While the potential for a startup company to be worth millions of dollars after inception drives many entrepreneurs, the reality is that new businesses do not always realize a profit in their first year of operation. Some many not may not make money for a couple years before becoming profitable (e.g. Amazon). During this period, new businesses may not be required to pay federal income taxes (because of the lack of profit), they still must be responsible for payroll taxes; an expense that is not tax deductible, of course.
However, federal law now enables small startups to take advantage of tax breaks that large enterprises have been benefitted from for years. Essentially, startups may claim the coveted research and development credit (R&D credit) that could help in securing the additional cash that small businesses covet.
For example, a new software development company that has an employee payroll of about $1.75 million would be subject to about $108,500 in payroll taxes. With being eligible for the R&D credit, the same business would be eligible to claim about $100,000 in federal credits, thus reducing the company’s payroll obligation to $8,500. The $100,000 in savings could be reinvested with the company in any manner the principals deem suitable.
Additionally, small startups may now claim the R&D credit against their Alternative Minimum Tax (AMT) on a permanent basis. These moves will reportedly result in more than $2 billion in tax savings which ostensibly will spur more investment into small startups.
If you have questions about how these changes may affect your business, an experienced tax law attorney can help.