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You do not need a study to claim the R&D Credit, BUT if you have over $175,000 in payroll/contractor costs, you will want a study if you are ever audited. A study provides cheap insurance if the IRS decides to audit your company.
An R&D Study is a document that records expenses that are qualified for the Federal R&D Credit. The R&D Credit is a federal income tax credit that allows some companies to get cash back for Research and Development they are doing in the US. A study can be thought of as cheap insurance for your R&D credit claim. If the IRS ever comes back and audits your company and you do not have proper documentation, they can require you to pay back the credit plus penalties.
Let’s say you spend $500K on R&D development. The first bite of the apple is that you get a tax deduction of $500K – this increases your taxable loss which is nice, but there is no immediate benefit until you are profitable and can offset those profits with your accumulated losses.
The second bite is big, though. You can take that same $500K 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 $35K to $50K.
If you are working on a new products or releases, those costs are typically eligible for R&D credit. The product must be of significant innovation and carry some market risk for the company to develop. If a product has already been released, bug fixes and updates on existing released software are typically not eligible for R&D credit.
The cost of payroll, consultants and contractors’ costs, and hosting – such as AWS – are eligible for R&D Credit.
The R&D Credit is an IRS Tier 1 issue – that means if you get audited, you better have good documentation and justification for the Credit. Consider your R&D study as good insurance which serves as proof of your R&D work.
Documentation: Contemporaneous timekeeping data is considered by many as the gold-standard of evidence to protect your R&D credit. Accountalent uses data from your version control system to get this information and compile a report which is completely audit-ready.