Case Studies

Case Study: Software Development Company Leverages R&D Tax Credits

Written by Randy Eickhoff, CPA, Founder & Head Coach | May 21, 2024 6:42:10 PM
Company Profile
  • Industry: Software Development
  • Location: California
  • Revenue: $6 million
  • Employees: 15 (primarily software engineers, developers, QA specialists)
Background

The company develops cloud-based business management software, aiming to streamline client processes. To enhance efficiency and customer experience, it invested in significant R&D efforts across core areas and utilized the R&D tax credit to leverage this ongoing innovation.

R&D Tax Credit Engagement

The company partnered with Acena Consulting for the following:

    1. Qualification Assessment:
      • In-depth analysis focused on these improvement areas:
      • API Development & Infrastructure
      • Inventory Management
      • Order Management
      • Shipment Management
      • Evaluation of activities against the IRS four-part test (Purpose, Uncertainty, Experimentation, Technological Nature)
    2. Expenditure Calculation:
      • Focus on wages for personnel directly involved in R&D within the improvement areas.
      • Identification of eligible computer rental expenses connected to these areas.
      • Detailed calculation of qualified research expenditures (QREs).
    3. Documentation:
      • Technical reports detailing R&D work in each area of improvement.
      • Emphasis on challenges, experimentation, and outcomes.
      • Robust contemporaneous documentation to substantiate all claims.
Results

Qualification analysis revealed eligible R&D activities within each improvement area:

  • API Improvements:
    Design of scalable REST APIs for seamless data exchange across systems.
    • Experimentation with GraphQL for tailored data retrieval.
    • Implementation of security protocols, authentication, and rate limiting.
  • Inventory Management Improvements:
    Development of algorithms for accurate, real-time inventory tracking.
    • System optimization for low-latency inventory updates across platforms.
    • Design of predictive analytics for demand forecasting and re-ordering.
  • Order Management Improvements:
    • Creation of rules-based order processing, reducing manual intervention.
    • Algorithm development for intelligent order routing and fulfillment optimization.
    • Integration with external systems for automated stock allocation and updates.
  • Shipment Management Improvements:
    • APIs enable smooth carrier integration and label generation.
    • Development of a real-time shipment tracking and update system.
    • Workflow and UI enhancements for streamlined returns management.

    Financial Impact
  • Qualified Research Expenditures (QREs): Approximately $2 million
  • Federal R&D Tax Credit: $200,000
  • California R&D Tax Credit: $100,000

    Outcome
    The company's R&D investment yielded significant operational enhancements and they were able to claim substantial R&D tax credits. These credits aided in:
  • Reduced Tax Liability: Direct offset against federal and state income taxes.
  • Cash Flow Improvement: Funds were reinvested for continued R&D and innovation growth
Key Takeaways
  • Focus Matters: Targeted R&D activity in core business areas unlocks significant value, both operationally and for tax benefits.
  • Substantiation is Key: Clear documentation of R&D efforts is essential to support credit claims.
  • Expert Assistance: R&D tax credit specialists offer guidance and maximize credit amounts.
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