Benefits of R&D Tax Credits for New Businesses

By providing a dollar-for-dollar tax liability reduction for each cited R&D tax credit, the R&D tax credit has historically been a substantial source of funding for prosperous businesses paying income taxes. However, new legislation is introduced for qualified small businesses under the Protecting Americans from Tax Hikes (PATH) Act of 2015. Tax credits for startup R&D can increase the returns on money invested in new products.

Startup R&D Tax Credits’ Advantages

Startup R&D tax credits offer a way to recover a portion of the R&D investment before becoming a successful and income-tax-paying company. However, entrepreneurs frequently pass up R&D tax credits because of misconceptions, such as the belief that they are not growing fast enough to incur significant R&D costs or that they cannot use the credits to offset payroll taxes if they do not have an income tax burden. Additionally, the majority of startups are either ignorant of the tax credit’s availability, how to qualify for the credit, or how to claim it. If you are establishing a new business, make sure to get a tax credit consultant.

R&D Tax Credit Changes Under the PATH Act

Since it assisted in removing some of the limitations businesses had to contend with while collecting the advantage, the PATH Act had a substantial impact on the R&D tax credit in several ways. The PATH Act’s three most significant modifications are as follows:

Improvement of Startup R&D Tax Credits

The R&D tax credit was initially not monetizable or usable by enterprises running at a loss, which frequently hindered small businesses and startups from making use of the policy. The PATH Act modified the eligibility requirements, allowing smaller businesses to apply up to $250,000 in R&D credits annually toward their payroll tax burden for up to five years. A business is required to demonstrate that its current tax year’s gross receipts amounted to less than $5 million to be eligible for the R&D tax credit for startups.

A Different Minimum Tax

The R&D tax credit can now be used by business owners to reduce their Alternative Minimum Tax thanks to the PATH Act. Before the Act, taxpayers could only offset their ordinary tax liabilities with the R&D credit. A taxpayer could not claim the R&D credit if their AMT was higher than their ordinary tax. They could use credits to bring the obligation downward to the AMT level if their normal tax burden was just a little bit higher than their AMT.

The Program’s Duration

The R&D tax credit was normally only prolonged for an extra one or two years at a period before the Path Act. But as of January 1, 2015, the PATH Act formally made the R&D tax credit a continuous provision. By making the R&D tax credit everlasting, company owners could make financial decisions without having concerns about the government’s approval. Get a tax credit advisor for better understanding.


Startups that meet the requirements might choose to use their R&D tax credit to reduce their income tax liability or unpaid payroll taxes. Consequently, irrespective of whether they have produced taxable profits, startup R&D tax credits can be a very useful tool in the process of recovering some of the costs connected with eligible enterprises’ innovative initiatives.

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