Bringing in approximately $10 billion a year, the R&D Tax Credit remains the largest credit out there for the benefit of U.S. businesses—and despite what you may have heard, government contractors in the software and technology industry can indeed qualify for the added tax savings.
If any of the following myths have prevented you from exploring the credit in the past, it would be wise to take a second look at the R&D Tax Credit as an opportunity for your business:
My company doesn’t do R&D.
This is probably the most common myth (among government contractors or otherwise) preventing perfectly eligible companies from claiming the credit—and one that is related to a simple misunderstanding.
When companies hear the term “R&D,” they tend to only think of scientists and test tubes when the credit’s definition is much more expansive. Simply put, applied science counts toward eligibility, meaning the steps taken to improve existing technologies (think version 1.0, 1.1, 2.0, etc.) or to solve customer problems through scientific principles will generally lead to eligibility for the credit.
My government contract prevents me from claiming R&D credits.
That depends on your contract. In reality, eligibility depends on the language contained in the contract, not the contract itself. Each individual clause of the contract must be examined and analyzed against a pattern of cases and Treasury regulations that govern what contracts qualify for the R&D Tax Credit.
I can’t claim the R&D credit since I am already being paid by the government.
According to the courts, not true.
Eligibility for the R&D credit does not hinge upon who is ultimately paying for the work performed. It is based upon the activities or projects that a company undertakes, regardless of whether or not the work is done for a state or federal entity. Many of the major cases interpreting eligibility for the R&D Tax Credit actually involve companies benefiting from (and being paid for) the work they performed for the U.S. government.
Pursuing the credit isn’t worth my return on investment.
The numbers would say otherwise. Considering that the R&D Tax Credit is a wage-based, dollar-for-dollar credit, software and technology companies are actually among its greatest beneficiaries, with the industry’s higher employee wages traditionally driving more lucrative credit results.
I don’t have a system in place to track time or adequate documentation to claim the credit.
Taking into account specific changes over the past few years in how the IRS calculates and qualifies companies for the credit (including new Treasury regulations and court precedent that has relaxed many of the recordkeeping standards), business owners would be wise not to assume that the information needed to qualify isn’t already on hand.
The R&D credit is only for large companies.
Wrong—and this is what too many small and mid-sized firms think. There is no red velvet rope barring small and mid-sized companies from the credit, but those companies do need to apply to reap the tax benefits—the IRS isn’t in the business of just handing out tax credits.
My projects are classified by the U.S. government. This prevents me from claiming the credit.
Absolutely not—but you do need to ensure that the information gathered for eligibility is done without breaching confidentiality. Our firm has seen firsthand how scores of government contractors around the country have qualified for R&D credits based on projects done on classified contracts. While there are certainly bells and whistles to making it all happen, it is certainly possible for such projects to qualify.
When evaluating the eligibility of government projects (classified or not), the key takeaway to all of this is the need to hire a qualified tax consultant, one with the industry expertise to identify all qualifying activities, while at the same time possessing knowledge of the tax code and Treasury regulations to navigate what can be complex government contracts. At alliantgroup, we employ software and technology professionals along with experienced tax attorneys and former IRS officials, ensuring that every qualified activity will be properly identified for our clients.
My government contract is expiring. I missed my chance to qualify.
Not necessarily. The R&D Tax Credit allows companies to retroactively claim their savings for all open tax years, meaning companies can claim their credits from 2012-2015. So, as it relates to software and technology firms, the everyday design, implementation and testing that these companies and their employees performed during the course of their contractual government projects (be it to enhance existing technologies or to launch a new product) can be claimed within this four year window.
When examining these myths, it’s important to remember why the R&D Tax Credit was originally put in place by Congress—to keep high-paying, technical jobs here in the United States. As such, it’s good to remember that our government wants companies to claim this credit, that it wants innovative software and tech firms to take advantage of the incentives designed to provide the means to grow and hire new employees here in the U.S. Just this past December, the R&D Tax Credit was made permanent and expanded through two key modifications, further hitting home our government’s desire to see companies claim the credit and that these myths are just that—myths. And they should not prevent you from taking advantage of an opportunity tailor made to help your business.
Taking this advice to heart, if any of the above myths sound familiar and have stopped you from exploring the credit in the past, now would be an excellent time to reevaluate your prior government contracting work—it could be one of the most lucrative decisions you will ever make for your business.