Research and development (R&D) tax credits extend beyond traditional white-coated scientists in gleaming labs, test tubes of proprietary pharmaceuticals, or cutting-edge artificial intelligence (AI). These federal and state-level incentives reward companies for innovation across virtually all industries. Qualified activities aren't limited to revolutionary breakthroughs. The credit covers ongoing improvement, problem-solving, and development of new or improved products, processes, computer software, techniques, formulas, or inventions.
If your business focuses on making things faster, more efficient, more reliable, or entirely new, there's a strong likelihood you're missing out on a valuable financial benefit by not exploring this credit. Companies like Acena Consulting (Acena) offer resources, including an R&D Tax Credit Calculator, to help businesses assess their eligibility and potential savings.
Dispelling Myths: R&D Extends Beyond Big Tech
Let's deconstruct common misconceptions and illustrate how businesses in diverse industries successfully claim R&D tax credits. Consider real-world examples from the following sectors:
- Agriculture: America’s farmers improve harvesting machinery for greater throughput, develop new pest-resistant strains, and experiment to create more efficient irrigation techniques.
- Example: A farm designs, develops, and tests new sensory technology to precisely monitor soil conditions and water usage for improved crop yields.
- Apparel & Textiles: Apparel professionals develop new water-resistant fabrics, improve dyeing processes for decreased pollution, and design apparel with user-friendly features.
- Example: An apparel company researching and testing new eco-friendly dyes that reduce water consumption.
- Architecture & Engineering: Civil engineers draw structures to endure extreme environments, develop new material applications, and improve energy efficiency through design.
- Example: An architectural firm develops a novel system for incorporating renewable energy sources directly into a building's facade, aiming to make it net-zero energy.
- Construction: Construction professionals employ R&D everywhere, including the design of energy-efficient structures, the chemical engineering of new materials, and the pioneering of new construction methods.
- Example: A general contractor creates a new, custom method to prefabricate modular building sections for specific functional needs that off-the-shelf solutions may not meet.
- Food & Beverage: Food scientists and culinary professionals develop new recipes, improve food-safety processes, and create new packaging methods to extend shelf life.
- Example: A bakery experiments with variable ingredient ratios to create a gluten-free bread that maintains taste and texture.
- Manufacturing: Manufacturers constantly refine production processes, develop new product lines, improve material efficiency, or design custom machinery.
- Example: A metal fabrication shop develops a new welding technique to increase joint strength and decrease material waste.
- Software Development: In addition to software companies, businesses across disparate industries develop internal or back-room software for automation, customer or project management, and data analysis.
- Example: A retail chain develops a custom inventory-management system that functions at the point of sale to optimize stocking levels.
The Four-Part Test: How to Qualify R&D Activities
While the range of eligible activities is broad, they generally must meet the Internal Revenue Service’s four-part test to qualify for the federal R&D tax credit:
- Permitted Purpose: The goal is creating or improving business components – like products, processes, or software – for sale, lease, or license to taxpayers.
- Technological in Nature: R&D is undertaken to discover information relying on “hard sciences” (i.e., chemistry, biology, and physics), computer science, and engineering.
- Technical Uncertainty: Technical unknowns about appropriate design, capability, or method have been pursued since the project's inception.
- Process of Experimentation (PoE): The activities support a systematic PoE to address the technical uncertainties.
Want to learn more about qualifying and documenting activities for R&D tax credits? Register for our free monthly webinar on July 15: “Cracking the (Tax) Code for R&D.”
- This workshop provides one CPE credit for professionals who are keeping up with continuing education.
Don't Miss Out: Explore R&D Credits Today
R&D tax credits can boost your bottom line, reduce tax liability, and free up capital for future innovation. Many businesses are unaware of their eligibility or incorrectly assume their activities aren't sufficiently groundbreaking to qualify.
Don't leave money on the table. If your business focuses on creation or optimization, then it's highly probable that there are eligible R&D activities. Consulting with a qualified R&D tax-credit specialist can help identify qualified activities, properly document them, and maximize your claim. Unlock the potential of your innovation and claim the credit you deserve.
We are excited to work with you to help your business thrive. Schedule a free consultation today to receive immediate assistance from Randy Eickhoff, CPA, Acena’s Founder & Head Coach. We will help you develop a plan to get the most out of your taxes.
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Edited by Laura Whittenburg, MSBME, Sr. Technical Writer at Acena Consulting. Photo courtesy of Paul Albertella on Flickr.