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Grants or Startup Tax Credit:Which one is right for you?
Webinar
September 19th, 2018
Jacob Setterbo, Ph.D., Director of GrantsJim Foster, J.D., National Tax Director
Presentation Overview
•Overview of Grants•Compare: Grants vs. R&D Tax Credits•Overview of R&D Tax Credit
• Details on Startup R&D Tax Credit•Q&A
Example Taxable Income vs. Time
Why Grants?
Grants
Why Grants?
Top 4 Reasons:1. Not a loan –
no repayment2. Non-dilutive –
no equity forfeiture3. No intellectual property (IP) forfeiture4. Provides recognition, verification, and visibility
Which Grants?• 10s to 100s depending
on your topic• Choose your battles
wisely…
Tenured Professor Entrepreneur
#1 Professors/ Universities
Small Businesses
Funds research and development (R&D)
that has the potential for commercialization!
Which Grants?
Figure: SBIR/STTR Budgets by Agency (FY13) - ~$2.3B Total
• Agencies1. Department of Agriculture2. Department of Commerce
– National Institute of Standards and Technology– National Oceanic and Atmospheric Administration
3. Department of Defense4. Department of Education5. Department of Energy6. Department of Health and Human Services
– National Institutes of Health7. Department of Homeland Security8. Department of Transportation9. Environmental Protection Agency10. National Aeronautics and Space Administration11. National Science Foundation
SBIR/STTR – Participating Agencies
• For profit, located in US• <500 employees• Ownership:
• >50% by U.S. individuals• National Institutes of
Health (NIH) SBIRs allow:• >50% owned by multiple VC
firms, etc.
SBIR/STTR – Eligibility
• SBIR• ≥*67% through small business• Principal Investigator (PI)
employed 50% at small business
• STTR (partnership)• ≥40% through small business• Requires ≥30% through single
university/institution• NIH allows PI to be employed
at the university*NIH allows as low as 50% through small business
SBIR/STTR – Eligibility – Facilities/Team
SBIR/STTR – Review Process & Success Rates (NIH)
•Most reviewers are professors
•NIH SBIR/STTR: •15-20% get funded
SBIR/STTR – Review Process & Success Rates (NIH)• Application score is based on 5 criteria:
1. Significance (importance/impact)2. Investigators (PhDs/MDs/patents/experience)3. Innovation (differentiation/new-to-world)4. Approach (logical/backed by science)5. Environment (company & collab. facilities)
•Before applying: • Is your Project/Team among the best?
SBIR/STTR – Award Information• Phases
• Phase I: feasibility• Phase II: continuation
• Fast Track: Phase I & II• (Phase III: on your own)
Phase I$150K - $225K
1 year
Phase II$1M - $1.5M
2 years
Phase III…
Fast Track
SBIR/STTR – Timeline to Funding
• April 5th Deadline (NIH) – EXAMPLE 1 • First Submission
• ~6-8 months from submission to award
Submit2 mos.
Jan 2 3 4 5 6 7 8 9 10 11 12 Jan 2 3 4 5 6 7 8 9 10 11 12
Scientific Review3-4 mos.
Advisory Council2-4 mos.
Begin R&D PROJECT – Phase I12 mos.
SBIR/STTR – Timeline to Funding
• April 5th Deadline (NIH) – EXAMPLE 2• Resubmission
• ~12-14 months from submission to award
Submit2 mos.
Jan 2 3 4 5 6 7 8 9 10 11 12 Jan 2 3 4 5 6 7 8 9 10 11 12
Scientific Review3-4 mos.
Submit2 mos.
Scientific Review3-4 mos.
Advisory Council2-4 mos.
Begin R&D Project – Phase I12 mos.
Jan 2 3 4
Why R&D Tax Credits?
Grants
R&D Tax Credits (2015)
R&D Tax Credits (2016+)
TAKE-AWAY:You no longer need taxable income!
Why R&D Tax Credits?
Top 3 Reasons:1. Not a loan –
no repayment2. Non-dilutive –
no equity forfeiture3. No intellectual property (IP) forfeiture4. Provides recognition, verification, and visibility
R&D Tax Credits – Eligibility & Success Rates• Eligibility determined by:
• Gross Receipts• Qualifying Research
Expenditures (QREs)• Unlike SBIR/STTR projects,
your R&D projects could be:• From any technology sector• Boring / incremental
• Success Rates:• Near 100% IF you follow IRS
rules!
R&D Tax Credits – Timeline to Funding
• March 15th Deadline – EXAMPLE 1• Standard R&D Tax Credit [companies with taxable income]
Jan 2 3 4 5 6 7 8 9 10 11 12 Jan 2 3 4 5 6 7 8 9 10 11 12
Qualifying R&D EXPENSES12 mos.
File TaxesCredit provides
immediate savings.
20182017
R&D Tax Credits – Timeline to Funding
• March 15th Deadline – EXAMPLE 2• Payroll (Startup) R&D Tax Credit [no taxable income required]
Jan 2 3 4 5 6 7 8 9 10 11 12 Jan 2 3 4 5 6 7 8 9 10 11 12
Qualifying R&D EXPENSES12 mos.
File Taxes Credit Offsets Payroll TaxesOffset begins the quarter after filing
Jan 2 3 4
20182017 2019
GRANTS vs. R&D Tax CreditsGrants R&D Tax Credits
Success Rate 15-20% (judged by professors) Near 100% (judged by IRS rules)
Forward or Backward-Looking?
Timeline to Money/Credit
Amount
You should do both if possible!
6-10 months from time of submission
0-3 months from time of filing
$225K for Phase I$1.5M for Phase II
8-12% of Qualifying R&D
Forward: Future projects Backward: Past projects
Presentation Overview
•Overview of Grants•Compare: Grants vs. R&D Tax Credits•Overview of R&D Tax Credit
• Details on Startup R&D Tax Credit•Q&A
What is the R&D Tax Credit?
•GOAL: • Keep innovation and creativity in the U.S. • Encourage economic growth
•BENEFIT: • Tax credit for companies that perform R&D in the U.S.
History of the R&D Tax Credit• TIMELINE:
1980 - 1985 - 1990 - 1995 - 2000 - 2005 - 2010 - 2015 - …
First adoption of R&D tax credit(The Economic Recovery Tax Act of 1981)
Several expirations of credit, then retroactive extensions…
Small to mid-size companies made eligible to take the R&D (wage-based) tax credits
3 HISTORIC CHANGES![Protecting Americans from
Tax Hikes (PATH) Act of 2015]
History of the R&D Tax Credit• PATH Act of 2015
1. Made R&D Tax Credit PERMANENT for the first time
2. Small Businesses can claim the credit against the Alternative Minimum Tax (AMT)
3. Startups can claim up to $250K of the credit against the company's payroll tax
1980 - 1985 - 1990 - 1995 - 2000 - 2005 - 2010 - 2015 - …
3 HISTORIC CHANGES![Protecting Americans from
Tax Hikes (PATH) Act of 2015]
1) R&D Tax Credit is now PERMANENT
• Businesses can now budget for tax credits in confidence
• Credit will not expire in the middle of the fiscal year
Scenario 1: TMT>RTL
Scenario 2: TMT<RTL
2) Small Businesses can claim the credit against AMT
2015Alternative Minimum Tax OVERVIEW• RTL=Regular Tax Liability• TMT=Tentative Minimum Tax• AMT=Alternative Minimum TaxR&D Tax Credit• Credit can offset the spread
(spread = RTL-TMT)RTL
RTLAMT
TMT
R&D credit
Scenario 1: TMT>RTL
Scenario 2: TMT<RTL
2) Small Businesses can claim the credit against AMT2016 (PATH Act Changes)
Alternative Minimum Tax OVERVIEW• RTL=Regular Tax Liability• TMT=Tentative Minimum Tax
• (Set to $0 for credit utilization)• AMT=Alternative Minimum TaxR&D Tax Credit• Eligibility: Average annual gross
receipts must be < $50M• Credit can offset any taxes paid!
RTL
RTLAMT R&D
creditR&D credit
TMT
2) Small Businesses can claim the credit against AMT
CHANGES explained using TI vs. Time Graph
2015/old
2) Small Businesses can claim the credit against AMT
2016/new
2) Small Businesses can claim the credit against AMT
2016/new
3) Startups can claim the credit against payroll tax
3) Startups can claim the credit against payroll tax• PATH Act of 2015 [no taxable income required!]
• For the 1st time, R&D tax credit can offset payroll taxes• Eligibility (more restrictions than AMT offset):
• Current year (e.g., 2017) gross receipts must be < $5M• No gross receipts before 5-taxable-year period ending with
current year (e.g., no GRs prior to 2013)• Benefits
• Can offset payroll taxes quarterly after filing a return• Benefit capped at $250K/year per company
3) Startups can claim the credit against payroll tax
FORM 6765
3) Startups can claim the credit against payroll tax
FORM 941 FORM 8974
What qualifies as R&D?
Tax Definition (“4-Part Test”)
1. New or Improved Business Component• Product• Process• Software (Internal or External)• Technique• Formula• Invention
2. Technical Uncertainty3. Process of Experimentation4. Technological in Nature
Traditional Definition
Qualified R&D Expenses (QREs)• If your project passes the 4-Part Test,you can qualify Three Expense Categories:
1. Wages2. Supplies3. 65% of Contract Research
Qualified R&D Expenses (QREs)Three Expense Categories:
1. Wages• Includes:
• Form W-2• Partnership Earnings subject to Self
Employment Tax• Schedule C• Bonuses paid to employees
• Excludes:• 401(k) & fringe benefits
Qualified R&D Expenses (QREs)Three Expense Categories:
2. Supplies• Items intended for use in R&D process• Any tangible property used in the conduct of qualified research
other than: land, improvements to land, or property subject to depreciation
• E.g.: lab animals, reagents, drugs, supply costs for prototypes, etc.
Qualified R&D Expenses (QREs)Three Expense Categories:
3. 65% of Contract Research• Can include fees paid to:
• Non-employees• Outside consultants/engineers/software developers• Contract Research Organizations (CROs)
• Qualification depends on the contract(e.g., applicant must bear economic risk & retain substantial rights)
Tax Credit Amount
• Benefit varies by calculation method used
• Tax Credit = 8-12% of QREs:• 10% with Regular Credit Method• 8-12% with Simplified Credit Method
Other R&D Considerations• Carryforward of credit
• R&D Tax Credits – 20 years • Payroll (Startup) Tax Credit – indefinitely
• Net Operating Losses (NOLs) – 20 years • This may offset the need for R&D tax credit
NOL
Life science examples (over-simplified):• Company qualified? • What proportion is QREs?• Approximate credit?
Startup Examples
Example 1
• Preclinical Stage (All R&D, All the Time)• Founded: 2013• Payroll and supplies: $242K + $8K• Gross receipts: None• All payroll ($242K) qualified:
• CEO: leads the R&D experiments• Laboratory technicians assist with experiments
• Supplies ($8K) are qualified:• Mice, rats, laboratory consumables, etc.
• FICA taxes (currently 6.2%) = $15,004• R&D credit estimate (using 10%) = $25,000
Example 1
• Preclinical Stage (All R&D, All the Time)• Founded: 2013• Payroll and supplies: $242K + $8K• Gross receipts: None• All payroll ($242K) qualified:
• CEO: leads the R&D experiments• Laboratory technicians assist with experiments
• Supplies ($8K) are qualified:• Mice, rats, laboratory consumables, etc.
• FICA taxes (currently 6.2%) = $15,004• R&D credit estimate (using 10%) = $25,000
Example 2
• Digital Health (R&D but Faster-Moving)• Founded: 2014• Payroll: $1M• Gross receipts:
• $500K in 2015 from app sales • $5.5M in 2016• $4.2M in 2017
• Only 75% ($750K) of payroll qualified:• Most of the programmers are actively working on R&D• But: CEO time fundraising and marketing is not qualified• Administrative assistant also does not assist with R&D
• FICA taxes (currently 6.2%) = $62,000• R&D credit estimate (using 10%): $75,000
Example 2
• Digital Health (R&D but Faster-Moving)• Founded: 2014• Payroll: $1M• Gross receipts:
• $500K in 2015 from app sales • $5.5M in 2016• $4.2M in 2017
• Only 75% ($750K) of payroll qualified:• Most of the programmers are actively working on R&D• But: CEO time fundraising and marketing is not qualified• Administrative assistant also does not assist with R&D
• FICA taxes (currently 6.2%) = $62,000• R&D credit estimate (using 10%): $75,000
Example 3
• Clinical (R&D and Approaching Commercialization)• Founded: 2009• Payroll: $1M• Outsourced/contract costs: $500K • Gross receipts: None• Only 70% ($700K) of payroll qualified
• R&D for 1st and 2nd pipeline drugs qualifies• Sales and business development payroll does not qualify
• Only 50% ($250K) of contract costs is R&D, and only 65% of that qualifies ($162.5K):• Hourly contractors performing R&D qualify• Lawyer and consultant costs for IP and regulatory does not qualify
• FICA taxes (currently 6.2%) = $62,000• R&D credit estimate (using 10%) =
$70,000 + $16,250 = $86,250
Example 3
• Clinical (R&D and Approaching Commercialization)• Founded: 2009• Payroll: $1M• Outsourced/contract costs: $500K • Gross receipts: None• Only 70% ($700K) of payroll qualified
• R&D for 1st and 2nd pipeline drugs qualifies• Sales and business development payroll does not qualify
• Only 50% ($250K) of contract costs is R&D, and only 65% of that qualifies ($162.5K):• Hourly contractors performing R&D qualify• Lawyer and consultant costs for IP and regulatory does not qualify
• FICA taxes (currently 6.2%) = $62,000• R&D credit estimate (using 10%) =
$70,000 + $16,250 = $86,250
Example 3-b
• Clinical (R&D and Approaching Commercialization)• Founded: 2009• Payroll: $1M• Outsourced/contract costs: $500K • Gross receipts:
• $150K in 2010• $0 in 2011-2016
• COMPANY NOT QUALIFIED
Example 3-b
• Clinical (R&D and Approaching Commercialization)• Founded: 2009• Payroll: $1M• Outsourced/contract costs: $500K • Gross receipts:
• $150K in 2010• $0 in 2011-2016
• COMPANY NOT QUALIFIED
Example 4
•SBIR-Heavy (Some Payroll is Federally Funded)• Founded: 2015• Payroll: $500K• Only 60% ($300K) of payroll qualified:
• 100% of company’s payroll is committed to R&D• But: 40% of payroll ($200K) is funded by SBIR and is not qualified:
• Projects funded by grants are not allowed (per IRC § 41(d)(4)(H))• FICA taxes (currently 6.2%) = $31,000• R&D credit estimate (using 10%): $30,000
Example 4
•SBIR-Heavy (Some Payroll is Federally Funded)• Founded: 2015• Payroll: $500K• Only 60% ($300K) of payroll qualified:
• 100% of company’s payroll is committed to R&D• But: 40% of payroll ($200K) is funded by SBIR and is not qualified:
• Projects funded by grants are not allowed (per IRC § 41(d)(4)(H))• FICA taxes (currently 6.2%) = $31,000• R&D credit estimate (using 10%): $30,000
HIREtech Overview• Corporate Headquarters in Houston, Texas
• International Offices in Sydney, Australia and Toronto, Canada.
(Grants)
•Experts in Technical Tax Incentives• We help CPAs’ and their clients recover millions
in R&D Tax Credits.• Similar to medicine, CPA firms refer clients to
us because we are R&D Tax Credit specialists.
HIREtech Overview
•Experts in Technical Tax Incentives• Our legal, technical (engineering) and
tax knowledge of IRS Section 41 results in higher tax credits.
• Our staff includes experienced: IP Attorneys, R&D Engineers, Ph.D. Scientists, and IRS Audit Experts from national tax consulting firms.
HIREtech Overview
Free Audit DefenseWe stand behind our services!
HIREtech Process
QUESTIONS?
HIREtech200 Westlake Park Blvd.
Suite 501Houston, TX 77079
Jacob: ext. 151, [email protected]: ext. 112, [email protected]
RESOURCES• Internal Revenue Code section 41 (IRC § 41)• PATH Act Bill, Division Q, Part 3, Section 121
