How To Choose a Firm For Your Software Startup R&D Credit Study

What is an R&D Credit Study?  Look at it as a form of “insurance” if the IRS audits your tax return.

Will not bore you with tax law, but the R&D Credit can now be monetized by startups – you can “cash it in” and get a refund of your payroll taxes. 

The amount of the R&D Credit for most startups will be 10% of the sum of their “qualified R&D expenses” (QRE).  “Qualified” means R&D projects for new product development or major releases.  For most startups, “Expenses” mean payroll, US contractors and tangible supplies.

If you get audited, the IRS will do two things.

  1. Audit your projects to ensure they pass the IRS “Four Part Test” – most startups will not have a problem here as they are working on new products or major releases.
  2. Audit the time that your R&D staff/contractors work on these projects.

So, the issue will be proving the amount of time that your staff/contractors worked on each project.  The IRS gold standard is contemporaneous timekeeping data, i.e. a timekeeping system.  No startup that we know of has or ever plans to have a timekeeping system.

So, how do you prove time to the IRS Agent (keep in mind that it is a felony to lie to an IRS Agent)? Hence, an R&D Credit Study!

But, not all R&D Credit Studies are created equal and the IRS knows this. Here is our take on the Studies being offered:

  1. Studies that just ask you to estimate the percentage of time that your staff/contractors were involved in R&D and multiply that percentage by their compensation to get the QRE.
    • Useless, as this provides no substantiation – IRS Agents love these as they will probably disallow the whole credit and make you pay them back with penalty and interest.
  2. Studies that will conduct in-depth interviews with each of your staff/contactors to substantiate their time worked on each R&D project.
    • Not bad, but time-consuming, intrusive and very expensive and still no contemporaneous timekeeping information. When the IRS audits these types of Studies, they will also do in-person interviews with some of your staff/contractors to corroborate their time.
  3. Studies that use contemporaneous timekeeping data married to a project management system.
    • THE GOLD STANDARD. The IRS Agent will often pass on doing any additional audit work and accept the amount of the R&D Credit.

As mentioned above, though, most startups do not have contemporaneous timekeeping info.  If you are a software company you probably DO have this required project and timekeeping information in your version control system (GitHub).  This is EXACTLY the information that the IRS wants to see in your Study.

A firm that we know well, eTaxConnect has an app whereby they are able to extract this git information and put it into a beautifully IRS compliant R&D Credit Study.  They to do this efficiently, inexpensively and taking very little of your time or involvement.  They have done a ton of Studies for YCombinator (YC) and other startup software companies.

Feel free to shoot JR or Mike an email and he can answer any of your questions. [email protected] or [email protected]

NY Taxes Out-of-State COVID-19 Health Care Volunteers

New York chose not to give any NY State Tax relief to the thousands of out-of-state health care workers that responded to the Empire State’s plea to them to “please come help us in New York right now. We need relief”.

Under NY tax law, if a worker is there for 14 days or more, that NY worker is subject to NY taxes.  As we all know, NY has one of the highest tax rates in the county.

Staying away from the politics and knee-jerk reactions of this decision, we will make a few interesting points here:

  • This illustrates the main theory behind multistate taxation and tax residency – you typically pay taxes where you are working because you are benefiting from the services that those taxes fund – public safety, transportation, etc.

  • These workers will get a “credit” on their resident state tax return (the state of their principal residence), so they will not be taxed twice on this income – they are just paying the net difference between the NY state tax rate and their home state tax rate.

  • They will need to file a Part-Year Resident NY tax return to report this income and their permanent resident state tax return may get a bit complex. They will probably need professional help preparing their taxes.

  • Out-of-State employers sending their employees to NY will need to secure Workers’ Compensation (WC) insurance.  NY has a very tough WC law – the fine is $2,000 for each ten-day period without WC insurance.

  • Most states have similar laws subjecting out-of-state workers to taxation after a certain number of days.

  • Professional athletes pay NY (and other state) taxes on the percentage of games they play in that state – so, Tom Brady (now a FL tax resident and FL has no state income tax) needs to pay NJ taxes on 12.5% of his salary, if Tampa Bay plays the NY Jets twice (the Jets play their “home” games in New Jersey – just think of all of the tax revenue that NY loses to NJ, as the Jets and Giants play their “home” games in NJ).

  • For the Army Corp of Engineers that built those NY hospitals – if they were a resident of NY before they joined the Army, their military pay is subject to NY taxes no matter where they are stationed.  If they were not NY residents prior to joining the Army, none of their military pay is subject to NY taxes no matter how many days they work in NY.

Got PPP? Now You Only Have 70% of PPP – the IRS Haircut

On Thursday, April 30th, the IRS one-upped Congress regarding the taxability of the Paycheck Protection Program (PPP) Loan forgiveness.

Congress wrote very specific language in the Act, EXCLUDING the loan forgiveness as taxable income.  They wanted 100% of the loan be earmarked to pay employees and facility costs.

Well, the IRS backdoored this – they did not challenge that the loan forgiveness is not taxable.  Instead, they announced that the payroll and facility costs that the loan funds are NOT tax deductible.

Bottom line, your PPP is now TAXABLE.  So, most companies will lose about 30% of their PPP Loan to taxes and startups will not be able to use the PPP funded payroll in the calculation of their R&D Credit – reducing their R&D Credit by about 15%.  Ouch!

Both Democrats and Republicans are not happy with the IRS, so stay tuned as the Swamp battles this one out.

Startups: Not Doing PPP? Do “Workshare” – It Can be a Better Deal Than PPP

For those startups that missed the Paycheck Protection Program (PPP) and need to now reduce burn, but do not want to lose their employees, “Workshare” is the PERFECT program for your startup and your employees.

Workshare is a State program (CA, NY and MA have very generous ones) whereby a startup can reduce the hours and compensation of their employees by up to 60% and the employees can collect unemployment benefits for the difference. There are some minor requirements, such as classifying employees in groups and treating all of the employees in those groups the same, but the programs are remarkably flexible.

A startup can reduce the employees’ time and compensation up to 60% and the employees can collect unemployment insurance to make them whole.

This was always a good deal, but a much better deal for lower paid employees, as a higher percentage of their reduced wages would be replaced by unemployment insurance.

With the $2.2T CARES Act, though, anyone collecting unemployment can collect an additional $600 per week. A GAME CHANGER!

Let’s take the example of a MA employee making $85K per year and their hours and salary are reduced by 60% or $45K per year:

Weekly Pay from Startup (after reducing by 60%)
Unemployment Benefit
Additional CARES Act Benefit
TOTAL Weekly Pay (payroll plus Workshare)

TOTAL Weekly Pay (payroll only)

A few caveats:
  • The amount of weekly unemployment benefits varies by states.
  • The employee does not pay state taxes on unemployment in some states, like CA (MA and NY tax unemployment benefits).
  • The employee always pays Federal taxes on unemployment benefits.
  • The Federal taxes on unemployment benefits are less than the Federal taxes on regular payroll.
  • There may be loan forgiveness issues if you do PPP and Workshare.
  • The additional $600 is available only through July 31, 2020.
  • The regular unemployment benefit can be collected for 39 weeks.

Tuesday, April 21st: PPP 2.0. Great Comments from PPP Facebook Group

PPP just got another $250B – do not wait. Apply immediately.

Below are some very interesting and insightful comments made on the following PPP/EIDL Facebook groups in the last 24 hours.

Divvy/Cross River PPP funded into my bank this morning. 12k as promised. After all of the applications, the paperwork, the frustration with them running out of funds, and after checking my account several times a day for weeks this feels like a huge win! Huge shout out to Divvy/Cross-River. They were so easy and all done in 10 days. My biz bank Wells Fargo – well lets just say we are closing our accounts.

Woke up this morning full ppp funds deposited and eidl grant advance of 3k deposited . God is good
Single employee LLC no payroll or 1099 l. Went thru getdivvy/cross river bank for ppp. And my eidl application was done 3/31-4/1 cant remember exact date

Got a response from BBT/Truist….didn’t think they were moving forward with funding until new Cares package came through.

SQUARE is now accepting applications. Seems like a better option than going through traditional banks and Paypal. I briefly looked into the application, seems really easy and straightforward compared to other banks. I’ve signed up with Citi, but they are giving me a headache and robotic response. Nothing approved through them and they are claiming my name has a “credit freeze” which I don’t.

If anyone did not get a loan the first round of PPP, try Kabbage. I applied with them the week after the program started and I signed final papers last week. Funds deposited this morning. I tried to apply with Wells Fargo and it was ridiculous so I just starting sending in applications.

Just got Approvals from Lendio, for my company, and at the same time my wife’s company did too, a few friends that applied there also all got approvals in the past 30 minutes…. No other details, it just says that it’s been approved.

The senate just mentioned on the floor that the next bill coming in a few weeks will involve offering leniency on the 8 week time frame to spend the PPP funds. They realize businesses are having a difficult time planning when they aren’t even sure when they’ll be allowed to reopen. This would be great!

Hey guys I’m like many of you guys waiting for banks to approved my PPP loan. Chase is my bank. But on a side note, try applying for PayPal. I applied yesterday for the hell of it and hours later got an approval via docu sign. Signed agreement and now waiting for confirmation. Today like many others chase sent a generic letter out to me also.

Applied on Thursday for PPP loan through PayPal. Finished app no email no interaction at all! Just read that one guy applied last night and got focusing papers this morning!? Did I do something wrong!! I’m desperate I need some guidance. I’m pregnant and have a son I’m really over whelmed and funds are getting low. First time business owner blues 

I personally had a banker tell me that they would get my loan done if it were over $100,000. So yes big businesses were who banks put preference first. More money for them. This was when PPP first opened up and pot was full.

While some of you stress out, here is a link to check when your payment is coming for the stimulus check. ($1200 per person)

PPP Loan officer explained to me if you take the ppp you can’t get unemployment . I think a certain amount is supposed to be used to pay you & your employees & if you get unemployment it’s like being paid twice. Just thought I’d share

What is unBookkeeper?

unBookkeeper is Accountalent’s bookkeeping solution for early stage startups.

unBookkeeper – what’s the story with the un?

  • Un means “not”.  We feel that early-stage startups may not need a bookkeeper, as bookkeeping has evolved and much of it can be done electronically.

How does it work?

  • We spend about 90 minutes with you via Zoom and we implement QuickBooks Online (QBO).
  • We (actually you, with our direction) electronically connect your bank, credit card, payroll, etc. accounts to QBO.
  • We electronically upload all of your historical transactions, from inception, into QBO.
  • We customize the QBO chart of accounts, financial statements, etc. to your business.
  • We train you to be an expert in QBO (trust us, we have a 100% success rate on this one!).

What happens next?

  • We set up “rules” in QBO so many of the transactions (Gusto, Brex, etc.) are electronically and automatically entered into QBO.
  • You spend about 20 minutes per week accepting the electronically entered transactions (checking a box in QBO).

What else does Accountalent do for us?

  • We do a thorough quarterly review.
  • We are always available to pinch-hit or troubleshoot.

What happens if this becomes too much work for us?

  • When the transaction volume becomes too much, we transition you to a best-of-breed cloud-based bookkeeping service, like Pilot.

How much does this cost?

  • $0 if you are an Accountalent tax client.
  • $650 if you are not an Accountalent tax client.
  • No monthly fee.
  • No consulting/hourly fee (even if you mess it up badly and we need to spend a ton of time fixing it).
  • No annual fee.

PPP For Startups – What We Have Learned the First Week

The Paycheck Protection Program (PPP) is a week old.  This is what we have learned in the first week:

  • The fever pitch has subsided – there was a lot of anxiety about this being a “first-come-first-serve” program and $350B would not last long.  As of today, there was about $125B committed and DC is working on appropriating an additional $250B.

  • The payroll companies finally fixed their reports to correctly calculate the loan amount.

  • Most of the banks got their act together and worked out the kinks in their systems.

  • Seems to be momentum not to take the PPP money if a Company does not need it – VCs leading this movement and it is building steam.

  • A lot of businesses are developing strategies to maximize their “forgiveness” amount/period by delaying their PPP Note until they are ready to recall their employees (unemployment amount was “juiced up” by $600 per week, so many workers are making more money unemployed).

  • A lot of businesses are developing strategies to coordinate the SBA EIDL loan and PPP.  First $10K of EIDL is forgiven, no questions asked.

  • A lot of application problems if there is a 20%+ foreign shareholder without an SSN or ITIN.

  • Many firms have submitted more than one application – a cardinal sin.  Lenders have been good about pulling the application if contacted, though, as most have not submitted it to the SBA, yet.

  • Not much guidance available yet for independent contractors/sole proprietors.  They can start applying on Friday, April 10th.  Many questions on the present online applications make no sense for independent contractors.

  • The following very interesting reps were in our BOA PPP Note that we just received:
    • Borrower will not outsource or offshore jobs for the term of the Loan and two (2) years after completing repayment of the Loan.
    • Borrower will use the funds of the Loan to retain at least 90% of its workforce, at full compensation and benefits, until September 30, 2020.

  • Hearing about more banks allowing non-customers to apply for the PPP with them.  If you are looking for one, shoot us an email.
    • Our prediction: in a few weeks there will be tons of banks advertising for this business.  They get 5% for most of these loans.  So, the program should grow to $600B – at 5%, banks will receive about $30B in fees for a 100% guaranteed loan that will probably be forgiven in 90 days.  They never lose!

  • Let us know if we can help.

Just Filed my 83(b) Election Form – What Happens Next?

If you just mailed your 83(b) Election Form to the IRS, do not expect anything to happen. The IRS does not acknowledge receipt or send you any correspondences regarding the filing.

In order to prove timely filing, you should always mail the form using US Postal Service Certified Mail with a Return Receipt requested. If you have never done this, just go to your local Post Office and ask the postal clerk. Here is a good instructional video

Make sure you keep the receipt that will be stamped with the mailing date and as a secondary backup, scan it and securely save it electronically. If you need to prove timely filing, there’s a strong chance it will be many years later. The IRS will always accept Certified Mail as proof of timely delivery.

Once the IRS receives the mailing, they will sign the Certified Mail’s Return Receipt and mail it back to you. This will show only that the IRS received it. The form needs to be mailed (not received by the IRS) within 30 days of the grant date.

As discussed in our “83(b) Elections for Dummies” post, in addition to mailing the form using Certified Mail, be sure to:
• Enclose a letter
• Include a copy of the 83(b) Election Form
• Include a self-addressed stamped envelope
In the letter, ask the IRS to date stamp the copy of the 83(b) Election Form, enclose it in the attached self-addressed stamped envelope, and mail back to you.

Following these instructions is crucial because if the IRS challenges your 83(b) Election Form when you sell the stock and the IRS did not properly record your 83(b) Election Form and you have no proof of timely filing, you lose.

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