When Ronald Reagan signed the Economic Recovery Tax Act of 1981 into law, businesses quickly jumped to take advantage of the new tax break that let them lease or rent computers. At the time, computers were prohibitively expensive, which made them impossible to own for all but the largest corporations and research institutions. Instead, most people leased time on mainframe computers. The 1981 bill made it so the money companies spent leasing mainframe computers were Qualified Expenses towards a tax credit.
Obviously, computers are no longer prohibitively expensive — but that doesn’t mean the credit is any less impactful for technology startups. That’s because though most companies buy their computers, they still spend a substantial part of their burn on another technological lease: cloud computing.
Cloud Service Providers (CSPs), like Amazon Web Services, have stepped in to provide a similar service to the one IBM provided in the 1980s. So long as your startup is using cloud computing to develop a new product, feature or process, the leasing of server space fits squarely into the regulations laid out in the law: 1) the computer is owned and operated by another company; 2) the computer is located off premises; 3) the startup is not the primary user of the computer. Clearly, all three of these regulations are true for CSPs.
You might feel like we’re deep in the weeds (we’re tax guys — believe me, we could get way, way deeper), so let’s cut to the chase. What does this all mean for you? It means that, in all likelihood, there’s a tax credit you haven’t yet claimed that your startup is owed. In some cases, you can be recouping up to 10% of your cloud-computing expenses. So, let us help you get your maximum R&D Tax Credit — that money can be the thing that extends your runway and lets your startup continue to grow.