Nowadays, more companies are investing in the development of innovative services and transforming their businesses by implementing technology like automation, artificial intelligence, and machine learning. Fortunately, the federal-state government provides research and development (R&D) credit to businesses of all sizes who create or implement these technologies.
Technology companies should especially be aware of this tax savings opportunity. Research and development is such an important aspect of the technology industry and the tax credit can be a significant tool for qualified businesses to offset payroll tax costs.
Does your Technology Company qualify for the R&D Tax Credit?
Since technology companies tend to be experimental, many activities involving the development of new products and processes may be eligible for the credit.
Some examples of qualifying activities include:
- Developing new or advanced technologies
- Conducting quality assurance (QA) or beta testing on products
- Enhancing the functionality and capabilities of existing applications
- Improving the accuracy, efficiency, or dependability of existing technologies
- Developing new technologies to make the manufacturing process more efficient
While some non-qualified activities include:
- Minor bug fixes not rising to the level of the four-part test
- Pure aesthetic/marketing portions of the design effort
Applying the Four-Part Test to Technology Companies
According to IRS guidelines, a simple four-part examination can help decide which activities classify as qualified research.
- Permitted Purpose – Requires the company to invest resources in developing a new or improved level of function, performance, reliability, or quality.
- Elimination of Uncertainty – Applies if the company’s available knowledge and information is insufficient or lacks the depth to meet the project’s criteria and specifications
- Process of Experimentation – A significant portion of the company’s development activity demonstrates an experimenting phase such as a series of trials and errors aimed at evaluating potential methods in order to attain the permitted purpose.
- Technological in Nature – The process of experimentation must rely on the hard sciences such as chemistry, biology, engineering, or computer science,.
How can KPT help?
KPT has already helped numerous technology companies with their R&D tax credit, and now it’s time for you to take advantage of this opportunity! Contact us today for detailed advice on how to claim you R&D tax credit.