The traditional new business start up
process of painstakingly developing a
new product and preparing a comprehensive business plan before
the market has increasingly been replaced by the Lean Startup.
The Lean Startup
methodology has been described in detail by Eric Reis in a new
aptly entitled "The Lean Startup." The Lean Startup business
integrate nicely with the statutory tax requirements for a
Federal R&D Tax
Many of the private industry and industry supported University R&D efforts will be eligible for Federal Research and Development tax credits. Enacted in 1981, the federal Research and Development (R&D) Tax Credit allows a credit of up to 13% of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:
Eligible costs include employee wages, cost
of supplies, cost of testing,
contract research expenses, and costs associated with
developing a patent. On
January 2, 2013, President Obama signed the bill extending the
Tax Credit for 2012 and 2013 tax years.
A Lean Startup is a reiterative process
that eliminates traditional
unnecessary costly time consuming business start up steps by
quickly bringing a
business to market. With traditional startups a long period of
time is spent
perfecting the new product and preparing a comprehensive
business plan. With a
Lean Startup a first mover can create and dominate an entire
quickly. Business plans get replaced by presenting business
ideas and quickly
presenting a Minimum Viable Product (MVP) which is actually a
in process. Not only is extended start up time expensive with
long term development approach, the new business may miss the
market allowing a
competitor to control the market or the new startup may miss
the opportunity to
pivot or quickly adapt the product to a larger business
of famous companies that moved quickly to market using lean
Groupon, IMVU, Votizen, Wealthfront, Aardvark, and Zappos.
The Lean Startup approach anticipates a Minimum Viable Product (MVP) that is used to test market acceptance. MVP's are introduced to the market as soon as possible when the developing product is at the minimum level where a prospective customer can examine the product.
The Federal R&D tax credit eligible expense amounts include labor and material costs for prototypes. Traditional more developed startups have prototypes eligible for the R&D tax credit that are much further evolved than MVP's. Accordingly, MVP new product iterations which by definition are less developed would be even stronger R&D tax credit candidates.
Lean Startup methodology is becoming the prevalent new business model. Lean Startup taxpayers should retain their step by step lean model process iteration documentation and utilize that documentation as part of the required R&D tax credit documentation.
Charles G Goulding is a practicing attorney with experience in R&D tax credit projects for a host of industries.
Jacob Goldman is the VP of Operations at R&D Tax Savers.
Sean Brophy is a Tax Analyst with R&D Tax Savers.
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