Tax Season is Here!

This is the time of year to make sure your 2017 financials are in order, and that you are organized and ready to file the necessary tax forms, including 1099’s, W-2’s/W-3’s, Federal and State returns. There are several special tax considerations of which Research & Development stage companies should be aware, so as to minimize your tax burden:

1. Revenue Recognition for grant-funded companies – If your company receives a substantial portion of its income through government grants, revenue recognition policies can have a significant impact on your tax burden.  Establishing appropriate revenue recognition policies for your 2017 financial reporting is particularly relevant given new tax laws going into effect in 2018.
2. The Research & Experimentation Tax Credit or R&D Tax Credit is a general business tax credit under Internal Revenue Code section 41 for companies that incur research and development (R&D) costs in the United States.  Early stage companies are now able to claim a credit against their payroll tax even if they pay no income tax. In addition, some state R&D programs provide for refundable credits.  Examples of activities typically considered to fall within the research and development functional area include:
   • Research to discover new knowledge
   • Applying new research findings
   • Formulating product and process designs
   • Testing products and processes
   • Modifying formulas, products, or processes
   • Designing and testing prototypes
   • Designing tools that involve new technology
   • Designing and operating a pilot plant
3. Corporate structure – Several considerations are important when determining your corporate structure (LLC, S-Corp, or C-Corp), including current and future ownership, capital needs, and granting agency requirements, and tax considerations.
4. Accounting method – You will need to determine whether to file taxes based on an accrual basis or cash basis method of accounting.  The main difference between accrual and cash basis accounting lies in the timing of when revenue and expenses are recognized. Determining whether you will adopt cash or accrual based accounting may have a large impact on your tax burden.  This is especially important for grant funded companies who may incur expenses on a grant in a different calendar year from which they receive the grant funds.