The tech industry is driven by constant innovation and refinement. These aspects make tech companies excellent candidates for research and development (R&D) tax credits. R&D tax credits are dollar-for-dollar tax savings companies can claim from the federal government for their research and development activities. We discuss multiple activities that can help a tech company reduce its tax burden.
Creating new products
Many tech companies regularly create and launch new products. The process of creating new products often involves eliminating uncertainty, experimentation, and must have a technical component. When a company makes new software or hardware, teams must experiment with new technology and test the product to ensure it is functional before it goes to market. All activities done when creating a new product can substantiate a claim for research and development tax credits.
Designing tech products is a process that can involve technical challenges. Design teams must think of several technically viable concepts during the design process. Designers must then ensure new designs are functional by creating prototypes for testing and determining which ones can be minimum viable products (MVP). Once a company has an MVP, it can further fine-tune its product to achieve the desired results.
Adding new capabilities or improving software functionality
Research and development are not limited to new products. Tech companies often contend with competitors and must constantly improve their lineup to remain viable in the market. Adding new capabilities and enhancing existing features qualify for R&D tax credits as they involve actions that meet the IRS four-part test. Organizations must ensure that these changes affect a technical component and are not purely aesthetic.
Improving the manufacturing process
Incorporating new technology into the manufacturing process can make manufacturing more cost-effective in the long run. Manufacturing tech hardware has undergone several improvements in the last several decades, and businesses can take advantage of these improvements while saving money on their efforts. Some of the technology organizations use to improve their manufacturing include 3D printing, the internet of things (IoT), and augmented reality. These changes can reduce manufacturing time, reduce waste, improve connectivity, and create safer working conditions.
Automating parts of the manufacturing process can help companies increase production and reduce the chance of errors, making it easy for tech companies to get a good return on their investment. In addition, automation makes it easier to adjust the manufacturing process.
However, incorporating automation into the manufacturing process can take time and effort, depending on the product. Fortunately, some companies can help tech businesses develop custom automated manufacturing solutions.
The last step to claim research and development tax credits for tech companies is to document all qualified research activities (QRAs). Companies must track all R&D activity conducted by each department, the job titles of everyone involved, and qualified research expenses. An organization then needs to compile all necessary documents, fill them out, and submit them to the IRS. It is crucial to remember that QRAs do not necessarily need to be successful; they only need to attempt to improve their product or service.
While tech companies have opportunities to claim R&D tax credits, startups and small businesses may lack time to determine which credits they are eligible for. MainStreet searches through every tax credit and helps tech companies dedicate more time to their business. Contact us to start increasing your savings!