In the dynamic world of software development, innovation is the lifeblood of success. Companies constantly strive to pioneer better products, enhance user experiences, and attract top talent to outpace the competition. 

The Challenge: Balancing Innovation with Financial Resources

Developing new capabilities, improving existing products, and exploring cutting-edge technologies require software companies to secure substantial capital and invest in research and development (R&D). Chief Financial Officers (CFOs) face the unrelenting challenge of balancing R&D investment with the realities of managing their finances. 

Yet many software companies – especially those nascent and rapidly growing – often overlook untapped powerful resources: R&D tax credits. These tax incentives can increase cash flow, reduce tax liability, and maximize the most precious asset of all: time.

For one of Acena Consulting’s partners creating cloud-based software for business management, this dilemma was particularly daunting. This California-based company had an annual revenue of $6 million and 15 employees. The leadership committed to streamlining client processes on its platform but needed a way of maximizing the R&D budget to ensure continued growth. Our client relied on us to navigate the complexities of R&D tax credits, which can be claimed at the federal and state level.

Acena’s Approach: Strategic R&D Tax Credit Optimization

Acena Consulting (Acena) completed a qualification assessment, performed a quantitative analysis, and developed the documentation necessary to substantiate each claim.

During qualification, Acena scrutinized company activities to identify all expenses during software development. This examination included a deep dive into all R&D projects, including those supporting:

• Design of scalable REST APIs (representational state transfer application programming interfaces) for seamless data exchange across systems.
  • Developing backend protocols for authentication, rate limitations, and security.
  • Experimenting with GraphQL for tailored data retrieval.
• Development of inventory-management algorithms for accurate, real-time inventory tracking.
  • Designing predictive analytics for demand forecasting and re-ordering.
  • System optimization for low-latency inventory updating across platforms.

• Improvement of inventory management for more efficient ordering and shipping with decreased manual demand. 

• Building functionalities with external systems for automated stock allocation and updating.
• Creating algorithms for order processing, intelligent order routing, and fulfillment optimization.
• Designing systems enabling smoother collaboration with carriers and label generation.
• Enhancing the user interface (UI) for real-time shipment tracking and streamlined returns management.

Acena’s diverse team of CPAs, engineers, and tax professionals was uniquely positioned to identify these expenditures and understand their connnections to functional advancements, which expedited study completion to our partner’s benefit in both time and money.

The Impact: Reinvesting in Innovation and Growth

Beyond simply qualifying eligible activities, Acena provided a quantitative analysis that resulted in a substantial and defensible credit and developed the necessary documentation to support their claim. This meticulous approach ensured our partner could confidently claim the credits without undue fear of an audit.

The results of our engagement were significant. 

• Qualified research expenditures (QREs) approximated $2 million.
• The federal R&D tax credit amounted to $200,000.
• The California R&D tax credit equaled $100,000.

Our partner secured substantial R&D tax credits, which translated directly into reduced tax liability and improved cash flow. These funds were strategically reinvested back into the business, fueling future growth and innovation. 

This lucrative outcome:

• Accelerated product development: The company dedicated more resources to developing new features and enhancing its cloud-hosted platform.
• Expanded the internal team: The improved cash flow allowed the company to hire additional talent to support ongoing R&D.

Key Takeaways

This case study highlights the importance of strategic tax planning for software companies. 

• Targeted R&D is key. Focusing R&D efforts on core business areas not only drives operational improvements but also unlocks valuable tax benefits.
• Substantiation is essential. Meticulous documentation of R&D activities is crucial to substantiate credit claims and withstand potential audits.
• Expert guidance is invaluable. Partnering with experienced R&D tax-credit specialists like Acena can maximize credit amounts, minimize risk, and streamline the entire process. Schedule a free consultation today to receive immediate assistance from Randy Eickhoff, CPA, Founder & Head Coach at Acena.

Stay Informed

Happy Valentine's Day from all of us at Acena Consulting!❤️

Want to learn more about qualifying and documenting activities for R&D tax credits?

• Sign up for our free, monthly webinar on February 18 (next week!): “Cracking the (Tax) Code for R&D.”
  • This workshop provides one CPE credit for professionals who are keeping up with continuing education.
• Visit our Acena Events page to stay abreast of all upcoming events.

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Edited by Randy Eickhoff, CPA, Founder & Head Coach at Acena Consulting. Photo courtesy of jakuza (Jacopo Romei) on Flickr.