Grants or Startup Tax Credit : Which one is right for you? Web ebinar 19 th , 2018 Septem ember er 1 2018 Jacob Setterbo , Ph.D., Director of Grants Jim Foster , J.D., National Tax Director
Pres esen entation on O 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
Ex Example Taxable I Income vs. Time
Why Gr y Gran ants? s? Grants
Why Gr y Gran ants? s? Top 4 Reasons: 1. Not a loan – no repayment 2. Non-dilutive – no equity forfeiture 3. No intellectual property (IP) forfeiture 4. Provides recognition, verification, and visibility
Which Grants ts? • 10s to 100s depending on your topic • Choose your battles wisely… Entrepreneur Tenured Professor
Which Grants ts? #1 Professors/ Universities Funds research and development ( R&D ) Small that has the potential Businesses for commercialization !
SBIR/ R/ST STTR – Par artici cipating A Agenci cies • Agencies 1. Department of Agriculture 2. Department of Commerce – National Institute of Standards and Technology – National Oceanic and Atmospheric Administration 3. Department of Defense 4. Department of Education 5. Department of Energy 6. Department of Health and Human Services – National Institutes of Health 7. Department of Homeland Security 8. Department of Transportation 9. Environmental Protection Agency Figure : SBIR/STTR Budgets by Agency (FY13) - ~$2.3B Total 10. National Aeronautics and Space Administration 11. National Science Foundation
SBIR/ R/ST STTR – Eligibility • 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/ R/ST STTR – Eligibility – Faci ciliti ties/Team • 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/ R/STTR – Revi view P Proces ocess & & Succ ccess R Rates ( (NIH) • Most reviewers are professors • NIH SBIR/STTR: • 15-20% get funded
SBIR/ R/STTR – Revi view P Proces ocess & & Succ ccess R 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/ R/ST STTR – Award I Information • Phases • Phase I : feasibility • Fast Track : Phase I & II • Phase II : continuation • ( Phase III : on your own) Phase I Phase II Phase III $150K - $225K $1M - $1.5M … 1 year 2 years Fast Track
SBIR/ R/ST STTR – Timeline t to Fu Funding • April 5 th Deadline (NIH) – EXAMPLE 1 • First Submission • ~6-8 months from submission to award Scientific Advisory Submit Review Council Begin R&D PROJECT – Phase I 2 mos . 3-4 mos. 2-4 mos. 12 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
SBIR/ R/ST STTR – Timeline t to Fu Funding • April 5 th Deadline (NIH) – EXAMPLE 2 • Resubmission • ~12-14 months from submission to award Scientific Scientific Advisory Submit Submit Council Review Review Begin R&D Project – Phase I 2 mos . 2 mos . 3-4 mos. 3-4 mos. 2-4 mos. 12 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 Jan 2 3 4
Why R&D T D Tax Credi dits? R&D Tax Credits (2015) TAKE-AWAY: R&D Tax Credits (2016+) You no longer need Grants taxable income!
Why R&D T D Tax Credi dits? Top 3 Reasons: 1. Not a loan – no repayment 2. Non-dilutive – no equity forfeiture 3. No intellectual property (IP) forfeiture 4. Provides recognition, verification, and visibility
R&D D Tax Credits – Eligibility & Succe uccess R s 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 D Tax Credits – Timeline to Fun unding • March 15 th Deadline – EXAMPLE 1 • Standard R&D Tax Credit [ companies with taxable income ] File Taxes Credit provides Qualifying R&D EXPENSES immediate savings. 12 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 2017 2018
R&D D Tax Credits – Timeline to Fun unding • March 15 th Deadline – EXAMPLE 2 • Payroll (Startup) R&D Tax Credit [ no taxable income required ] File Taxes Credit Offsets Payroll Taxes Qualifying R&D EXPENSES Offset begins the quarter after filing 12 mos. Jan 2 3 4 Jan 2 3 4 5 6 7 8 9 10 11 12 Jan 2 3 4 5 6 7 8 9 10 11 12 2019 2017 2018
GRAN ANTS v vs. R&D D Tax Credits Grants R&D Tax Credits Success Rate 15-20% (judged by professors) Near 100% (judged by IRS rules) Forward or Forward: Future projects Backward: Past projects Backward-Looking? Timeline to 6-10 months from time of 0-3 months from time of filing Money/Credit submission Amount $225K for Phase I 8-12% of Qualifying R&D $1.5M for Phase II You should do both if possible!
Pres esen entation on O 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 i 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 o of t the R&D D Tax Credit • TIMELINE: 3 HISTORIC CHANGES! [Protecting Americans from First adoption of R&D tax credit Tax Hikes (PATH) Act of 2015 ] (The Economic Recovery Tax Act of 1981) Several expirations of credit, then retroactive extensions… 1980 - 1985 - 1990 - 1995 - 2000 - 2005 - 2010 - 2015 - … Small to mid-size companies made eligible to take the R&D (wage-based) tax credits
History o of t the R&D D Tax Credit • PATH Act of 2015 1. Made R&D Tax Credit PERMANENT for the first time 3 HISTORIC CHANGES! 2. Small Businesses can claim the credit [Protecting Americans from against the Alternative Minimum Tax ( AMT ) Tax Hikes (PATH) Act of 2015] 3. Startups can claim up to $250K of the credit against the company's payroll tax 1980 - 1985 - 1990 - 1995 - 2000 - 2005 - 2010 - 2015 - …
1) 1) R&D Tax Credit is now PERM RMANEN ENT • Businesses can now budget for tax credits in confidence • Credit will not expire in the middle of the fiscal year
2) Small B Businesses can claim the credit against AMT Scenario 1: Scenario 2: 2015 TMT>RTL TMT<RTL Alternative Minimum Tax OVERVIEW R&D credit • RTL=Regular Tax Liability TMT • TMT=Tentative Minimum Tax AMT • AMT=Alternative Minimum Tax RTL R&D Tax Credit Credit can offset the spread RTL • (spread = RTL-TMT)
2) Small B Businesses can claim the credit against AMT Scenario 1: Scenario 2: 2016 (PATH Act Changes) TMT>RTL TMT<RTL Alternative Minimum Tax OVERVIEW • RTL=Regular Tax Liability TMT • TMT=Tentative Minimum Tax R&D AMT (Set to $0 for credit utilization) credit • RTL R&D • AMT=Alternative Minimum Tax credit R&D Tax Credit RTL Eligibility : Average annual gross • receipts must be < $50M Credit can offset any taxes paid! •
2) Small B Businesses can claim the credit against AMT CHANGES explained using TI vs. Time Graph
2) Small B Businesses can claim the credit against AMT 2015/old
2) Small B Businesses can claim the credit against AMT 2016/new
3) S Sta tartups can claim the credit against payroll tax 2016/new
3) S Sta tartups can claim the credit against payroll tax • PATH Act of 2015 [no taxable income required!] • For the 1 st 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) S Sta tartups can claim the credit against payroll tax FORM 6765
3) S Sta tartups can claim the credit against payroll tax FORM 941 FORM 8974
What q t qualifi fies as R&D? Traditional Definition Tax Definition (“4-Part Test”) 1. New or Improved Business Component Product • Process • Software (Internal or External) • Technique • Formula • Invention • 2. Technical Uncertainty 3. Process of Experimentation 4. Technological in Nature
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