If ever there was an industry uniquely positioned to capitalize on the research and development tax credit, it's the software and technology vertical. Most software and technology enterprises conduct qualified research activities (QRAs) on an almost daily basis, instantly confirming their eligibility for this dollar-for-dollar tax incentive. Unfortunately, like so many other fields, many companies operating within the software and technology industry aren't aware of the lucrative cash flow opportunities offered on both a state and federal level through the R&D tax credit program.
Software and Technology Development Enterprises Often Miss Out on the Innovation Tax Credit
Of course, knowing that the innovation tax credit exists isn't always enough to optimize its taxpayer benefits. Some software and technology firms may succeed in filing for some of their credits, yet still fail to claim all of their qualifying corporate activities. For example, most innovation entities will often capture applicable expenses within their designated programming cost centers. However, there could still be a litany of pertinent eligible research and development activities that occur beyond what's considered a programming department.
Additionally, some entrepreneurs assume that to qualify for the R&D tax credit, they must bring completely new, groundbreaking innovation to the market. The good news? You don't have to develop a trailblazing system, platform, or application to participate in this almost 40-year-old tax program. Under current research and development legislation, any company that demonstrates an attempt (and not even a successful attempt at that) to create or develop any new or improved processes, products, and software or technology could potentially qualify for the credit.
Know Some of the Most Common QRAs in the Software and Technology Vertical
From video games to healthcare management software systems, there are countless innovation niches conducting activities that fall under the innovation tax credit. Some common qualified research activities (QRAs) performed within the software and technology industry that may warrant an R&D tax credit claim include:
- Creating and/or evaluating software applications
- Developing, designing, and testing new or enhanced innovations
- Programming, compiling, and/or testing software source codes
- Designing software that improves cost and/or time efficiencies across multiple verticals, such as healthcare, financial, educational, marketing, logistics, accounting, and more
- Testing and evaluating the integration capabilities, functionality, performance, and regression of a software program or platform
Research and Development Tax Professionals Identify and Document QRAs
As with any specific tax incentive, it's critical to work with a qualified firm that specializes in research and development for maximized credit claims. Experienced R&D tax accountants will systematically work through each operation across every department in your organization to designate all qualifying activities that satisfy the mandatory four-part test:
Elimination of Uncertainty
Software and technology companies must demonstrate an attempt to eliminate uncertainty about the improvement or development of a product or process. Cosmetic and aesthetic technology upgrades typically won't qualify.
Process of Experimentation
Innovation firms must prove they've used various methods, such as simulation, modeling, and trial and error to achieve desired results.
Technological in Nature
QRAs must utilize a hard science when navigating through the process of experimentation. For many software and technology companies, the discipline used is often engineering and computer science.
Innovation companies must validate that the research was conducted to create a new or improved product or process that directly enhances function, performance, dependability, or quality.
Do you have questions about eligible research and development activities at your software and technology firm? Acena Consulting's team of specialized R&D tax accountants can pinpoint and document all relevant QREs to minimize your ultimate corporate tax burden. Contact us today to learn more.