Brand New Kind of R&D Tax Credit In The Works

Posted by Jeffrey Feingold on 02.05.13

Entrepreneurs could benefit from a new research and development tax credit that has been proposed by bipartisan lawmakers in Congress. If it passes, the tax credit would bring serious savings to startups that spend money on innovation before they have turned a profit.

Dubbed the Startup Innovation Credit Act of 2013, the bill would allow qualifying companies to claim the Research and Development Tax Credit against their employment taxes. Typically, a business deducts its research and development expenses from its taxable profits, which means the current R&D tax credit is useless for any startup that has not yet started making a profit. Under the proposed bill, if a startup is not yet making profit, it will still be able to reap a reward for investing in innovation by deducting its R&D spending from its employment spending.

To qualify for the tax credit, a startup must be fewer than 5 years old and have less than $5 million in total revenues. The startup would be able to deduct the total amount it spent on R&D up to $250,000 frm its employment taxes the following year.

Historically, the R&D tax credit has primarily benefited large companies. Over half of the R&D tax credit taken in 2012 was taken by companies generating over $1 billion in revenue, said Coons on the Senate floor last week. "This gaping hole in our policy around R&D can be fixed, I think, with a relatively simple tweak," said Coons. "Rather than shutting our startups out of the R&D tax credit, let's open the doors to these innovators and see what they can do."


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