4 ms·

Let's say I pay a programmer to develop that new game engine...why wouldn't I just deduct the expense of paying the developer against my revenue? Why would I ev

Let's say I pay a programmer to develop that new game engine...why wouldn't I just deduct the expense of paying the developer against my revenue? Why would I even need to look into this tax credit? The only companies I see this benefitting are those with no or negative income, but have high payroll taxes, which doesn't seem to me to be a lot of companies out there.

fooey 9y ago
I would bet practically all software startups fall into the category of having negative income and high payroll taxes.
gamblor956 9y ago
Deduction applies to pre-tax income, and is based on your tax rate. If, for example, you have a deduction for $100, and your effective tax rate is 20%, your tax liability is reduced by $20. Deductions also generally don't carry over if unusuable. A credit applies against your tax liability. So if you have a tax credit for $100, your tax liability is reduced by $100. Credits generally do carry over to future years to the extent unusable in the current year. Whether a credit is preferable to a deduction depends on the taxpayer's tax situation, including whether they would be able to make use of carried-over credits in future years. Edit: in a previous comment I said R&D credits aren't available if you don't have positive income. That's not strictly true. R&D credits only apply against actual tax liabilities, but if you don't have any taxable income the unused credits would carry over into a future year for potential use.
- jliptzin 9y ago
  Thanks!
- Dwolb 9y ago
  This credit is unique in that it can be used against federal payroll taxes. i.e. most companies (even if unprofitable) can realize a cash benefit immediately
sokoloff 9y ago
In addition to the other posts, if your developer is creating a capital asset (software/IP with a useful life beyond the current tax year), you may not be able to expense 100% of their cost. It's just like if you hire a builder to make you a rental property. You can't deduct 100% of the costs of that house in the year it's built.

fooey 9y ago

I would bet practically all software startups fall into the category of having negative income and high payroll taxes.

gamblor956 9y ago

Deduction applies to pre-tax income, and is based on your tax rate. If, for example, you have a deduction for $100, and your effective tax rate is 20%, your tax liability is reduced by $20. Deductions also generally don't carry over if unusuable. A credit applies against your tax liability. So if you have a tax credit for $100, your tax liability is reduced by $100. Credits generally do carry over to future years to the extent unusable in the current year. Whether a credit is preferable to a deduction depends on the taxpayer's tax situation, including whether they would be able to make use of carried-over credits in future years. Edit: in a previous comment I said R&D credits aren't available if you don't have positive income. That's not strictly true. R&D credits only apply against actual tax liabilities, but if you don't have any taxable income the unused credits would carry over into a future year for potential use.

jliptzin 9y ago
Thanks!
Dwolb 9y ago
This credit is unique in that it can be used against federal payroll taxes. i.e. most companies (even if unprofitable) can realize a cash benefit immediately

sokoloff 9y ago

In addition to the other posts, if your developer is creating a capital asset (software/IP with a useful life beyond the current tax year), you may not be able to expense 100% of their cost. It's just like if you hire a builder to make you a rental property. You can't deduct 100% of the costs of that house in the year it's built.