Why R&D Tax Credits Matter for Small Business Owners

Making payments on time and getting taxes right are two fundamental elements of running a business. Yet, they are high-stakes and time-consuming tasks for small businesses to manage manually. This creates a huge opportunity for Justworks to, well, just work and give our customers peace of mind so they can focus on growing their business. 

I often describe our payments platform as the brain of Justworks. At the core of everything we do sits this complex rules engine that collects, allocates, and routes money. It moves tens of billions of dollars across millions of transactions each year. For the hundreds of thousands of counterparties we transact with—employees, contractors, benefits providers, vendors, and governments—this all happens seamlessly and accurately behind the scenes. And that’s how they like it!

But, in recent years, we’ve also challenged ourselves to bring the power of our payments and tax technology to the forefront. Increasingly, we want it to not just have an impact on our customers’ operational efficiency and confidence, but also a more direct positive impact on our customers’ businesses. This is where R&D tax credits come in.

Small businesses are the engine of innovation in America. Yet, they often face significant challenges when it comes to investing in research and development (R&D). The costs associated with R&D can be high, and many small businesses struggle to stay competitive in their industries—especially when competing with larger businesses. 

What are R&D Tax Credits?

The U.S. first introduced the R&D tax credit in the early 1980s as a way to support innovation and competitiveness in the face of growing international competition. Over the years, the government has expanded and modified the credit to make it more accessible.

Significantly, starting in 2016,  qualified small businesses could apply up to $250,000 of the R&D tax credit against their payroll tax obligations.  Additionally, effective in 2023, this amount has been dramatically increased, going from a maximum of $250,000 up to $500,000. Due to the new inclusion of employer medical taxes, in addition to social security taxes that can now get refunded quarterly by the tax credit, credit recovery speed will also accelerate in 2023. 

Challenges Facing Small Businesses Claiming R&D Tax Credits

For small businesses looking to claim research & development tax credits, it's important to understand how the IRS defines R&D expenses. As with the COVID relief programs, this is easier said than done—especially when you have other things on your plate as a business owner.

Navigating the complex rules and regulations associated with claiming the credit can be challenging for many small businesses, and some even end up leaving money on the table. Additionally, the cost of complying with the requirements of the R&D tax credit system on a go-forward basis can be prohibitive for small businesses. To many, it doesn’t seem worth it. 

However, during this economic environment in particular, taking advantage of tax credits like research and development can be incredibly helpful, especially in the current climate where the cost of capital has dramatically increased. Small businesses and startups face the difficult choice of borrowing capital at decade-high interest rates or raising equity at unfavorable market valuations. Tax credits are non-dilutive equity that can materially impact a business’ cash position. 

Lessons from the Pandemic

The Payments & Tax team at Justworks is not new to rolling out payroll tax credit solutions for our customers. During the first year of the COVID-19 pandemic, small businesses had to react quickly to changes in regulations, tax credit programs, and filing deadlines—or risk missing out on critical government relief. Over the course of the pandemic, tax credits emerged as Congress’ preferred way of supporting small businesses, and the government relied heavily on the infrastructure of the payroll industry to do so. 

Every day, we heard from hundreds of customers about how difficult it was to grasp what was going on and what they might be eligible for. They needed to know how and when these programs would actually impact their ability to pay their people or offset their tax obligations—they didn’t have the time to figure out the mechanics. Small businesses were focused on taking care of their teams, supporting their own customers, and planning for uncertainty.

Thanks to Justworks’ next-generation payments engine, we were able to react quickly and launch major product updates in response in a matter of weeks… not months. These new tools enabled our customers to easily take advantage of paid leave tax credits under the Families First Coronavirus Response Act, defer the employer portion of social security taxes, and access Employee Retention Tax Credits. 

Adoption-wise, these tools were some of our most in-demand launches ever. By bringing our payments and tax technology to the forefront during the pandemic, we saw how we might apply it to other evergreen government incentives to help small businesses, too.

How Justworks Customers Can Take Advantage of R&D Tax Credits

To help eligible small businesses take advantage of research and development tax credits, we’ve made it easier for them to upload and submit their Federal R&D tax credit documentation to Justworks in just a few steps. 

Under the new “R&D Tax Credit” page in Justworks, we’ve built a guided experience. Customers can simply click the “Get Started” button to fill out the eligibility form and upload the Form 6765, which they will need to file with the IRS with their income tax return before submitting to Justworks. After that, Justworks will handle the rest (including claiming your tax credit on Form 941 and sending them the funds every quarter). 

For further support, we’ve also partnered with Aprio and Boast to help small businesses connect with R&D tax experts. As is often the case, if you’re not sure how to start or if you qualify for these credits, you can connect with one of our partners to get started.  

Boast is a FinTech company that has over 60 integrations to pull data to calculate your credit and uses an AI powered data classification system to reduce the time to calculate the tax credit. They are SOC-2 compliant and have automatic audit documentation & protection for your tax credit.

Aprio is a Top 50 CPA led advisory firm. They offer full-service studies and audit defense of the Federal and State Credits for R&D tax credits, as well as comprehensive internal R&D services. They will educate your staff on qualified activities and provide an executive summary of your tax credit findings that can serve as audit support.

At Justworks, we’re always looking for ways to create ease for our small business customers. When thinking about what’s next for R&D tax credits, we’re building products, reports, and insights for our customers and their accountants to easily track and reconcile R&D tax credits all in one place.