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R&D Tax credits and Software engineers: What is the connection?

Did you know that more than 80% of technology companies are either completely unaware they are eligible for government-sponsored tax credits or don’t have an easy way to get them? As many startups are thinking about ways to be efficient with spending, we want to do our part as well. 

We asked our friends at TaxTaker, to share about the Research & Development Tax Credit – which can save a company thousands of dollars (sometimes even hundreds of thousands) every year. 

The R&D tax credit allows technology companies and startups to reduce federal and state tax liabilities and earn back up to 10% on what they are spending on product development. Four types of expenses can be included in the credit calculation for your qualified projects: 

  1. W2 Wages
  2. US-based contractor expenses
  3. Cloud expenses
  4. Supplies

So how do you take advantage of this? Well, TaxTaker told us that employee wages for direct R&D activity can be included in the credit (as well as supervision or direct support of such activity). So thinking about bringing on a new frontend developer? With R&D tax credits, it is possible to recover 10% of their wage every year. 

TaxTaker also informed us the most common employee titles that qualify for the R&D tax in technology companies include:

  • Product engineers
  • Software and database architects
  • Computer and data scientists
  • Quality assurance testers

The long and short of it, tech startups have the potential to earn back up to 10% of what they spend developing products and technologies each year.

This is a heavily wage-driven credit, so the greater your salaries, the greater your relative credit adds up!  What’s more, starting in 2023, you can also use the R&D Tax Credit to offset all employer-related payroll taxes (FICA+ Medicare, 7.65%-double check this).  Further, as part of the Inflation Reduction Act, the upper bound for startups increased to $500,000, so regardless of profitability, your startup can reap the benefits nearly immediately.

If you want to learn more about R&D tax credits please talk to your accountant (we are not tax experts) or reach out to our friends at TaxTaker.

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