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Changes to research and development tax credit help startups

A carpenter.

A woodworker. Startup businesses filing taxes this spring might qualify for a research and tax credit that historically hasn’t applied to new businesses. File photo.

Many startups filing taxes this spring might qualify for a research and tax credit that historically hasn’t applied to new businesses.

This year will mark the first time businesses can take advantage of changes Congress made to the R&D Tax Credit in 2015 when it passed the Protecting Americans Against Tax Hikes Act.

The act made the R&D tax credit permanent and broadened what it could be applied to by allowing it to count against payroll taxes instead of income taxes. This change allows new businesses that haven’t set up a strong sales channel to take advantage of the credit while still in a development stage, said Randy Million, a CPA at Ripley Doorn and Company.

“Before, startups could reduce their income tax with the credit, but since you can’t go below zero in order to get a refund, many of these companies weren’t receiving much of an advantage,” Million said. “A lot of companies didn’t even have this credit on their radar because they knew it wouldn’t really apply to them until a few years down the road.”

Randy Million

Randy Million

Beginning with tax filings for 2016, startups with annual gross receipts of less than $5 million and no gross receipts beyond the past five years will be able to apply R&D tax credits toward up to $250,000 in payroll taxes.

To qualify for the credit, companies must show they are experimenting with something new in order to improve a technological process such as a computer system used by a manufacturer, brewery, software developer or lumber mill.

“You don’t even have to be developing something new to the world,” Million said. “A lot of people don’t realize it, but as long as you are developing something new for your business that will make it more efficient, you can qualify for this credit.”

Claude Solnik contributed on this story. 

About Benton Alexander Smith

Benton Alexander Smith is a reporter for the Idaho Business Review, covering the Idaho Legislature, new business, technology and financial services.