“What is it? Is it legitimate? Do you think it’s worth my time?” I cannot tell you how many times I heard these questions when I first started educating our clients about the federal R&D tax credit at the beginning of the year.
As you may or may not know, 2017 marked the start of qualified small businesses being able to claim up to $250,000 per fiscal year, applying it against their Social Security taxes to help offset their costs for research and development. It’s unique because it is an income tax credit, but it can be claimed against payroll taxes, which means it’s now available to a huge number of small businesses that were not eligible before.
The Congressional Budget Office estimates that the government will dole out $10 billion to small businesses for the new payroll tax portion of the credit in fiscal year 2016, and that figure will increase to $21 billion by 2026. However, to many businesses, including my clients, it sounded too good to be true. Proving it to be a genuine and relevant credit was harder than anticipated, but nine months from when it was first announced, we’ve successfully conducted numerous audits of R&D expenses and filed the necessary Form 6765 documents to set small businesses on the path to claiming the credit.
Here are some tried-and-tested strategies to help educate clients on what the federal R&D tax credit is, and how it can help them.
1. Start with the basics. Pull together a simple one-pager, which addresses the common who, what, why, when, and where, as well as the common questions raised by previous clients. This will help businesses understand the full picture of why this matters to them, as well as saving you time in the long run.
2. Proactively get word out there. Craft an e-mail campaign using a provider like MailChimp, which starts by gently introducing the tax credit and follows with more in-depth materials, such as a whitepaper or Q&A with a client who has just successfully filed. This is a great way to prove yourself as a valuable partner to your existing clients while engage potential customers. Alternatively, picking up the phone to talk through it and address any questions and doubts — while it can be time-intensive — can be worth its weight in gold.
3. Build a cost saving calculator. With many businesses likely to ask for a ballpark estimate of how much they could save, work with a software developer to build a simple calculator on your Web site. If this is not possible, the quick estimate is that clients will be able to capture a ~10 percent credit off of the R&D expenses that they allocate. For example, $150,000 in R&D payroll will result in a $15,000 credit check from the IRS.
4. Prove the process is pain-free. Be sure to emphasize how simple the process is from start to finish. For example, some payroll providers now handle the quarterly filings automatically. Gusto even offers small businesses a real time R&D tax credit option, which allows the credit to be deducted from each business’ payroll instantly. This means that instead of paying employer Social Security taxes and getting a refund for them at the end of the quarter, businesses pay less in taxes throughout the quarter and keep that money. Proving you can save their business dollars in real time can be the clincher.
5. Be transparent about your fees. Avoid surprises later on by being upfront about the cost of your services and what exactly is included from the start. While there is no set industry standard, most accountants will charge between 15-25 percent of the captured credit amount, often with a minimum fee involved. However, there may be pricing corrections come 2018 once CPAs have full visibility into the time commitments the new R&D payroll tax credit will require.
As a small business or startup, saving valuable capital during the early days is critical to success. By persisting with educating your clients on something that greatly impacts their bottom line, you could be instrumental to their long-term success.