> ## Documentation Index
> Fetch the complete documentation index at: https://www.finta.com/docs/llms.txt
> Use this file to discover all available pages before exploring further.

# R&D Tax Credits

#### Overview

The Federal R\&D tax credit is an IRS tax incentive that rewards innovation in the US.

To claim it, a tax preparer needs to conduct an R\&D study and include the claim with tax filings.

<Tip>Startups can get back up to \$500,000 for R\&D expenses spent in their first five years.</Tip>

#### Eligibility

If you spent money on qualified R\&D expenses in the US, you're eligible for these tax credits.

#### R\&D expenses

Eligible expenses must be spent on creating something new or improving an existing product.

And it must be spent in the US - international expenses, like foreign contractors, are ineligible.

#### How it works

<Steps>
  <Step title="Step 1: Determine credit amount">
    For startups, eligible R\&D expenses are typically:

    * Gross pay for employees/contractors doing product, engineering, design
    * Raw materials for physical prototypes
    * Hosting and server costs

    <Info>You must reasonably estimate and apply a % of time spent on eligible activities.</Info>

    * Include time on: scoping, designing, and coding prototypes and new features.
    * Exclude time on: bugs, support, user research, marketing, hiring, fundraising, etc.

    <br />

    Roughly 10% of R\&D expenses can be claimed as credits. For example, if you paid a
    US-based Engineer \$100,000 in salaries last year, then you can claim \$10,000.

    To get a more accurate estimate, see sample calculator at the bottom of this page.

    <br />
  </Step>

  <Step title="Step 2: Claim the credit">
    Your tax preparer will add the R\&D tax credit amount to your annual tax return.

    If the IRS has no issues, the credit is approved. But this is not money back yet.

    <Tip>Like a store credit with the IRS - it's not cash, but it can be applied to future purchases.</Tip>

    <br />
  </Step>

  <Step title="Step 3: Get the money">
    There are two approaches. Every year you must pick one.

    **Option A: Reduce income taxes amount**

    If profitable, the amount of taxes owed can be reduced from existing credits.

    For example, say you owe \$1,000 in taxes and have \$5,000 of credits, then you can reduce taxes owed to \$0 and still have \$4,000 credits remaining.

    Most startups are unprofitable with no taxes owed. So this approach is **uncommon**.

    <Tip>Like using your existing store credit to reduce what you have to pay the IRS.</Tip>

    <br />

    **Option B: Get refund for future payroll taxes**

    As you run payroll for salaried employees, you need to pay payroll taxes to the IRS.

    The IRS will issue a refund to you via mailed checks for those payroll taxes every quarter until all credits are utilized.

    For example, say you claimed \$5,000 of tax credits from taxes filed in March.
    Then in Q2 (April-June), you paid \$1,000 in payroll taxes.
    Your payroll provider will submit this refund claim to the IRS, and you'll receive a physical check from them in 10–12 weeks.
    This continues every quarter until the full \$5,000 is claimed.

    <Info>PEO payroll providers typically cause the refund process to take much longer
    because they claim all of their customers' refunds under the same PEO legal entity.</Info>

    Most startups are unprofitable with payroll expenses. So this approach is **common**.

    <Tip>Like paying the IRS then asking to get a refund using existing store credits.</Tip>

    <Warning>Since this approach is a cash refund, it's limited to companies that incorporated within the last 5 years, have ≤\$5M in revenue for the tax year, and ≤\$500K in credits to claim.</Warning>

    <br />
  </Step>
</Steps>

#### Calculator

<script src="/docs/credits.js" defer />