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.
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:
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]
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