A New Non-Dilutive Funding Source for Startups

Startups can now benefit from both grants and R&D Tax Credits

The R&D Tax Credit was created by Congress to encourage R&D investment within the United States. For years, I have told prospective grants clients (which are mostly life science startups) that “HIREtech’s main business is R&D Tax Credits, but that is only for companies that are profitable.” It did seem a bit unfair that these life science startups, which perform PRIMARILY R&D but have no income tax for years, could not benefit from the R&D Tax Credit (FIGURE 1).

This disparity between profitable companies and startups has finally been resolved, and startups can finally benefit from R&D Tax Credits! The gap was closed by the PATH Act, signed Dec 18, 2015 (FIGURE 2). In addition to making the R&D Tax Credit permanent and allowing it to be applied against the Alternative Minimum Tax (AMT), the PATH Act allows startups to use the R&D tax credit to offset payroll taxes for up to 5 years. This change is particularly beneficial for life science startups, because it often takes several years before their first gross receipts. Plus, everyone has to pay payroll taxes!

FIGURE 2: In 2016 and beyond, even startups are eligible for the R&D Tax Credit.

 

Grants and tax credits are similar in that they are non-dilutive (you don’t lose equity) and you don’t have to pay them back. Their main difference is grants are forward-looking whereas tax credits are backward-looking. For grants, you have to convince reviewers (often professors) that your proposed, future project is significant, innovative, and will have a great impact on public health. The national “success rate” for SBIR/STTRs is typically somewhere around 15-20%. For tax credits, you just have to be able to prove that you performed R&D the previous year. While my lawyer colleagues at HIREtech can clarify who is eligible, what is considered “qualified research expenditures,” and how to calculate the credit, I can assure you that the “success rate” for R&D Tax Credits is near 100% if you follow the rules.

CONCLUSION: As a life science entrepreneur, it is in your best interest to seek various funding sources. Grants are an excellent source of non-dilutive funding that can push your project forward, but, as noted on www.sbir.gov, they are “highly competitive.” Fortunately for startups, the new R&D Tax Credit rules allow you to offset your payroll taxes if you perform R&D in 2016. Like grants, these tax credits are non-dilutive, but, unlike grants, they are nearly a sure betwhen calculated correctly!