R&D Credit Basics for Startups


How has the R&D Credit changed?

  • Before 2016, the R&D Credit had to be taken against taxable income – most startups do not have taxable income, so it was nice, but no immediate benefit.
  • For tax year 2016 (returns filed in 2017) and onward, there is an immediate benefit for startups – the IRS will send you check for the Credit – a very immediate benefit!
  • Our clients have received checks from the IRS for over $2M for 2016 R&D Credits.

What is a credit?

  • An R&D Credit gets you “two bites of the apple” for money spent on R&D.

How do you get two bites of the apple? Let’s say you spend $100K on a software engineer. The first bite of the apple is that you get a tax deduction of $100K – this increases your taxable loss – nice, but no immediate benefit until you are profitable and can offset those profits with your accumulated losses.

The second bite is huge, though.  You take that same $100K and throw it into the R&D Credit equation, which typically results in a 7% to 10% credit.

What this means: The IRS sends you a check for $7K to $10K.

What qualifies as R&D Credit?

  • If a product has already been released, costs for small or custom changes on the released product are typically not eligible for R&D credit.
  • If you are working on a new products or releases, those costs are typically eligible for R&D credit.
  • Not all costs spent on R&D are eligible for the R&D Credit:
    • Payroll, Consultants and supply costs are eligible for R&D Credit.
    • Payroll benefits, travel, office rent, computers, design software costs are examples of costs that are not eligible for the R&D Credit.


  • The R&D Credit is an IRS Tier 1 issue – that means if you get audited, you better have a ton of documentation and justification for the Credit.
    • Documentation: it is best to have a timekeeping system (online, very simple is fine) to justify time worked on the different R&D projects by employees and contractors. If there is no timekeeping system, you can document the time worked with “interviews” – this should really be done by an outside firm (they charge between 10% to 15% of the total credit).
    • Justification: There is a very well publicized IRS Four Part Test for eligible R&D projects.  Lab books, project plans, gant charts, meeting notes, drawings, etc. should be kept proving these projects are eligible.



IRS Circular 230 Disclosure

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purposes of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

Beware of The IRS 1099-K Startup Trap

1099-K: Clearing up the Confusion

If you’re a startup company who receives payments for your goods and services through credit card merchant accounts or third-party processors, then you’ve likely received one or more Form 1099-K’s. And if you’re like many recipients, you may have given them a quick once-over, filed them away, and not thought much about them since. The simple fact is that ignoring a 1099-K can end up costing you a lot of money in the form of an unexpected tax bill. What’s worse is that it’s a bill you probably shouldn’t be paying at all. So, unless you’re running a startup with plenty of cash to burn, we recommend that you familiarize yourself with 1099-K’s: what they are, why they’re important, and what you can do to avoid paying the unnecessary taxes they can bring with them.


What is a form 1099-K? 

A 1099-K is simply a tax form, like a W-2, that reports the recipient’s earnings. In the case of the 1099-K, it’s the gross amount the recipient was paid through the credit card company or third-party processor. The form’s purpose is to ensure that taxpayers are accurately reporting and paying the full amount of taxes they owe to the IRS on their sales.


Who receives a 1099-K?

Anyone who uses an online-based service to collect payments. Examples include:

  • Sellers of apps on Google Play and Apple’s App Store.
  • Uber and Lyft drivers.
  • Amazon and Ebay retailers.
  • Attorneys, doctors, architects and any other professionals who accept and receive credit card merchant or online payments for their services.
  • Freelancers (writers, graphic artists, bookkeepers, etc.) who are paid through PayPal, Etsy or other third-party payment services.


The frequent problem:

As mentioned above, 1099-K’s report the gross amount earned by the recipient – that is, the full amount earned before any commissions or fees are taken out – not the net amount, which is what the recipient is typically paid by the credit card company or third-party processor.

Herein lies the problem: The IRS requires your company to report the gross amount earned on its tax return, not the net amount the company was actually paid. Many startups, however, mistakenly report the net amount (this is the amount that downloads from your bank into your accounting system or a spreadsheet) instead of the gross amount. When the IRS receives the return, it compares the total income figure stated on the return to the total amount of the gross payments reported on the 1099-K’s. When the figure on the tax return is, inevitably, smaller than the total amount reported on the 1099-K’s, the IRS presumes you’ve understated your income and – you guessed it – your company owes more in taxes.


The solution:

Here’s what you can do to help prevent a 1099-K tax problem for your business:

  • Be sure to report the correct amount of total income on your corporate tax return – which is the total combined gross payment figures reported on all of your company’s 1099-K’s.
  • Then, report all commissions and processor fees as expenses on the return. The result is an accurate net income figure upon which your company will pay the proper tax amount.
  • Check the figures listed on your 1099-K’s and compare them to those in your accounting system. There’s always the possibility that a mistake has been made.


One last thing:

If your company uses Stripe, Paypal, or another third-party payment service, make sure to open the account with the company’s EIN, not your SSN. This is a frequent occurrence and creates tons of problems when the IRS sends the owner a 1099-K instead of the company.  


Hiring Interns this Summer? Useful Tips for Startup Companies — From the ‘Go To’ Tax and Accounting CPAs


Hiring unpaid interns is a great idea, but it can be a legal minefield: There are more than a few obvious reasons why a startup might want to hire an unpaid intern but it can be a confusing web of laws and requirements. The Department of Labor and State Governments can impose hefty legal consequences for not properly classifying interns. How do you know if you can hire an unpaid intern? There are six-factors laid out by Department of Labor to determine whether it is legal for you to hire an unpaid intern. You can find the test here.

Hiring foreign students: Since there are certain laws regarding hiring students with J-1 and H-1 visas. For instance, many universities and colleges will limit the period in which students with Visas can work and the Department of Labor regulates the amount of time per week they can work. Some states have specific requirements that non-profit and for-profit companies must abide by. For instance, New York requires that any student intern that will perform any amount of manual labor (cleaning, filing papers, carrying binders or books, etc.) must be covered under the employer’s workers’ compensation. It is important to understand all Federal, State and Local laws before onboarding interns.

When in doubt, pay them out: The Department of Labor has complex laws that apply to foreign and domestic interns. Because each startup has its own unique needs, you cannot always legally hire an unpaid intern. If you have any reasonable doubt that a potential unpaid intern will not meet all of the six factors laid out in the Department of Labor test, it is always best to hire them as an employee and pay them according to Federal, State and Local laws.

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