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R&D Tax Credits

Small Businesses, Big Rewards

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It’s hard to understate the importance of the virtuous cycle of innovation—and of the R&D that powers it. Innovation can drive technological breakthroughs, which drive productivity, which drives economic growth, which drives employment, which drives wealth, which drives more government receipts.   

The benefits don’t stop there. COVID-19 has shown us how innovations can also bolster our resilience in the face of crisis. Just imagine the years 2020 and 2021 without the remote-work technology and fast internet many of us now take for granted.

Visualize the state of the world today—human, economic, social—had several new and effective vaccines not been developed and deployed (at least in privileged countries), at record speed. Where would we be without R&D? 

A growing number of governments are recognizing that when it comes to jumpstarting wounded economies, R&D-heavy startups have a special role to play. These seat-of-the-pants enterprises—with audacious ideas and a burning desire to bring them to the marketplace—punch above their weight.

They inject new energy and new money into the economy. They hire new people, rent, buy, or build new buildings, and create (or improve on) new products and services.

Of course, established companies spend on R&D, too, and governments reward them for doing so. But there’s a key difference: Old-timers tend to recycle profits and tax credits, instead of investing in new R&D spending—with relatively less potential effect on economies than their scrappy new competitors.  

Baby companies, like baby humans, are the future, and they’re investing in their own survival. A growing number of governments are seeing the advantage in nurturing them, too—by offering special treatment to startups who are likely to inject new dollars (or yen, or yuan) into job-creating innovation. Here’s how these incentives play out around the world.  

Five Countries Where Startups Matter 

United StatesWhile the U.S. R&D tax credit program is four decades old, it wasn’t until 2003 that the government began to address some of the structural issues that were unwittingly throttling the entrepreneurial and innovative energies of startups. First came the elimination of the Discovery Rule, which required that R&D activities be new to the world (rather than just to the taxpayer).

Now, startups could focus on improving a product, service, or process, rather than having to invent it—opening the door to new energies and new industries. 

Then, the 2015 PATH Act took a hammer to the biggest obstacle facing early-stage companies: the requirement to be profitable in order to use R&D tax benefits—despite the likelihood that pre-revenue and tax loss startups are the companies that could most use that help. 

Today, startups in a loss position can apply to offset up to a quarter-million dollars of payroll taxes for up to five years. More promising news: As of summer 2021, several bills in the legislative pipeline point to still-more-generous conditions on the horizon for startups. 

AustraliaDown Under, R&D tax incentives are especially sweet for small enterprises: any company with revenues below A$20 million (about US$15 million) can enjoy a 43.5% credit for their R&D expenses—and crucially, that amount can be refunded in cash if there isn’t enough income to offset it. Australia has a long history of generosity with SMEs: Over the years, these firms have accounted for nearly 90% of participants in its R&D tax incentive program. As of July 2021, that generosity has been increased, with an upper-level deduction cap boosted from A$100 million to A$150 million—music to the ears of innovators with more ideas than cash.  

New Zealand This island nation has been riding a wave of optimism since its stellar performance during the pandemic. That’s good news for startups, especially since the Kiwi R&D regime, long the province of direct grants, had started to find its footing with a generous new tax-incentive program—including new, refundable incentives for cash-strapped innovators withtax losses. In its first two years, 100% of the benefit went to SMEs, helping spark a startup culture. A new government doubled down: pledging to substantially beef up the country’s R&D overall spend, bolstering a double-barreled scheme which also includes a 15% tax credit on eligible expenditures (within specified limits), and promising an investment of NZ$1 billion in new funding over four years. 

Japan: It’s definitely a good time to be a startup in Japan—a nation once synonymous with cutting-edge consumer technology and design that has been striving to get its innovation mojo back. The island nation lavishes extra R&D attention on its SMEs, which it sees as engines of rebirth in the wake of the country’s worst slowdown in 75 years (a humbling period intensified by the pandemic-driven postponement of the 2020 Summer Olympics and political turmoil). As part of the government’s goal of doubling the number of startups by 2024, Japan, like China, is focusing plenty of energy on R&D venture companies, offering R&D tax credits worth up to 40% in certain circumstances. Other incremental targeted incentives can push the generosity for innovation-heavy small companies significantly higher—up to 60% off their corporate tax bill, if all the conditions are met.  

China: If you’re a high-tech startup, China may not be the first place that comes to mind to seek R&D credits, given its unquestioned prominence in manufacturing. But the country’s industrial policy has dramatically shifted direction: Today’s goal is to win the global innovation race (and outpace the U.S.’ dominance). China’s diversified, well-financed R&D program extends to local venture-capital companies who invest in startups. The conditions are complicated, but up to 70% of that investment can be deducted against income. China also offers tech-focused SMEs a generous 175% super deduction on qualifying expenses, and has announced it will provide loans to small- and micro-sized companies.  

Governments Are Stepping Up: Startups Need to Meet Them Halfway  

It’s encouraging to see a growing number of countries taking a fresh look at the outsize role startups play in the health and resilience of their economies. It’s good to see more and more of them recognize that in the long run, new ideas—even untested ones, even ones that fail—are worth as much as recirculated ideas.  

If you’re a startup, accustomed to bootstrapping your way to eventual success, you may not even realize that you’re not alone in this fight—that being on the radar of government agencies such as tax authorities may actually be good. 

You might not be aware that there are extremely generous incentives available to you for the asking—simply to do what you are already doing, no matter the industry. Sadly, in many countries only a tiny fraction of eligible companies ever claim the money that’s been earmarked to help them succeed.  

It’s hard enough starting a company during a pandemic—or at any time, really—and guiding it to success in the marketplace. What a shame it would be for an ambitious, innovative company not to seize a much-needed, readily available benefit.  

Don’t be that company. There may never be a more propitious time to bring your innovations, improvements, ideas, services, products and processes to the world—and there certainly has never been a more favorable time to take advantage of the R&D tax incentives available to you right now.