Software Companies Fail to Optimize Cash Flow with R&D Tax Credit

4 Minute Read
Posted by Randy Eickhoff on Oct 29, 2019 12:08:57 PM

Research and development has always served as the cornerstone of most software and computer companies. However, today's speed-of-light innovations have pushed research and development to the forefront of technology enterprises as they race to surpass the competition and stand out in the marketplace. The rapid evolution and utilization of cutting-edge technologies, such as robotics, virtual reality, augmented reality, machine learning, artificial intelligence, and the Internet of Things (IoT), has encouraged more businesses to focus their time, efforts, and resources into expanding tech stacks and technical functionality.

Technology Boom Increases the Chance of R&D Tax Credit

The ongoing global technology boom has expanded the reach of organizations within the software industry with operations that qualify for the research and development tax credit. Technology companies incurring qualifying research expenditures (QREs) may be able to claim federal and/or state R&D tax credits based on activities and operations they are already performing. As a dollar-for-dollar incentive, the innovation tax credit can reduce overall corporate liability, instantly increasing revenues and bottom-line dollars. 

Businesses claiming the benefits may find they can lower their federal tax obligation up to 7.9 percent of their total qualifying expenses. There is also the possibility of a state benefit (see eligibility here). Some of the main costs that can be claimed as a research and development expense include: 

  • Wages paid to developers, programmers, software engineers; may also include salaries paid to supervisors overseeing the development process
  • Costs of relevant freelancers or subcontractors
  • Expense of needed cloud licenses used when conducting experiences and/or development software
  • Time-sharing computers 

Software Companies Still Miss out on the R&D Tax Credit

Unfortunately, many business owners within the vertical don't realize they are eligible for the R&D tax credit benefit. These entrepreneurs assume that only traditional programming practices and standards comply with the R&D tax credit rules and regulations. They may also believe they have to be a large technology enterprise to meet all the qualifications of the program. As a result, these companies often inadvertently leave earned working capital on the table.  

Yes, the research and development program rewards companies that create and develop new technologies. However, your software or computer business doesn't have to invent groundbreaking systems, applications, or platforms to reduce its total tax burden. Knowing how the R&D tax credit works, as well as understanding some of the many qualifying industry practices, can help your organization optimize every cash flow opportunity afforded by this powerful, government-backed incentive. Some potentially eligible operations include: 

  • Creating new algorithms
  • Developing new technology
  • Enhancing or specializing existing technology
  • Designing or developing software architecture
  • Developing software specifically for use in a hardware product
  • Creating feature enhancements
  • Designing, programming, or testing software source codes
  • Performance, integration, or unit testing

Even attending technical meetings or improving existing internal practices and processes may qualify as an eligible research and development expense. 

Acena Consulting: Software Companies Trust Us With Their R&D Tax Credit Needs

Navigating the current R&D tax credit rules and regulations is challenging, but you don't have to manage the process alone. Acena Consulting specializes in innovation tax credits helping business owners across multiple industries lower tax burden. Contact us today to hear more.


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Randy Eickhoff

Randy Eickhoff

Acena Consulting President Randy Eickhoff, licensed CPA, has partnered with more than 200 companies during more than 20 years of experience securing tax credits and other government incentives. His corporate partners range from multinational technology firms to smaller, privately held manufacturing, sports, and technology enterprises.