Emerging technology and startup companies face many unique challenges that mature businesses don’t necessarily encounter.
Some of these challenges are fundraising and attracting potential investors, product development, cashflow management and talent attraction with a limited budget. In addition to these challenges, many early-stage and emerging technology companies face unique and technically challenging accounting requirements with limited internal accounting resources. One of these areas that has both unique accounting and tax implications is research and development costs.
Arguably, one of the biggest spends for an emerging technology or early-stage company is research and product development. These costs include some of the following items:
- Materials, equipment and facilities
- Salaries, wages and other related costs
- Contract services for research and development
- Reasonable allocation of indirect costs
- Computer software used in research and development
It is very difficult to determine if research and development activities will result in a future economic benefit; therefore, generally speaking, these costs should be charged to expense as incurred and disclosed in the financial statements in accordance with Accounting Standards Codification (ASC) Topic 730. If certain materials and equipment costs have a future alternative use, those costs may be capitalized and depreciated over their estimated useful lives, with depreciation expense being recognized as a research and development cost.
In addition to the financial reporting side of research and development costs, there are certain unique tax considerations as well. There is a possibility for early-stage companies to claim a research and development tax credit.
Certain qualified small businesses (businesses with less than $5 million in annual gross receipts and within five years of generating gross receipts) may be eligible to claim an annual credit of up to $250,000 against their payroll tax. If the business is not a qualified small business, there may still be an opportunity to claim this credit against income tax.
If you have any questions with respect to the accounting or tax implications regarding research and development costs, please feel free to reach out to us.
About Schneider Downs Emerging Technology Services
Schneider Downs understands the ever-changing landscape of the emerging technology industry. Our team of seasoned professionals has experience working with emerging technology companies in all phases of their evolution. To learn more visit our dedicated Emerging Technology Services page.
