The Techstars Founder’s Guide to Tax Credits

We’ve helped startups claim over $5M in Tax Credits so far. In preparation for the upcoming deadlines for the 2023 R&D Credit, we wanted to share more information about it — even if your startup is pre-revenue you can claim it, the average YC startup we work with gets back $21,000. Remember: if you do not file an extension OR claim the credit before October 18th, you will lose it (up to $250,000). Fondo can help you with both!

If you have any questions or need help with claiming your tax credits feel free to email me d@tryfondo.com

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There are two tax credits that every startup needs to consider: the R&D Tax Credit & the Employee Retention Tax Credit.

💰 R&D Tax Credit
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• How to qualify: Be a startup that has U.S. based R&D employees (engineers, designers, product managers, founders, etc.) on payroll
• How to claim: Work with someone like Fondo to do an R&D Tax Credit study & file with your corporate tax return — see how much you can get back here.
• How much can I get back? Up to $250,000 ($500,000 starting next year); based on total R&D employee and contractor payroll
• Deadline: October 18, 2023 when you file extension
• When do you get your check from the IRS? Beginning the quarter after you file your corporate tax return with R&D credit forms, you can claim the credit on your quarterly payroll tax filing. Generally, you can expect to receive payment approximately 8 - 12 weeks after you have filed your respective quarterly payroll tax filing. As an example, if you filed the R&D credit with your Tax Return in Q2 and in your payroll filings for Q3 by the October 31 deadline, then you should expect to receive payment by December 31. Keep in mind the timing is dependent upon how quickly the IRS can work through the filings and process payments and thus timing is subject to change.
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💰 Employee Retention Tax Credit
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• How to qualify: Recovery Startup - Founded after February 15, 2020 & have an annual gross receipts of $1 million or less, have W2 employees
• How to claim: Work with someone like Fondo to do an analysis to qualify, substantiate, calculate, and claim your employee retention tax credit
• Deadline: April 15, 2024
• When do you get your check from the IRS? Typically, you will receive your first check 4-7 months following the submission of your claim to the IRS.

Longer version✍️

What are Tax Credits?

Tax Credits are government incentives intended to encourage innovation, hiring, and growth of the US economy. There are thousands of tax credits, but only some are useful for startups. Most credits are only valid for companies that owe income taxes, but since startups are generally not turning a profit in their early days, the other credits are not so useful. The most critical tax credits that offer direct cash back from the IRS, regardless of whether the company owes income tax. There are two tax credits that every startup needs to take advantage of.

The Most important Tax Credits for startups
💰 R&D Tax Credit

The R&D Tax Credit is a tax credit for startups that invest in research and development — which includes all startups with engineers, designers, product managers, and founders on payroll. The credit can be claimed against income tax or payroll tax. Most startups claim it against payroll tax, which makes this credit refundable — your startup gets a check directly from the IRS.

💰 Employee Retention Tax Credit

The Employee Retention Tax Credit (ERTC) is a tax credit available to eligible employers who retain their employees during the COVID-19 pandemic. The ERTC is a refundable payroll tax credit companies can claim on eligible employee wages and healthcare costs. It was designed to reduce layoffs by offering relief for those who kept employees on the payroll through their financial hardships. And even though it’s come to an end, it’s well worth exploring if you didn’t take advantage of it already. If you qualify, you can apply the rules retroactively. And save yourself from losing out on the chance for some financial relief.

How can my startup qualify for Tax Credits?

To qualify for these tax credits, your business must be registered with the IRS and be up to date with your corporate tax filings. Missing a corporate tax deadline could disqualify you from some of these valuable credits. Both the R&D Tax Credit and the ERTC have different qualification criteria which we will review in detail below.

How do I qualify for the R&D Tax Credit?

As we discussed earlier, there are two ways to claim the R&D Credit, the method that is most advantageous to startups is via the payroll tax credit. Eligible startups include those that:

• Are developing new or improved products, processes, software, algorithms, formulas, or inventions
• Have under $5 million in gross receipts in the current year
• No more than 5 years of generating gross receipts, including the current year.
• Have employees or contractors in the United States

How much Is the R&D Credit Worth to my startup?

Your startup can get up to $250,000 per year ($500,000 per year starting next year) from the R&D Tax Credit. To see if you qualify and how much you can get back see here.
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How do I qualify for the ERTC?

The ERTC was originally only available to eligible employers who retain their employees during the COVID-19 pandemic. The American Rescue Plan Act (ARPA), passed in March of 2021 expanded the ERTC. ARPA added new eligibility for "Recovery Startups". It allows businesses that started operations during the pandemic (and thus weren’t around in 2019) to compare 2021 earnings to revenue for the same quarter in 2020. And it permits qualified startups to claim credits for the third and fourth quarters of 2021. Further, it allowed recovery startups to be eligible for relief even if they didn’t experience a government mandated shutdown or the required revenue decline so long as the startup:

• Began operations after February 15, 2020
• Have an annual gross receipts of $1 million or less

How Much Is the ERTC Worth to my startup?

For wages paid between January 1, 2021 and September 30, 2021, the credit increased to equal 70% of qualified wages up to $10,000 per employee each quarter. That means you can claim up to $7,000 per employee per quarter, meaning you could claim a maximum of $21,000 per employee for 2021. Fondo can help you determine all of these qualifications, calculate the maximum amount you can get back, file the additional forms with your corporate tax return, and make the necessary updates your payroll system to ensure you are getting your cash back from the IRS. If that is helpful, you can get started here (tryfondo.com/tax-credits-yc).

How do I claim the Tax Credits for my startup?

Below are the things you will need your accountant to complete in order for you to claim and receive these credits.

How to claim the R&D Tax Credit

This credit is claimed by doing an R&D Credit Study, filing additional forms (Federal & State) with your corporate tax returns, and updating your payroll system. Fondo would love to help you with this, you can sign up here.

How to claim the ERTC

You would have needed to fill out Form 7200, Advance of Employer Credits Due to Covid-19 at the beginning of the tax year.

Alternately, if you’re eligible, you could have claimed the new Employee Retention Credit by calculating your total qualified wages (including any health insurance costs) for each quarter. You then subtract that total from your deposit on Form 941, Employer’s Quarterly Federal Tax Return.

If you haven’t already claimed credits, you can do so retroactively by filling out Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund for the quarter or quarters in which you paid qualifying wages.

Fondo would love to help you with this, you can sign up here.‍

Conclusion

The government offers a number of tax credits that can help startup businesses offset the costs of research and development, hiring employees, and more. By taking advantage of these credits, you can save your startup money while you invest in growth.

To ensure you are maximizing your tax credits amount and doing everything correctly, it is best to work with a professional. Fondo helps 600+ startups with their taxes each year and would love to help your startup! Fondo can help you determine all of these qualifications, calculate the maximum amount you can get back, file the additional forms with your corporate tax return, and make the necessary updates your payroll system to ensure you are getting your cash back from the IRS. If that is helpful, you can get started: tryfondo.com/tax-credits-techstars.

🤝 NEW! Techstars Deal

<sup>At Fondo, we are committed to building the best all-in-one accounting solution for Techstars startups. As part of this commitment, we are excited to introduce our new Tax Credits pricing for you (applies to all existing & new customers):
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• 8% of Tax Credits (when tax credit is less than or equal to $50,000)
• 15% of Tax Credits (when tax credit is greater than $50,000)

How does this compare to others?

Our competitors typically charge 20%-30% of tax credits or 2% of total qualifying expenses which is equivalent of 20% of tax credits.</sup>

Need help?

Try Fondo ⚡

Disclaimer

This blog for informational purposes only and does not constitute legal or tax advice or create an attorney-client relationship. Companies should consult their own attorneys or tax accountants for advice on these issues. Because of the generality of the issues discussed in this piece, the information provided may not apply in all situations and should not be acted upon without specific legal or tax advice based on particular situations.