New York: Startup Friendly, R&D Welcome

If you’re starting a new business in 2014, you may want to head toward New York for several reasons. Thanks to START-UP NY, you can run that business tax-free for 10 years. That means no business, corporate, state or local taxes, sales taxes, property taxes, or business fees. But what if you’re already operating a business in New York and you don’t qualify for all that tax-free startup “swag”? Not to worry: you’re still eligible to benefit under Treasury rules by claiming various tax credits for your business, among them the R&D credit.

The State of the Union…R&D Tax-Wise

Lobbyists representing companies of all sizes and scopes have long asked Congress and the IRS for expanded R&D credits; sometimes these credits broaden, and sometimes they contract, depending on the administration. Suffice to say that if the IRS was completely cooperative with the wishes of businesspeople across the U.S., the country as a whole would have the finest R&D tax credits in the world!

In the meantime, states have stepped up to the plate and enacted their own R&D credit allowances, dangling incentives in front of both startups and relocations.

In some locales, businesses have been able to completely negate their state income tax liabilities with generous R&D credits. And this is good for more than just a given company’s bottom line: generous tax benefits help turn around sagging economies and provide work for thousands of university graduates in technical areas. After all, what’s a more classic picture than the dedicated scientist, decked out in his/her lab coat and working on the next big invention?

The Rising Tide that Raises All Boats

In a word, the R&D tax credit is a “jobmaker” that has a great ripple effect: when a startup gets the kind of financial boost that New York gives it, it has more cash to invest back into the business for expansion, innovation, and more job creation. Bloomberg refers to R&D credits for startups as a “double-barrel benefit”— no surprise, as the National Bureau of Economic Research indicates that the biggest “engine” for job growth is new business. It’s a chain reaction of the best possible kind.

The First Link in the Chain

Many businesses unwittingly cheat themselves out of this R&D benefit by not pursuing it in the first place — out of a mistaken belief that they don’t qualify. The good news is you qualify if you’re doing research and experimentation to develop a new process or product or refine an existing one. That covers a broad range of companies, business models, and industries. You don’t need to invent the wheel — but if you’ve found a better way to keep those wheels rolling, you might have a nice tidy claim, indeed.

Make Sure of the Numbers

Treasury regulations are sticklers for documentation, so make sure you’re accurately tracking your costs and expenses for any research your company does. When it comes to the IRS, the burden of proof is on you as a taxpayer. Have sufficient information on hand when you submit your claim so that the IRS doesn’t have wiggle room for questions; that’s the safest way to avoid a credit being disallowed or, worse, being subject to an audit. In this respect, if your business uses project-based accounting, you might have an easier time matching activities to costs than a cost-center-based business; however you do it, though, have methods in place for both quantifying what you spend and explaining why it qualifies for a credit.

Whichever Path You Take…

Whether you’re taking advantage of New York’s startup-friendly business climate or perhaps realizing for the first time that this R&D credit is for you, it’s wise to consult a professional business and corporate tax advisor. That way, you’re positioned in the best possible way to maximize your benefits, increase your cash flow, and grow your business along with enhancing the economy in your state.

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