There’s nothing worse than finding out you could’ve qualified for government funding after it’s too late, especially when your business is in its infancy and you could use all the cash you can get your hands on.

Most of the founders we advise aren’t aware of the financial help that’s out there, or which programs are available for their business. 

We introduce two specific opportunities for government funding that are important for startups to know about: national tax credits and state grants.

A tax credit for U.S.-based research and development

The rapid growth of technology and, in particular, software engineering and artificial intelligence, has made research and development (R&D) an even more important factor in many businesses’ operations. But even if you’re not hiring professional engineers or scientists, any amount of experimentation could help your business qualify for assistance.

Governments tend to support companies that innovate, but public funding can’t singlehandedly support all the R&D being carried out today. That’s why they reward private investments in R&D, too, in the form of a tax credit.

The R&D tax credit has been around since 1981, but it’s set to change a bit in 2022. Here are the latest details about qualifying for this credit:

  • R&D expenses must be domestic to the U.S. This requirement can apply to any step in the process. For example, if you’ve outsourced your research but you have a U.S. oversight team, only the money it takes to maintain your U.S. activities will qualify.
  • Your organization must have less than $5 million in gross receipts for the year to which the credit applies, and no interest income or gross receipts dating back more than five years. This is especially great news for young startups.
  • Starting in 2022, you’ll be required to amortize, or pay off, expenses over five years, rather than claiming them immediately. Keep an eye on changes to the tax code to be sure you’re correctly taking advantage of the credit.

Some of our clients worry about losing money if they don’t currently generate enough revenue to pay income taxes. Still, you’ll want to look into the R&D tax credit even if you don’t currently have much tax liability to offset because the credit can be applied 20 years into the future. It’s also sometimes possible to apply it retroactively to open tax years.

Luckily, you can now calculate the R&D tax credit and use it to offset your employer match of payroll taxes. Instead of dipping into your pocket to match your employees’ FICA, social security, and other federal taxes, you can put small dents in your R&D credit over time.

If your business does qualifying research in a field such as life sciences or healthcare, this government funding source could help you significantly conserve cash in the early stages.

State and local incentives or grants

With the rise of remote and inter-state businesses, there’s more competition between states trying to attract small business owners — and specifically, the jobs and money they bring with them.

If you’re looking to establish a brick-and-mortar storefront or office, you could take advantage of state incentives such as grants for following through on capital improvements and growth that you promise up-front.

Some states also allocate grants that function as gap financing: covering the cost difference between opening a business in one state vs. a more expensive one.

Amounts vary dramatically. In the Tri-State Area, for example, a credit can be as low as $1,500-$2,000, or as high as $15,000, per employee per year for 10 years. These potentially large credits can be especially helpful if you’re bringing on employees with high salaries that you’d like to offset.

Finally, there are Angel Investor Tax Credit Programs worth leveraging in 29 states.

In our experience, most startups should look into government funding. It can be a serious source of cash flow if you do some due diligence and set your business up to qualify.

This article is based on an episode of the WTFAQ Podcast.

Get straightforward answers to all of your startup questions from Wiss CPA Matthew Barbieri.


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