Lean-New-Business-Startups
The traditional new business startup
process of painstakingly developing a new product and preparing a
comprehensive business plan before announcing it to 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increasingly been replaced by the lean startup.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
bestselling book aptly entitled "The Lean Startup". The lean
startup business plan steps integrate nicely with the statutory
tax requirements for a Federal R&D Tax Credit.
The Research & Development Tax
Credit
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:
• New or improved products, processes, or
software
• Technological in nature
• Elimination of uncertainty
• Process of experimentation
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
R&D Tax Credit for 2012 and 2013 tax years.
What is a Lean Startup?
A lean startup is a reiterative
process that eliminates traditional unnecessary costly
time-consuming business startup 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 entirely new market
quickly. Business plans get replaced by presenting business ideas
and quickly presenting a Minimum Viable Product (MVP) which is a
rudimentary work in process. Not only is extended startup time
expensive with the traditional long-term development approach, but
the new business may also 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 opportunity.
Examples of famous companies that moved quickly to market using
lean principles include Groupon, IMVU, Votizen, Wealthfront,
Aardvark, and Zappos.
R&D Credit Requirements for
Lean Startup Elements
Prototypes (Traditional Startup vs
Lean Startup)
The Lean startup approach anticipates
a minimum viable product (MVP) that is used to test market
acceptance. MVPs 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 MVPs. Accordingly, MVP
new product iterations which by definition are less developed
would be even stronger R&D Tax Credit candidates.
Conclusion
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.
