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At nearly $10 billion a year, the research and development (R&D) tax credit is one of the largest incentives available. It can save service companies significant dollars — yet many don’t take advantage of it. Why, you ask?
Many people think of R&D involving engineers in a manufacturing facility creating prototype products or scientists in lab coats painstakingly pouring solutions into beakers. Fortunately the rules are far more liberal than that, and many industries—including many technology organizations—qualify.
Take an innovative Software as a Service (SaaS) company, for example. From evaluating and establishing program specifications, to functional and performance testing, there are a number of eligible activities that qualify as R&D for SaaS companies. It also goes far beyond SaaS companies; platform based Business to Consumer (B to C) or Business to Business (B to B) companies in areas such as logistics, big data and even retail organizations that develop proprietary software platforms—all could be viable candidates for the R&D tax credit.
Additionally, the R&D tax credit is available for businesses of all sizes, from start-up technology companies, emerging growth companies to large corporations with dedicated development teams.
To qualify, a company must:
1. Develop a new or an improved technology, product or process. Remember, it doesn’t have to be new to the world—just your organization.
2. Experiment with alternative designs to resolve technical uncertainty of the product or the process development.
3. Use hard sciences like programming, or chemistry, engineering, or mathematics to research improvements to the product or the process.
4. Conduct all activities in the United States.
5. Maintain substantial rights.
The general rule is this: if you have employees who are programmers, designers and developers, engineers or technical specialists you likely qualify for the R&D tax credit. So what’s the benefit of the R&D tax credit? You typically are eligible to recoup anywhere from 4 to 7 percent for every dollar spent on R&D efforts. This can quickly add up to hundreds of thousands of dollars.
In many cases your business may be eligible to amend previous tax returns and claim the credit for past years — meaning more money to help grow your organization. The IRS isn’t giving away this tax credit — you need to have proper documentation to support your activities and correctly apply the law. It’s certainly a credit that’s widely recognized and used by a wide range and number of service organizations every year. Plante Moran can help determine if you qualify for the credit and assist you in developing a plan to capture the expenses related to eligible activities.
