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As an accountant I have had to shoot attempts at claiming this credit down time and time again. Unless you are doing cutting edge/novel research into AI, machin

by cde-v 9y ago

As an accountant I have had to shoot attempts at claiming this credit down time and time again. Unless you are doing cutting edge/novel research into AI, machine learning, quantum computing, etc you will not qualify for the credit. Think about it this way, unless your research is something you could write a scientific paper on and have it published in a peer reviewed journal, it will not qualify. Also, this is not a new R&D tax credit, it was extended, again, for the umpteenth time. There were slight changes made in addition to the extension, but they did not change what qualifies as qualified research. Gusto is trying to drum up business, that is all.

martinpannier 9y ago
We're only enabling those startups that already qualify for the R&D tax credit to much more easily, and cheaply, claim it. We've seen accountants charge customers up to 25% of the credit obtained, and we think we can help.
mrkurt 9y ago
It's working! I didn't know about this credit and I'm fairly sure we qualify. I think many companies building internet infrastructure can.
- mnierstedt 9y ago
  Hi there. Another PM chiming in from Gusto on Federal R&D :). While you may be eligible, you will need to make sure that you have filed Form 6765 with your 2016 Corporate Tax Return. The good news (I guess) is that if you didn't file this form you can amend you Corporate Tax Return (https://www.irs.gov/pub/irs-pdf/i6765.pdf https://www.irs.gov/pub/irs-pdf/i6765.pdf). However, just be advised that the process to amend a corporate tax return is often pretty painful. So you may want to be sure that the credit will be worth your while. It sounds like you are eligible, but I would double check with an accounting firm just to be sure. If you go to our accountant page (https://gusto.com/partners/find-an-accountant https://gusto.com/partners/find-an-accountant) look for "Offers R&D Tax Services" on their company listing. This should give you some very reputable firms to work with on your credit study. Good luck with your Credit! Michael from Gusto https://www.linkedin.com/in/michaelnierstedt/ https://www.linkedin.com/in/michaelnierstedt/
gamblor956 9y ago
Think about it this way, unless your research is something you could write a scientific paper on and have it published in a peer reviewed journal, it will not qualify. That's not true at all. In the US, at least. As a tax lawyer, I've had to have this conversation quite a few times with accountants who misread the law and don't think it applies to their clients. The US R&D credit has 4 basic requirements, and "cutting edge" is not one of them, nor has it ever been.. Generally (broadly paraphrased), it is sufficient that the R&D result in new (or improved) functionality, etc. of a business component (specific to the taxpayer), in a systemic process of a scientific, engineering, or computer-science nature. For example, a game developer developing a new game engine would qualify for the R&D credit; as would a retail company developing an improved inventory system. (The latter is in fact one of the examples that IRS employees give at tax seminars.) The real issue with the R&D credit isn't claiming the credit; it's supporting the amount claimed with proper and sufficient documentation. It's the documentation part that gets most taxpayers, since the R&D credit is one of the areas that the IRS still devotes resources to auditing. Further edit: by the way, Gusto's article is about the new small business R&D credit from the Protecting Americans from Tax Hikes Act (PATH) which went into effect for the 2016 tax year. The original credit is limited to taxable income, so you couldn't use it until you had profits or if you were subject to AMT. The new credit applies against federal payroll and AMT.
- cde-v 9y ago
  I agree with all but your first sentence... I think you are just underestimating what topics can have peer reviewed scientific papers written about them. http://ac.els-cdn.com/S235197891500013X/1-s2.0-S235197891500013X-main.pdf?_tid=9c9e77a6-5b80-11e7-88b4-00000aacb35d&acdnat=1498599540_9ad3fe6ba882e11ce5159248902cb301 http://ac.els-cdn.com/S235197891500013X/1-s2.0-S235197891500... I was more taking a shot at the companies who do a redesign/facelift of their website/customer portal, or a bank struggling to integrate an off the shelf trading tool into their systems.
  - gamblor956 9y ago
    I'm not sure what you're getting at. The first is a clear example of a permissible R&D credit activity if it otherwise satisfies the 4 requirements, and courts have found that the second activity generally would also be permissible for R&D credits if the integration involved additional software development by the bank (though this is more of a facts-based determination).
tedmiston 9y ago
Can you clarify sources for what types of R&D activities apply? I've been curious myself and didn't see this mentioned in the blog post.
- cde-v 9y ago
  Honestly, as evidenced by the rabid response above, reading the actual regulations is the best way to understand this topic. https://www.irs.gov/pub/irs-regs/research_credit_basic_sec41.pdf https://www.irs.gov/pub/irs-regs/research_credit_basic_sec41...
- gamblor956 9y ago
  If your company is looking to see if R&D credits are available, consult with an established major accounting firm or R&D-specialist firm. (But not cde-v's firm.) Most firms that do R&D work will charge a percentage of the R&D credit recovered rather than an out-of-pocket fee, so you generally won't have any financial outlay if your business doesn't qualify. Generally speaking, any US-based systemic research- or experimentation-based process that results in the development of new or improved (cheaper, better, etc.) business components (broadly meaning goods, services, processes) can qualify for the R&D credit.
  - learc83 9y ago
    Sounds like even sales funnel optimization with A/B testing would qualify.
jbob2000 9y ago
You don't have to pass the requirements, you just have to pass the person who reviews your proposal. Put enough fancy language in there and you can make it sound like a simple messaging app is cutting edge machine learning. Every company I've worked for has done similar with the Canadian program (SR&ED).
- geoka9 9y ago
  > Put enough fancy language in there and you can make it sound like a simple messaging app is cutting edge machine learning. Good luck if you get audited, though.
  - redthrowaway 9y ago
    We got audited. They just reduced the payout. It's the appeals process that's a pain in the ass. Takes about 3 years.
jboggan 9y ago
But if your startup is developing conversational AI? Wouldn't that qualify? Do you actually have to be publishing? Where's the dividing line in your opinion?
mbesto 9y ago
I know more than two software companies first hand that are not doing "AI, machine learning, etc" who qualified for this in the past.
- arikr 9y ago
  Yeah, oddly enough I believe this accountant is 100% incorrect.
Kiro 9y ago
Why do you shoot down attempts instead of letting them try? Is there any downside of trying and get rejected? Judging by the comments it sounds like you risk shooting down attempts that may actually succeed.
- URSpider94 9y ago
  While I do think the grandparent is being a little too conservative, there is no "trying and getting rejected" here. This is not a credit that you apply for, it's part of your income tax filing. The only case where it would be reviewed is if you were audited by the IRS, and if they then disallowed your credit, you would be liable to repay that amount, plus interest and potentially plus late-payment penalties. AND, you would likely be flagged as a target for future audits ... In general, when you claim a deduction on your US income taxes (personal or business) you want to be pretty darned sure that the deduction is going to stand up to an audit.
arikr 9y ago
As far as I can tell this accountant is spreading misinformation. (I've never written that before!) I've talked to other companies doing nothing related to novel research, just standard SaaS, who were able to get a healthy sized deduction. Please don't let this person dissuade you from checking if you can get the credit. To the accountant - please see all the comments below yours and edit your post, unless you have evidence against them. Your comment may well make people not apply for this who could've gotten the deduction without issue.
cde-v 9y ago
Replying to my own comment since I'm too late to edit. Just read the regs people, the barriers are not as low as the little bit of anecdotal evidence in this thread are suggesting. https://www.irs.gov/pub/irs-regs/research_credit_basic_sec41.pdf https://www.irs.gov/pub/irs-regs/research_credit_basic_sec41...
- mbesto 9y ago
  I think most people here are basically saying "its a grey area and it would be stupid not to take advantage of the credits even if you feel you don't 100% qualify".
- gamblor956 9y ago
  1) Those aren't regulations, those are statutes. It is disturbing that you are attempting to advise people on this subject but do not know the difference. Statutes are written by Congress, regulations are written by the Treasury Department to implement or clarify statutes. 2) The PDF is for the 2004 version of the R&D statutes. They have been revised significantly since then. 3) Current version of the statutes: https://www.law.cornell.edu/uscode/text/26/41 https://www.law.cornell.edu/uscode/text/26/41 Current version of the regulations: https://www.law.cornell.edu/cfr/text/26/1.41-1 https://www.law.cornell.edu/cfr/text/26/1.41-1 Cornell is not an authoritative source but it's easier to read than the GPO website. If you want final authoritative sources, you'll need to read the House and Senate resolutions and to track down a physical copy of the appropriate issue of the Federal Register.
  - tyrw 9y ago
    It really is a shame that this accountant person is tripling down on everything without actually having the needed domain knowledge. Thanks for following up on each of these -- as a small business owner that might pursue this, it's often difficult to separate signal from noise without having much time to spend on it.
goeric 9y ago
While the R&D tax credit is not new, one of the tweaks was not a slight change. Before, you could only offset your corporate income taxes, so you couldn't claim the credit if you weren't profitable (because you wouldn't have corporate income taxes). Now, you can offset social security taxes, which are based on payroll. So more startups can now benefit from this credit.
jgalt212 9y ago
> Unless you are doing cutting edge/novel research into AI, machine learning, quantum computing, etc you will not qualify for the credit that's patently untrue, I know plenty of firms claiming this credit, not doing cutting edge research, and who are not getting audited. My personal guess on audit risk rule of thumb is how close to zero does the R&D tax credit get your tax liabilities. e.g. If after the credit, you still pay a lot of taxes, your audit risk is low.
vecter 9y ago
I have no idea why this is the top most upvoted comment. I know of many companies doing nothing near the level of cutting edge R&D work that the poster claims is necessary, but have gotten substantial tax breaks from this application. cde-v is spreading categorically false information to the potential detriment of many entrepreneurs. This comment should be downvoted or flagged.
- austenallred 9y ago
  > I have no idea why this is the top most upvoted comment HN thinks if you can shoot something down it means you're smarter than that thing. Therefore the most negative sentiment is the most intelligent, and should be voted to the top.
codecamper 9y ago
Must the work be performed in the US to qualify as an R&D tax credit? Thank you
- gamblor956 9y ago
  Yes. Limited to US-based activities. The primary purpose of the R&D tax credit is to incentivize the performance of R&D activities in the US instead of off-shoring it to cheaper jurisdictions.
  - codecamper 9y ago
    That makes sense. So it really doesn't make much sense to outsource offshore during the seed stage of a start up. Can R&D credits be applied to future year earnings? Is there a time limit for retroactively claiming these? Thank you!
tchock23 9y ago
I'm not an accountant, but work in an incubator where a well-known accounting firm came in and presented on this to a bunch of software startups. Their recommendation was to take advantage of this, even if you're not doing anything super novel/cutting edge.
stult 9y ago
As a tax lawyer who works exclusively on section 41, you're completely wrong. You should send your clients to tax consultants who know what they're talking about because you clearly do not. Section 41 is a taxpayer centric test, so the work does not have to be "cutting edge." It merely has to resolve technical uncertainties via a process of experimentation.
bshoemaker 9y ago
This is categorically wrong. HN sure loves a contrarian comment, even if it's completely incorrect
Shooter 9y ago
I don't have time to look at the details of this particular incentive, but I know from personal experience that many R&D tax credits do not require earth-shaking research to qualify. I own two SaaS companies that have received R&D credits and I'm also an investor in a few other businesses, including an injection molding company, that have received R&D tax credits. The injection molding company mostly makes cups for gas stations. Which is not exactly quantum computing. I used the same company to get all of the credits. They had a staff of tax attorneys, accountants, engineers, etc. that worked with us to see what we could qualify to receive. They looked at about 30 different programs to get tax incentives or reduce expenses. And they worked entirely on a contingency basis, where we only paid them a percentage of what we saved. They were very accurate in their initial assessments, and we have not been audited since receiving the incentives (/knock on wood/) At one point, they commented that the bane of their existence (as tax incentive specialists) was misinformed accountants that thought you had to have an army of lab coats or a clean room in order to qualify. I would agree, however, that Gusto is trying to drum up business.
late2part 9y ago
This post reminds me of about 70% of accountants. "Unless the tax code explicitly says you can do, it I'm not going to let you!" Then there's accountant that say "It's sort of a grey area, I suppose that makes sense, are you willing to defend it at audit?" The whole system is designed to discourage risk; and so many people say "I won't write off what I'm entitled to because I fear an audit." Then I hear stores about accountants that say "Well you're not flagged unless you're over X% of revenue on expenses in this category, so go ahead and increase it." Like so many well defined laws, there's a lot of room for intepretation. IANACPA

by cde-v 9y ago

martinpannier 9y ago

We're only enabling those startups that already qualify for the R&D tax credit to much more easily, and cheaply, claim it. We've seen accountants charge customers up to 25% of the credit obtained, and we think we can help.

mrkurt 9y ago

It's working! I didn't know about this credit and I'm fairly sure we qualify. I think many companies building internet infrastructure can.

mnierstedt 9y ago
Hi there. Another PM chiming in from Gusto on Federal R&D :). While you may be eligible, you will need to make sure that you have filed Form 6765 with your 2016 Corporate Tax Return. The good news (I guess) is that if you didn't file this form you can amend you Corporate Tax Return (https://www.irs.gov/pub/irs-pdf/i6765.pdf https://www.irs.gov/pub/irs-pdf/i6765.pdf). However, just be advised that the process to amend a corporate tax return is often pretty painful. So you may want to be sure that the credit will be worth your while. It sounds like you are eligible, but I would double check with an accounting firm just to be sure. If you go to our accountant page (https://gusto.com/partners/find-an-accountant https://gusto.com/partners/find-an-accountant) look for "Offers R&D Tax Services" on their company listing. This should give you some very reputable firms to work with on your credit study. Good luck with your Credit! Michael from Gusto https://www.linkedin.com/in/michaelnierstedt/ https://www.linkedin.com/in/michaelnierstedt/

gamblor956 9y ago

Think about it this way, unless your research is something you could write a scientific paper on and have it published in a peer reviewed journal, it will not qualify. That's not true at all. In the US, at least. As a tax lawyer, I've had to have this conversation quite a few times with accountants who misread the law and don't think it applies to their clients. The US R&D credit has 4 basic requirements, and "cutting edge" is not one of them, nor has it ever been.. Generally (broadly paraphrased), it is sufficient that the R&D result in new (or improved) functionality, etc. of a business component (specific to the taxpayer), in a systemic process of a scientific, engineering, or computer-science nature. For example, a game developer developing a new game engine would qualify for the R&D credit; as would a retail company developing an improved inventory system. (The latter is in fact one of the examples that IRS employees give at tax seminars.) The real issue with the R&D credit isn't claiming the credit; it's supporting the amount claimed with proper and sufficient documentation. It's the documentation part that gets most taxpayers, since the R&D credit is one of the areas that the IRS still devotes resources to auditing. Further edit: by the way, Gusto's article is about the new small business R&D credit from the Protecting Americans from Tax Hikes Act (PATH) which went into effect for the 2016 tax year. The original credit is limited to taxable income, so you couldn't use it until you had profits or if you were subject to AMT. The new credit applies against federal payroll and AMT.

cde-v 9y ago
I agree with all but your first sentence... I think you are just underestimating what topics can have peer reviewed scientific papers written about them. http://ac.els-cdn.com/S235197891500013X/1-s2.0-S235197891500013X-main.pdf?_tid=9c9e77a6-5b80-11e7-88b4-00000aacb35d&acdnat=1498599540_9ad3fe6ba882e11ce5159248902cb301 http://ac.els-cdn.com/S235197891500013X/1-s2.0-S235197891500... I was more taking a shot at the companies who do a redesign/facelift of their website/customer portal, or a bank struggling to integrate an off the shelf trading tool into their systems.
- gamblor956 9y ago
  I'm not sure what you're getting at. The first is a clear example of a permissible R&D credit activity if it otherwise satisfies the 4 requirements, and courts have found that the second activity generally would also be permissible for R&D credits if the integration involved additional software development by the bank (though this is more of a facts-based determination).

tedmiston 9y ago

Can you clarify sources for what types of R&D activities apply? I've been curious myself and didn't see this mentioned in the blog post.

cde-v 9y ago
Honestly, as evidenced by the rabid response above, reading the actual regulations is the best way to understand this topic. https://www.irs.gov/pub/irs-regs/research_credit_basic_sec41.pdf https://www.irs.gov/pub/irs-regs/research_credit_basic_sec41...
gamblor956 9y ago
If your company is looking to see if R&D credits are available, consult with an established major accounting firm or R&D-specialist firm. (But not cde-v's firm.) Most firms that do R&D work will charge a percentage of the R&D credit recovered rather than an out-of-pocket fee, so you generally won't have any financial outlay if your business doesn't qualify. Generally speaking, any US-based systemic research- or experimentation-based process that results in the development of new or improved (cheaper, better, etc.) business components (broadly meaning goods, services, processes) can qualify for the R&D credit.
- learc83 9y ago
  Sounds like even sales funnel optimization with A/B testing would qualify.

jbob2000 9y ago

You don't have to pass the requirements, you just have to pass the person who reviews your proposal. Put enough fancy language in there and you can make it sound like a simple messaging app is cutting edge machine learning. Every company I've worked for has done similar with the Canadian program (SR&ED).

geoka9 9y ago
> Put enough fancy language in there and you can make it sound like a simple messaging app is cutting edge machine learning. Good luck if you get audited, though.
- redthrowaway 9y ago
  We got audited. They just reduced the payout. It's the appeals process that's a pain in the ass. Takes about 3 years.

jboggan 9y ago

But if your startup is developing conversational AI? Wouldn't that qualify? Do you actually have to be publishing? Where's the dividing line in your opinion?

mbesto 9y ago

I know more than two software companies first hand that are not doing "AI, machine learning, etc" who qualified for this in the past.

arikr 9y ago
Yeah, oddly enough I believe this accountant is 100% incorrect.

Kiro 9y ago

Why do you shoot down attempts instead of letting them try? Is there any downside of trying and get rejected? Judging by the comments it sounds like you risk shooting down attempts that may actually succeed.

URSpider94 9y ago
While I do think the grandparent is being a little too conservative, there is no "trying and getting rejected" here. This is not a credit that you apply for, it's part of your income tax filing. The only case where it would be reviewed is if you were audited by the IRS, and if they then disallowed your credit, you would be liable to repay that amount, plus interest and potentially plus late-payment penalties. AND, you would likely be flagged as a target for future audits ... In general, when you claim a deduction on your US income taxes (personal or business) you want to be pretty darned sure that the deduction is going to stand up to an audit.

arikr 9y ago

As far as I can tell this accountant is spreading misinformation. (I've never written that before!) I've talked to other companies doing nothing related to novel research, just standard SaaS, who were able to get a healthy sized deduction. Please don't let this person dissuade you from checking if you can get the credit. To the accountant - please see all the comments below yours and edit your post, unless you have evidence against them. Your comment may well make people not apply for this who could've gotten the deduction without issue.

cde-v 9y ago

Replying to my own comment since I'm too late to edit. Just read the regs people, the barriers are not as low as the little bit of anecdotal evidence in this thread are suggesting. https://www.irs.gov/pub/irs-regs/research_credit_basic_sec41.pdf https://www.irs.gov/pub/irs-regs/research_credit_basic_sec41...

mbesto 9y ago
I think most people here are basically saying "its a grey area and it would be stupid not to take advantage of the credits even if you feel you don't 100% qualify".
gamblor956 9y ago
1) Those aren't regulations, those are statutes. It is disturbing that you are attempting to advise people on this subject but do not know the difference. Statutes are written by Congress, regulations are written by the Treasury Department to implement or clarify statutes. 2) The PDF is for the 2004 version of the R&D statutes. They have been revised significantly since then. 3) Current version of the statutes: https://www.law.cornell.edu/uscode/text/26/41 https://www.law.cornell.edu/uscode/text/26/41 Current version of the regulations: https://www.law.cornell.edu/cfr/text/26/1.41-1 https://www.law.cornell.edu/cfr/text/26/1.41-1 Cornell is not an authoritative source but it's easier to read than the GPO website. If you want final authoritative sources, you'll need to read the House and Senate resolutions and to track down a physical copy of the appropriate issue of the Federal Register.
- tyrw 9y ago
  It really is a shame that this accountant person is tripling down on everything without actually having the needed domain knowledge. Thanks for following up on each of these -- as a small business owner that might pursue this, it's often difficult to separate signal from noise without having much time to spend on it.

goeric 9y ago

While the R&D tax credit is not new, one of the tweaks was not a slight change. Before, you could only offset your corporate income taxes, so you couldn't claim the credit if you weren't profitable (because you wouldn't have corporate income taxes). Now, you can offset social security taxes, which are based on payroll. So more startups can now benefit from this credit.

jgalt212 9y ago

> Unless you are doing cutting edge/novel research into AI, machine learning, quantum computing, etc you will not qualify for the credit that's patently untrue, I know plenty of firms claiming this credit, not doing cutting edge research, and who are not getting audited. My personal guess on audit risk rule of thumb is how close to zero does the R&D tax credit get your tax liabilities. e.g. If after the credit, you still pay a lot of taxes, your audit risk is low.

vecter 9y ago

I have no idea why this is the top most upvoted comment. I know of many companies doing nothing near the level of cutting edge R&D work that the poster claims is necessary, but have gotten substantial tax breaks from this application. cde-v is spreading categorically false information to the potential detriment of many entrepreneurs. This comment should be downvoted or flagged.

austenallred 9y ago
> I have no idea why this is the top most upvoted comment HN thinks if you can shoot something down it means you're smarter than that thing. Therefore the most negative sentiment is the most intelligent, and should be voted to the top.

codecamper 9y ago

Must the work be performed in the US to qualify as an R&D tax credit? Thank you

gamblor956 9y ago
Yes. Limited to US-based activities. The primary purpose of the R&D tax credit is to incentivize the performance of R&D activities in the US instead of off-shoring it to cheaper jurisdictions.
- codecamper 9y ago
  That makes sense. So it really doesn't make much sense to outsource offshore during the seed stage of a start up. Can R&D credits be applied to future year earnings? Is there a time limit for retroactively claiming these? Thank you!

tchock23 9y ago

I'm not an accountant, but work in an incubator where a well-known accounting firm came in and presented on this to a bunch of software startups. Their recommendation was to take advantage of this, even if you're not doing anything super novel/cutting edge.

stult 9y ago

As a tax lawyer who works exclusively on section 41, you're completely wrong. You should send your clients to tax consultants who know what they're talking about because you clearly do not. Section 41 is a taxpayer centric test, so the work does not have to be "cutting edge." It merely has to resolve technical uncertainties via a process of experimentation.

bshoemaker 9y ago

This is categorically wrong. HN sure loves a contrarian comment, even if it's completely incorrect

Shooter 9y ago

I don't have time to look at the details of this particular incentive, but I know from personal experience that many R&D tax credits do not require earth-shaking research to qualify. I own two SaaS companies that have received R&D credits and I'm also an investor in a few other businesses, including an injection molding company, that have received R&D tax credits. The injection molding company mostly makes cups for gas stations. Which is not exactly quantum computing. I used the same company to get all of the credits. They had a staff of tax attorneys, accountants, engineers, etc. that worked with us to see what we could qualify to receive. They looked at about 30 different programs to get tax incentives or reduce expenses. And they worked entirely on a contingency basis, where we only paid them a percentage of what we saved. They were very accurate in their initial assessments, and we have not been audited since receiving the incentives (/knock on wood/) At one point, they commented that the bane of their existence (as tax incentive specialists) was misinformed accountants that thought you had to have an army of lab coats or a clean room in order to qualify. I would agree, however, that Gusto is trying to drum up business.

late2part 9y ago

This post reminds me of about 70% of accountants. "Unless the tax code explicitly says you can do, it I'm not going to let you!" Then there's accountant that say "It's sort of a grey area, I suppose that makes sense, are you willing to defend it at audit?" The whole system is designed to discourage risk; and so many people say "I won't write off what I'm entitled to because I fear an audit." Then I hear stores about accountants that say "Well you're not flagged unless you're over X% of revenue on expenses in this category, so go ahead and increase it." Like so many well defined laws, there's a lot of room for intepretation. IANACPA