Created by Congress in 1981 to encourage increased research and development (R&D) spending in the United States, the R&D credit is something companies around the country take advantage of each year. Doing so allows them to save billions of dollars in tax obligations. Your company may be eligible for this type of credit — regardless of its age or size — so long as you’ve recently improved, developed, or designed a formula, technique, process or product.
In the past, large tech companies were able to claim the credit more frequently than smaller businesses, but thanks to the PATH Act, that’s changed. Now, small to mid-size companies and startups may claim research credits if they meet certain requirements having to do with the development of new products and processes. Unfortunately, many businesses in the tech industry miss out on the cash flow these tax credits can provide. That’s why we’ve outlined everything you need to know to ensure you’re not leaving money on the table.
Qualifying Costs and Activities
Many of the actions your company takes on a regular basis could make you eligible for the R&D credit. For example, you may qualify if your business develops new and improved accounting and financial software, educational software, database management systems, marketing software or document management systems. Further, you may be eligible if your company develops apps that enable businesses to move more of their data and operations to the cloud.
At a basic level, additional activities eligible for R&D credits include developing new technologies or improving upon existing ones. In your company, qualifying activities may include programming new source code or building electronic interfaces between existing software applications.
It’s important to remember that any in-house expenses related to the aforementioned activities may also be eligible for R&D credit. This may include wages paid to the employees engaging in and supporting the R&D activities, as well as wages paid to those employees supervising and directing these projects. Additionally, the costs of engaging outside contractors or firms to do some or all of this R&D work can be eligible for credits.
Don’t Leave Money on the Table
In order to ensure that you are taking advantage of any applicable tax credits, take the time to evaluate the normal business activities your company engages in on a daily basis. Ask yourself: Do any of these tasks, projects and procedures meet the standard outlined above? If your company is eligible, the tax credit will extend to your overall tax liability.
If your tech company develops new and improved technology and software, your management team should work together to gain a thorough understanding of tax credits and where you may qualify. Take what’s yours: Investigate the R&D credit today.
Ms. McDonald is a Partner-in-Charge, R&D Tax Credit Services at Aprio, a 2019 ATDC program sponsor. The views expressed are not necessarily those of ATDC or Georgia Tech.