R&D Tax Credits for Computer Science Companies
Computer science companies are in the business of innovation. As such, they are ideal candidates for the research and development tax credit. The federal R&D tax credit was essentially authorized for the specific purpose of encouraging the research and development of new products and processes. That said, a majority of computer science companies fail to take advantage of America’s largest tax incentive. In 2016 alone, nearly $16 billion in R&D tax credits were claimed, yet computer science companies continue to leave money on the table by not claiming the research and development tax credits made available to them. The primary reasons computers science companies aren’t claiming R&D tax credits are they either don’t know the credits exist or don’t believe they qualify to claim the R&D tax credits. Computer science companies may also be unaware of some recent changes in the R&D tax credit laws that have expanded the scope of the program so that more taxpayers are able to claim R&D tax credits than ever before. The best way to learn whether your computer science activities are R&D tax credit eligible is to work with an experienced and well-qualified R&D tax credit consultant. Schedule a free consultation with Clarus R+D to learn more about the benefits of the R&D tax credit program or to discuss whether you are eligible to claim the credit. Clarus’ technology-driven solution empowers companies to fuel their growth with America’s largest tax incentive.
Computer science companies can claim R&D tax credits
Computer science embodies innovation. Computer science is a remarkably young field, yet a revolutionary one. For a substantial period of time, computer science wasn’t event recognized as a field separate from engineering and mathematics. As computers gained popularity, their functionality expanded and a new field was born. Computer science is essentially the science of solving problems with the aid of a computer. It is the the study of computers, algorithmic processes, computation, and all the associated applications and impact of the same. Computer scientists seek innovation and their research activities are perfectly well-suited to take advantage of the R&D tax credit. It is the single largest tax credit available to computer science companies. In order for your computer science company to be eligible to qualify for the R&D tax credit, it must engage in certain qualified research activities.
Clarus R+D has worked with computer science companies across the country to help them claim the R&D tax credit. Examples of industries that employ computer scientists or engage in computer science activities include:
- Research companies
- Large computer and software companies
- Social media companies
- The government
- Large manufacturers
- Financial service providers
You don’t have to be among the largest computer science companies to take advantage of the research and development tax credit. Small computer science companies and startups are even eligible to claim the R&D tax credit. In fact, recent changes to the applicable laws have made it easier than ever for more CS companies to take advantage of the R&D tax credit.
Benefits of R&D tax credits for computer science companies
The research and development tax credit is a government-sponsored tax incentive available to companies who conduct research and development within the United States. The credit was implemented as a Congressional response to the decline in research spending which negatively impacted the Country’s economic growth, productivity gains, and overall global competitiveness. The R&D tax credit was initially implemented in 1981 and has since been reauthorized several times. In 2015, when the Protecting Americans from Tax Hikes (PATH) Act was adopted, the Research and Development (R&D) credit became a permanent part of the tax code
Many computer science companies assume the R&D tax credit is available only to the big software development companies. This, of course, is not the case. You don’t have to be as large as Amazon, CSC or Microsoft to be eligible for the credit. A computer science company is eligible for the incentive as long as they are engaged in qualified research activities, regardless of the size of their company. Under the current tax code, any company that develops or improves products or processes may be eligible for the credit. The number of computer science companies who engage in eligible activities is ever-increasing; computer science is, by its very nature, innovative. Clarus R+D is your tax credit consultant of choice to help your computer science company take advantage of the research and development tax incentive.
Many computer science companies are unaware of the tremendous benefits of R&D tax credits. The credit is worth 7-10% of qualified research expenses. This is a dollar-for-dollar credit against taxes owed. Plus, it carries forward 20 years. For startups, applying the credit against payroll taxes is a valuable, non-dilutive funding opportunity. Eligible expenses for the R&D tax credit include U.S.-based wages, contracting, and supply costs. Most typically, wages are the largest qualified expense, but there must be nexus between the expense and qualified project. Additionally, most states offer an R&D tax credit that can supplement the federal R&D tax credit.
Computer science and R&D tax credit eligibility
Working with a professional R&D tax credit consultant, like Clarus R+D, is the best way for you to determine your tax credit eligibility. In order to be eligible for the research and development tax credit, your software development company must engage in qualified research. Qualified research generally is private sector or commercially driven development intended to yield innovation within a scientific or technological field. The following four-part test determines whether an activity is considered qualified research and, thus, eligible for the R&D tax credit.
The purpose of the activity or project must be to create new (or improve existing) functionality, performance, reliability, or quality of a business component. A business component is defined as any product, process, technique, invention, formula, or computer software that the taxpayer intends to hold for sale, lease, license, or actual use in the taxpayer’s trade or business.
Elimination of Uncertainty
The taxpayer must intend to discover information that would eliminate uncertainty concerning the development or improvement of the business component. Uncertainty exists if the information available to the taxpayer does not establish the capability of development or improvement, method of development or improvement, or the appropriateness of the business component’s design.
Process of Experimentation
The taxpayer must undergo a systematic process designed to evaluate one or more alternatives to achieve a result where the capability or the method of achieving that result, or the appropriate design of that result, is uncertain as of the beginning of the taxpayer’s research activities. Treasury Regulations define this as broadly as conventional implementation of the scientific method to something as informal as systematic trial and error process.
Technological in Nature
The process of experimentation used to discover information must fundamentally rely on principles of the physical or biological sciences, engineering, or computer science. A taxpayer may employ existing technologies and may rely on existing principles of the physical or biological sciences, engineering, or computer science to satisfy this requirement. Research activities that qualify for R&D tax credits must be conducted in the U.S. If your business does any of the following, it likely qualifies for the R&D tax credit:
- Develops or designs new products or processes
- Enhances existing products or processes
- Develops or improves upon existing prototypes and software
Even if your work passes the four-part test, there are a few exclusions to the R&D tax credit. Expenses incurred under the exclusions will not qualify for the incentive. Some of these already appear in the four-part test, including the need to rely on hard sciences. The activity must take place in the U.S. and cannot include routine data collection or market research. Also, activities cannot receive funding from an unrelated third party because your company might not retain ownership of the resulting intellectual property.
Clarus R+D will work with you to help you understand what is considered qualified research for purposes of determining R&D tax credit eligibility for your computer science company.
R&D tax credits: Computer science and innovation
The field of computer science explores the practical and theoretical aspects of computational processes. Areas of research within the field include algorithms, architecture, artificial intelligence, computer vision, computational biology, concurrency and distributed computing, database systems, machine learning, machine vision, natural language processing, networks, numerical analysis, programming environments, programming languages and methodology, robotics, and theory of computation. Those who know how to create and improve software are highly marketable and are in demand. Here is just a brief list of careers that likely engage in qualified research within the computer science industry.
- Data scientist
- Software tester
- Web developer
- Systems analyst
- Business analyst
- Product manager
- Network architect
- Software engineer
- Software developer
- Full-stack developer
- Engineering manager
- User interface designer
- Database administrator
- Cloud computing engineer
- Information security analyst
- Computer science professor
- Chief information security officer
- Information technology specialist
- Software quality assurance manager
- Mobile application designer or developer
- Research and development (R&D) scientist
- Computer scientist or computer science researcher
- Artificial intelligence and machine learning engineer
In order to be eligible to claim the R&D tax credit, computer science activities must satisfy the four-part test described above. Clarus R + D will work with you and your team to help determine if your computer science company is eligible to claim R&D tax credits.
R&D tax credit consultants: What to expect
Working with a professional R&D tax credit advisor is the best way to determine eligibility and maximize your benefit. Here is what you can expect by selecting Clarus R+D as your R&D tax credit consultants:
- Clarus R+D provides a team of professionals with expert credentials able to answer all your R&D tax credit questions.
- Our proprietary software streamlines R&D studies which maximizes your ROI.
- Clarus has expert knowledge of the IRS regulations relating to the research and development tax credit, IRC Section 41, as well as the regulations pertaining to state-specific research and development credits.
- Clarus has extensive experience in recognizing qualified research activities and expenditures.
- Our time-proven methodology has yielded maximum benefits to our clients.
- The Clarus team has helped hundreds of clients claim millions in R&D tax credits.
- We place emphasis on helping growth businesses take advantage of the tax incentive.
- Clarus does the work for you; our web-based app allows you to enter information at your own pace.
- We have extensive IRS and state audit experience and provide our clients with audit support.
- We have maintained an exceptional success rate in applying for the R&D tax credit.
- We work directly with our clients and their respective accounting firm and payroll processor.
- Our process saves valuable time and resources within the engineering and finance departments.
- Our fees are very competitive.
- Our performance, success rate, and unparalleled quality of service result in high client loyalty.
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Schedule a free consultation with our team of experts to learn more. We’ll discuss the R&D tax credit and help you determine if our solution is a fit for your company.