New Tax Credit Frees Up Funds for Startups
When is a tax credit of little use? Entrepreneurs have had access to the federal R&D tax credit for 35 years, but that only impacts income tax – and since startups typically have very little income, that particular tax credit really didn’t help much.
But startups do have employees who get paid. That’s why, starting this year, expansion of the Federal Research and Experimentation Tax Credit will, at last, bring entrepreneurs the tax relief they’ve been seeking by impacting not their income tax, but their payroll tax. The new tax credit includes a new way for “qualified small businesses” to receive a credit for their research expenditures by offsetting their payroll taxes.
According to a recent article in Forbes, Congress recognized the problem of startups not receiving tax benefits because of the focus on income taxes. That, plus the fact that Congress acknowledged that entrepreneurs are also job creators, led to the legislation creating a second way to take the R&D tax credit.
At the PLSG, such entrepreneurs are the lifeblood of the regional life sciences industry – one that has been growing and promises to continue on that path. Funds that can be redirected from taxes to further investment in people and products is very encouraging news.
Again, according to the Forbes story, newer companies quality for the payroll offsets for the 2016 tax year if the startup was launched after 2011 and their 2016 revenues are less than $5 million. The tax credit can be for up to 10 percent of a company’s expenditures in the creation of innovation (research and development), to include expenses for research-related employees, contractors, and non-depreciable supplies. The maximum benefit is $250,000 a year, and startups have a five-year window to take advantage of this tax credit before it reverts back to an income-based tax credit.
Angel investors and other investors of life sciences companies like PLSG need to make their portfolio companies aware of this important development, which can reap significant financial benefits during the critical early phases of research and testing, prior to commercialization.
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