The Research and Development (R&D) tax credit exists to incentivize innovation within U.S. companies of all sizes. Many companies, particularly small businesses, qualify for the tax credit but don’t realize it. In a recent blog post, I described how most companies that make a truly unique product qualify for the credit. I’d like to expand on that with another pro-tip: the tools, processes and systems your company uses every day can also qualify.
Even if your company makes a commoditized product or offers a service that is not unique, the way you do business could involve enough innovation to qualify for the R&D tax credit. What does that look like? Imagine a company that distributes electronics made by a manufacturer. Any R&D involved in creating and manufacturing the electronics is available to the manufacturer, not the distributor. But let’s imagine that the distributor develops an entire central sales and management system to run its business. It’s a unique process created specifically for its business. As long as those R&D activities take place in the U.S., they would qualify for the credit even though the system isn’t directly used in product creation. This also applies to any software or systems created for sales, marketing or distribution.
Many niche companies and small businesses don’t have access to the tools they need to manage their workflows, staffing, or budget— so they create their own. We work with a consulting company that developed its own project management tool to track and predict whether teams will hit their project budget and deadlines. The tool uses a unique algorithm the company created based on its years of project management experience. The research and development needed to create that project management tool entitles the company to tax credits. Even though that R&D did not go toward the product or service they’re actually selling, it still qualifies.
This also applies to the manufacturing process, physical tools and machinery used to create a product, not just software. For example, if a company wants to sell a new product and must develop a new production process or tool in order to do so, both expenses can qualify for the R&D tax credit if they took place in the U.S.
Taxes can be confusing and complicated, but the R&D tax credit is surprisingly simple. Our team of CPAs can work with your business to maximize your credit year after year. Contact us today to learn how Ardius can help.