with deep R&D expertise that helps businesses and their accountants access tens to hundreds of thousands of dollars in tax credits that they’ve earned, we integrated their tech and talent into Gusto. Gusto’s R&D tax specialists are here to determine if your company is eligible for R&D credits and help you claim them.

In this post, you’ll learn all about how people advisors help small businesses receive R&D tax credits, the history of R&D tax credits, who qualifies for R&D tax credits, and how Gusto’s People Advisory services can support you and your clients during difficult times. You’re going to learn a lot of valuable information that will help you and your clients, so let’s get started!

The history of research and development tax credits

R&D tax credits have been around since the early 1980s. Prior to that much of the history of R&D credits has involved supporting big manufacturers. 

The credit was developed to keep technical work from going abroad and to award innovation throughout the country.

In the 90s, the internet shifted the way the public and the government viewed venture capital, and the government started providing R&D tax credits for smaller businesses. However, many small companies still didn’t qualify for an R&D tax credit because they didn’t pay income tax.

Male and female wearing safety vest and hard hats disusing something over a laptop while in manufacturing facility

Many startup companies were not profitable. But in 2015, the PATH Act was passed and among other measures it allowed for small and medium businesses to use R&D credits to offset other taxes, primarily the payroll tax.

The Protecting Americans from Tax Hikes Act of 2015 enabled more small businesses to benefit from R&D tax credits. R&D tax credits are even more readily available since the beginning of COVID-19 because the government saw it as an opportunity to stimulate the economy.

Your clients are more likely to receive an R&D tax credit now more than ever. It’s crucial for you and your firm to use Gusto People Advisory so that you don’t miss R&D tax credits that could greatly benefit your clients!

Who qualifies for R&D tax credits? 

Eligibility for R&D tax credits has expanded, so it’s crucial for you to know if your clients qualify. Jeff Haskett observed that small businesses need to know their eligibility for R&D tax credits more than ever because of the pandemic: 

Take for example, restaurants that have had to develop or improve platforms for ordering and delivering meals when people had to stay home or pick-up their food at the curb. Certain aspects of many businesses include R&D and are eligible for R&D credits.

Now more than ever, it’s essential that you’re able to get your clients all available tax credits that they may qualify for. Monika Your clients can use the R&D tax credit against their payroll taxes. Not yet profitable startups have the opportunity to use their R&D tax credits against their payroll tax liabilities by up to $250,000 a year. R&D tax credits generated by nonprofitable startups can be used to offset the employer’s Federal Insurance Contributions Act (FICA) payroll taxes for up to five years.

A group of 6 male and female colleagues meeting and standing over a table looking at a project

That’s potentially $1.25 million in R&D tax credits to offset the costs of your startup. If your business has no gross receipts prior to the five-year period ending with the current tax year or has less than $5 million of annual gross receipts in the tax credit claim year, it’s qualified for credits against the payroll tax liability. Generally speaking, most startups are not profitable for about five to 10 years.

Qualified small businesses can offset their payroll taxes with R&D tax credits. In addition to receiving a credit against payroll taxes, your qualified clients can also offset their alternative minimum tax (AMT) using R&D tax credits.

Companies that develop new or improved business components, including products, processes, computer software, techniques, and/or formulas of inventions that result in new or improved functionality, performance, reliability or quality may be eligible. Some costs that qualify for the tax credits include the wages of employees performing R&D, the costs of subcontractors performing R&D, raw materials and supplies and web hosts and some software. 

Businesses that are innovating and developing new products can qualify for R&D tax credits. If your client develops new products or new technologies, such as an app, they may qualify without even realizing it. Through Gusto, you’ll be able to keep your clients informed about their R&D eligibility, and you’ll be able to transfer funds automatically if they qualify. 

Learn more about R&D tax credits and how Gusto’s People Advisory program can help you

2020 was a challenging year for small businesses. The shutdown caused by the pandemic and the proceeding economic fallout resulted in many businesses closing. As we continue working through this unprecedented crisis, it’s essential that we help our clients receive as much funding as possible. This is where Gusto’s People Advisory program comes in. Jaclyn Anku explained the benefits that accountants can offer their clients through People Advisory certification:

People advisors combine financial expertise with people-focused guidance to advise clients on building a great place to work. People advisory is a brand new category of advisory. It’s a consultative service that for the first time focuses on serving business owners and their teams.

Jaclyn Anku

And even after the pandemic is over, your clients will still need People Advisory services in order to make the best decisions for their business. Empowered by Gusto’s People Advisory Certification program, you can assist your clients with various people-based services, including payroll, benefits, and HR, as well as accessing tax savings through programs like Gusto’s R&D Tax Credit Service.

If you’re ready to help your clients with R&D tax credits and people advisory services, sign up for Gusto’s People Advisory Certification program. By joining Gusto’s People Advisory program, we’ll automatically assess your client’s eligibility for R&D tax credits, and if they qualify, you can then schedule an appointment with one of our R&D tax specialists. Once the tax credit comes through, we then process it in real-time so that your clients automatically receive the funds during payroll. If you want to learn more about Gusto’s People Advisory, click here

Gusto Editors Gusto Editors, contributing authors on Gusto, provide actionable tips and expert advice on HR and payroll for successful business management.
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