Often overlooked, R&D tax credits may be waiting for your business
Among the top challenges cited for implementing digital transformation — including the Internet of Things (IoT) initiatives — is the cost. As companies develop a compelling business case for rolling out IoT-enabled capabilities, they should consider potential tax savings as part of their value propositions.
Even though the Research and Development (R&D) Tax Credit has been around for over three decades, it is one of the more underused tax credits. Designed to encourage investment in innovation, the R&D tax credit offsets federal income tax liabilities for eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:
- New or improved products, processes, or software
- Technological in nature
- Elimination of uncertainty — the activity is performed to eliminate technical uncertainty about the development or improvement of a product or process
- Process of experimentation
Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent. Moreover, a majority of US states (36, in fact) have their own R&D credit programs. These come in varying incentive amounts, and many closely resemble or even mirror the federal rules regarding what types of activities and expenses are eligible.
In 2015, President Obama signed the bill making the R&D tax credit permanent. In addition to expanding the credit to benefit startups and small businesses, this allowed executives to include the credit in their long-term business planning without concerns about expiration.
According to the MPI Internet of Things study, while 79 percent of manufacturers claim they are investing in the IoT, only 43 percent plan to pursue IoT-related tax credits and incentives. Most of the companies surveyed that were not using R&D credits claimed that they either were not aware of the tax credits (37 percent) or knew of the incentive but did not plan to claim it for IoT-related investments (20 percent), for various reasons.
While not every business will qualify, companies should still keep track of R&D expenses — the IRS allows you to carry forward them up to 20 years — meaning you may even be able to get a refund by filing for an amended return.
Companies designing, piloting, and implementing IoT enhancements or machine intelligence are among the best candidates for the credit in terms of financial value as the U.S. government continues to reward the dynamic work taking place in this space. Qualifying activities don't need to be groundbreaking, or even successful. If companies are trying to make products, processes, or software better, faster, cheaper, or more sustainable, they most likely qualify.
Companies of all sizes are already investing in IoT initiatives for the revolutionary new layer of data they provide. These technologies often require an iterative process, and R&D tax credits are just one incentive to ensure U.S. businesses remain competitive. As businesses research IoT and the increase in productivity and agility that comes with it, they would be wise to consult with tax credit professionals. A truly comprehensive plan will explore all of the risks and opportunities at stake.