R&D tax credits are dollar-for-dollar incentives designed to encourage innovation, research, and development, which can lead to substantial savings on Tax Day. Tech and media companies must constantly innovate and refine their products to stay relevant, making them excellent candidates for R&D tax credits. Here are everyday activities the tech and media industry perform which may qualify for credit.
Creating new products
Many tech companies constantly develop and create new products to keep up with technological advancements and remain competitive. Creating new products generally involves designing prototypes, adding new capabilities, and frequent testing during the development cycle.
When filing a claim for R&D tax credits, it is crucial to document each R&D activity to verify that it meets the IRS criteria for qualifying research activities (QRAs). Businesses can document research activities by logging each prototype’s development process, amount of time spent on projects, and designating a supervisor to oversee an R&D team.
Improving visual effects and animations
Improving software or products’ visual effects and animations can be a QRA as it can be crucial when improving a product or service. For example, if a company creates visual effects in a film, the process likely presents technological challenges for the team. Visual effects teams typically must perform several rounds of testing to achieve the desired effect, making it likely that the labor counts as a QRA.
However, it is vital to note that the IRS does not consider purely aesthetic changes such as changing website element color or creating a limited-edition product with solely cosmetic differences as technologically oriented activities and will not count as QRAs.
Adding new features to improve functionality and performance
Improvements to your current lineup may qualify your company for R&D tax credits. Implementing new features to an existing product or enhancing a component, such as improving a device’s battery life or processing speed, is another way to qualify for R&D tax credits.
For the IRS to verify research legitimacy, companies must track all labor and expenses to improve the business component. After an organization has conducted research to improve a product or service, they must compile payroll records and receipts and invoices for R&D-related supplies. Most business supplies other than land can count as a qualifying research expense (QRE).
Improving algorithms
Tech and media companies often use algorithms during computer programming to create a set of instructions for a computer program. An efficient algorithm is able to provide the computer with a correct answer while taking less time and using less memory.
Improving algorithms usually requires experimenting with multiple inputs and rule sets to determine the ideal output for a computer. For instance, while many algorithms are correct, some are more efficient than others. An efficient algorithm results in improved products such as a faster search engine and news feeds tailored to be more relevant to a user’s interests.
Making improvements to algorithms is crucial for companies to remain competitive, and investing time and resources to refine them can be an excellent activity to include on an R&D tax credit claim.
Creating prototypes and beta testing new software
Creating prototypes and beta testing are QRAs that may help you claim R&D tax credits for experimenting. A common misconception about R&D tax credits is that activities must be successful or groundbreaking to qualify.
However, it is not necessary for prototypes or beta testing to achieve anything besides being part of a technical, experimental process. If you track activities accurately and provide thorough documentation, the IRS will likely consider each prototype’s development a QRA.
Tech and media companies have plentiful opportunities to claim R&D tax credits, but the process can become time-consuming and complicated. MainStreet’s tax specialists search through R&D tax credits and finds the ones that match your company so small business owners can dedicate more time and money to their organizations. Contact us to get started today.
