The rapid evolution of technology has forced many businesses to stay innovative in order to thrive in a competitive business market. Every business will encounter technical challenges related to developing new or improved products and trade processes, as well as integrating them with already existing assets. Being able to overcome these technical hurdles is imperative to running a successful business.
Innovation is synonymous with trial and error. In some cases, innovative undertakings can fail with no return on investment. Taking these chances can be extremely expensive and time consuming for both management and employees. This is why the federal government incentivizes businesses to conduct research and development in order to benefit the economy. The Research and Development (R&D) tax credit is the primary way the government rewards businesses to invest in research, and more than 40 industries can qualify, including software development companies.
What Are R&D Tax Credits?
The R&D tax credit was first introduced in 1981 as a temporary measure for research and development. It has been renewed each tax season ever since until it was signed permanently into tax law in 2015.
The credit is available to any business that attempts to develop new, improved, or advanced products or trade processes. The Internal Revenue Code (IRC) section 41 lays out all of the rules and regulations associated with the tax credit.
What Qualifies As Research Expenses?
The R&D credit includes the following types of Qualified Research Expenses (CRE) for Software Developers:
Programming source code for software
Designing and developing structural software architecture
Establishing electronic interfaces and functional relationships between various software modules
Conducting requirements, domain, software elements, or scope analysis for a new functional software enhancement
Evaluating and establish functional specifications
Conducting unit, integration, functional, performance and regression testing
Compiling and test source code
Developing new or improved technologies
Additionally, you must be able to pass the four-part test to qualify for R&D tax credits for software development.
Tax Planning For Developers: Benefits Of R&D Tax Credits
The tax credit reduces a company’s liabilities for money spent on research. The credit is equal to a certain percentage of a business’ qualified research expense (QRE) that is more than the base amount. The IRS has developed a four-part test that can help you determine if you qualify for a R&D activity:
Elimination of Uncertainty: You have to show that you have attempted to eliminate any uncertainty concerning development or improvement of a product or process. Something that has been changed purely for aesthetic purposes would not qualify as an R&D activity.
Process of Experimentation: You must be able to demonstrate that you have explored other alternatives for achieving the desired result. This type of demonstration can be achieved through modeling, simulation, systematic trial and error or other methods.
Technological in Nature (The Discovering Technological Information Test): Experimentation processes must rely on science, such as engineering, physics, chemistry, biology or computer science.
Qualified Purpose (The Business Component Test): The research must be conducted for the purpose of creating a new or improved product or process, resulting in increased performance, function, reliability or quality.
The Money Saved From R&D Tax Credits Is Reinvested Into Your Business.
If you have not already taken advantage of all the R&D tax credits for software development, these regulations provide a good motivation to re-examine the benefits you may qualify for. Fortunately, we at Fusion CPA offer tax planning services for developers to help determine whether you have a tax advantage through R&D tax credits. Additionally, tax planning year-round is something you should consider implementing. As accounting experts, we understand the importance of planning your finances today for the success of your business down the road. For this reason, we also offer strategic tax planning for developers like you to help your business benefit from tax advantages that you might not otherwise benefit from if you don’t know all the tax codes.
Improving Your Overall Business Value: Bringing In A Financial Adviser For Developers
Aside from tax planning, we also offer comprehensive CFO business advisory for software developers developers. This means all of your strategic planning needs can be handled by us, so you can focus on the innovation and software development associated with your business. Bringing in an experienced financial adviser for your specific industry can transform your overall business strategy as well, which, as a result, can lead to you saving money down the line.
We have your back. Our team of seasoned accountants here at Fusion CPA is motivated by providing comprehensive services to help you see where you fall short and where you can improve. You can learn more about our services by clicking the button below to schedule a complimentary discovery call today!
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.