Why Some Companies That Are Performing R&D Don’t Even Know It
“We aren’t doing any R&D.”
I hear this phrase all too often from companies I know from my own research are definitely doing some form of research and development. For example:
- “We aren’t doing any R&D,” said the president of a small manufacturing company whose team just finished a custom design for a difficult new project.
- “We aren’t doing any R&D,” said the VP of Finance at a regional bank, whose institution just invested a million dollars on a new customer facing online banking portal.
- “We aren’t doing any R&D,” said the controller of a software development company whose organization just spent 14 months developing a secondary SaaS based solution that will complement their flagship product.
You get the gist.
What’s unfortunate is that by failing to recognize their work for what it is, research and development, these companies are missing out on the R&D Tax Credit, an incentive intended specifically to help them offset these kinds of costs.
Their narrow perception of R&D, mixed with a lack of knowledge about complex IRS regulations have created a situation where they are missing out on a longstanding tax credit that was enacted specifically to help them stay competitive in an increasingly difficult global market.
Perception vs. Reality
Many businesses automatically perceive that they aren’t eligible for an R&D credit. To them, the words “research and development” conjure up the classic image of a scientist wearing a white lab coat holding a beaker over a Bunsen burner. Or, they envision a large company with an in-house R&D lab and equally large pockets to fund the efforts. Since their business operations don’t fit this mold, they assume the efforts they are undertaking couldn’t possibly qualify for a tax incentive.
In many cases, they are wrong. The regulations relating to the credit allow for a very broad definition of R&D; far broader than what many businesses realize. In fact, here are just a few activities that would qualify for the credit:
- Developing NEW or IMPROVED products. Yep – you read that correctly. Product improvements qualify as R&D.
- Improving your current manufacturing processes. That’s right, if you are making significant improvements to your manufacturing process, you qualify for the R&D credit.)
- Developing NEW or IMPROVED technologies, architectures, algorithms, database management techniques or programming source code. Sound familiar software developers? As you can see, many of your day-to-day activities qualify for this credit.
- Utilizing contractors and consultants to conduct any of the above activities. No joke. If you are using contractors to do qualifying R&D work, you can pull those costs into the credit.
So, if your company is working to create something new or improved, or working to do something faster, cheaper or better, you shouldn’t think of these efforts as routine just because you’re not wearing a lab coat.
In fact, you may be missing out on a tax credit that was literally designed for you.
