As we approach year-end, technology companies should remember that they are eligible to claim tax credits for expenditures made during the year to develop or improve their products, manufacturing processes, or software. Although recent tax reforms have eliminated several obstacles to such claims, and clarified the standards for qualification, many businesses, particularly technology start-ups, are still missing valuable opportunities for tax relief.
We are accountants in the Technology Practice at accounting and consulting firm BDO Seidman, LLP, and we encourage all founders to carefully evaluate their credit potential before December 31. We’ve highlighted three areas on which to focus some attention.
Your Base Expenses Generally, the “development” tax credit equals 20% of qualifying expenses over a “base amount.” Determining your company’s correct “base amount” of expenses is, therefore, critical to making sure you don’t over- or under-stating your claimed tax credit. There are different ways to calculate the base amount, and several factors affecting the calculation have changed recently, so many companies are misstating their credits.
A major criterion is whether a company is a “start-up” under the credit rules, or whether the company is a member of a group of commonly controlled (established) businesses. See the criteria here. A company can be a start-up under the credit rules even if they’ve existed for more than 20 years. Many companies assume they are a start-up, when in fact they are not. If they’ve misinterpreted their status, they may well be significantly under- or over-claiming the amount of credit available to them.
Think Outside the R&D Box. R&D frequently occurs in settings other than traditional R&D cost centers. Areas commonly overlooked by technology companies include: manufacturing process improvements; design validation testing by quality assurance and other personnel; field application engineering; beta testing done by employees; the development of software to be used internally; and direct supervisory and support activities.
Day-to-Day Innovations. Many companies believe—because tax authorities used to tell them—that their operations needed to be “venturing into uncharted waters,” that is to say, exceeding, expanding, or refining the common knowledge of skilled professionals, in order to qualify for the “development” credit. This is not the case. For technology companies, many day-to-day activities—such as developing new products or processes, or improving existing products and processes—qualify for a tax credit. In fact, “day to day innovations” are precisely the kind that this tax credit was enacted to incentivize.
Chris Bard and Jonathan Forman are members of the Technology Practice at accounting and consulting firm, BDO Seidman, LLP.
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