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2019 year-end tax letter: emerging technologies and the R&D credit

Today’s competitive landscape is driven by rapidly changing advanced technologies such as robotics and intelligent automation, artificial intelligence and machine learning, blockchain, virtual or augmented reality as well as data visualization, advanced analytics, cloud solutions or even complex, custom designs of enterprise resource planning (ERP) systems dealing with large volumes of data, development of custom modules or system integration. These technologies and platforms enable companies to make timely decisions, optimize production, reduce costs and improve efficiencies and gross margin.

The innovation and investments in these emerging technologies may present an R&D credit opportunity. To qualify under the R&D rules and regulations, the projects and activities:

  1. Must be technological in nature and based on the principles of hard science like software engineering or computer science;
  2. Must be for a permitted purpose and involve the creation of a new or improved level of function, performance, reliability, quality, durability or cost reduction;
  3. Must involve the elimination of uncertainty with respect to capability, methodology or design; and
  4. Must include a process of experimentation such as evaluating alternatives and testing and modeling.
Key takeaway: The benefits from R&D credits can include a dollar-for-dollar reduction in tax liability as well as an increase in cash flow that can be used to increase investments in new technologies.

Examples of qualifying development activities for these technologies and software development generally include:

  • Any software design/development activities directed at resolving software development uncertainties through an iterative process
  • Designing and developing new products and/or product enhancements
  • Developing product specifications or requirements, such as functional, design or test specifications
  • Designing and integrating applications and technologies
  • Developing new or improved technologies (e.g., new algorithms or methodologies)
  • Designing, developing and testing client-specific applications
  • Designing and developing software architecture
  • Programming software source code
  • Conducting functional and/or technical testing to validate design
  • Compiling and testing source code
  • Involvement in technical design/development meetings
  • Direct technical supervision/support of the above activities

Internal wages, third-party contractors/vendors and cloud storage costs used for development are included in the R&D credit. Generally, the federal R&D credit equates to about 7% to 9% of eligible expenses. Certain states also have similar R&D credits.

Benefits from R&D credits include the dollar-for-dollar reduction in tax liability and an increase in cash flow that can be used to increase, optimize and fund investments in new technology and related resources.

View more insights in the 2019 year-end tax planning letter >

Download the 2019 year-end tax planning letter >

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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Wendy Landrum
Partner
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