R&D Tax Credits — The Big One

If you’re writing code, you probably qualify for the federal R&D tax credit under IRC Section 41. And most tech companies we talk to either don’t know about it or assume it’s only for pharmaceutical labs and hardware manufacturers. It’s not.

Developing a new feature for your SaaS platform? That counts. Building internal tools that improve your product’s performance? That counts too. The credit is worth 6-8% of qualifying expenses, which includes developer salaries, contractor payments for engineering work, and cloud computing costs tied to development (not production hosting).

For a startup with $500,000 in annual developer payroll, that’s $30,000 to $40,000 back. Startups with under $5 million in gross receipts can apply the credit against payroll taxes instead of income taxes — which matters when you’re pre-revenue or barely profitable. You claim it on Form 6765.

SaaS Sales Tax in New York

Here’s where it gets ugly. New York taxes SaaS as a taxable service. If you’re selling to customers in New York State, you need to collect sales tax at the applicable rate — which in NYC is 8.875%. A lot of SaaS founders assume that because their product is “in the cloud,” sales tax doesn’t apply. Wrong.

The good news: if you’re selling B2B and your customers are resellers or using your software for resale purposes, they can provide you with a resale certificate (Form ST-120) and you don’t collect tax on those transactions. But you need the certificate on file before the sale, not after an audit.

Multi-state nexus is the other headache. If you have employees or contractors working remotely in other states, you might have sales tax obligations there too. We map out your nexus footprint and set up the right collection and filing processes so you’re not blindsided during a state audit.

Startup Entity Structure and Equity Compensation

Most VC-backed startups incorporate as Delaware C-corps. That’s fine — investors expect it, and the legal infrastructure is well-established. But you still need to register as a foreign corporation in New York and pay the state’s franchise tax based on your capital base or income, whichever produces a higher bill.

Equity compensation is where founders trip up. Stock options (ISOs and NSOs) and restricted stock each have different tax treatments:

• 83(b) elections — founders who receive restricted stock need to file this within 30 days of the grant. Miss the deadline and you’ll owe ordinary income tax on the spread when the stock vests, which could be a massive number if the company has appreciated
• ISOs — no regular income tax at exercise, but the spread is an AMT preference item. If you exercise a large block, you could trigger Alternative Minimum Tax
• NSOs — taxed as ordinary income at exercise. Withholding is required, and the company needs to report it on the employee’s W-2

We’ve seen founders owe six figures in unexpected tax because nobody told them about the 83(b) election. That’s a conversation we have early.

Accounting Method and Revenue Recognition

SaaS revenue recognition trips up a lot of companies, especially when they start dealing with annual contracts. If a customer pays $12,000 upfront for a 12-month subscription, you don’t necessarily recognize all of that as income in the month you received it. Under accrual accounting, you recognize $1,000 per month as the service is delivered.

For tax purposes, the rules around advance payments (under IRC Section 451(c)) let you defer recognition for up to one year. We set up your books so that your financial statements, your investor reporting, and your tax return all tell the same story — or at least reconcile cleanly when they don’t.