In research and development tax credits, some cost related to wages, supplies and contract research are eligible. Many times, however, taxpayers tend to overlook some of the processes and work that can be included to maximize the tax savings.
Contrary to popular belief, R&D credits are not limited to things that have not previously been done. Many think these credits are limited to new inventions like the cell phone, or the lightbulb, but that is not the case. The Internal Revenue Service does not require that technology be revolutionary or new innovation to be eligible for these tax credits. The only requirement is that products and processes be improved.
Unfortunately, those who could benefit from claiming R&D tax credits either fail to claim them, or leave money on the table, because they aren’t aware of all the activities that qualify. R&D credits are a dollar-for-dollar reduction in income tax liability that is either underutilized or not utilized at all every year.
Here are some often overlooked qualifiers for R&D credits:
CLOUD COMPUTING NETWORK COSTS
Cloud computing server, platform and SaaS software application innovation costs may be qualified research expenses that are eligible for R&D credits. Leasing cloud computing time is often cheaper and easier than purchasing locally hosted servers and outfitting data centers. These expenses may be eligible when the cloud servers are located away from the taxpayer’s premises and operated by another. The taxpayer must not be the only, or primary, user of the cloud server.
AUTOMATION THAT IMPROVES EFFICIENCY OF PROCESSES
Improving workflows and processes in manufacturing may also qualify by using process automation tools. Automated shelving, labeling systems, and the use of robotic arms are some of the process automation tools that may be involved. In the case of a robot, while the cost of the robot cannot be used for R&D credits, the time invested in designing the type of robot, how and where the robot will be used, and the testing involved may be qualified expenses.
ARTIFICIAL INTELLIGENCE AND MACHINE LEARNING
Any process of product that uses machine learning or artificial intelligence to determine how to better accomplish a process, or increase its efficiency, qualifies for R&D credits. Machine learning can assist in the decision of where to place a robotic arm for the most efficient and effective use.
REPLACING AN OBSOLETE PART OR PRODUCT WITH NEWER TECHNOLOGY
A common scenario in which these expenses may qualify for the R&D credit, a piece needs to be replaced as part of a manufacturing process, but the supplier no longer makes the part. If a direct replacement cannot be found, the taxpayer may change their product or process to accommodate a new part on the market, requiring design changes. These changes may be related to size, functionality, geometry or other elements.
When the obsolete part is so old, new technology may also provide a better answer than a retrofit. Research and testing must be done to accommodate the new technology. If the taxpayer can provide proof of concept, demonstrate how the new technology improved the product or process, and document the failure points, they may be able to recoup the amount expended for design and testing. The wages related to a marketing associate who provided the design input to the improvement or features that should be created through the new technology, but they must be able to show documentation of the individual’s contribution to the process, and that they had the sufficient technical experience necessary to participate in the design.
MACHINE LEARNING AND AI
Any product or process using machine learning or artificial intelligence to learn how to do something better, more efficiently, or faster, qualifies for R&D credits. For example, machine learning might help a company learn where to place a robotic arm for its best use.
These are a few activities that might be overlooked in considering expenses for the R&D credit in manufacturing products and processes. This is not an exhaustive list but may help in thinking through how to maximize your research and development credit. Activities do not have to necessarily fit the textbook definition of research to qualify.
If you have questions about R&D credits or their application, please give me a call at Cash Flow Strategies, Inc. We have a team of experts who can certainly answer your questions regarding this topic, Cost Segregation, Section 179, The 2014 Tangible Property Regulations, and the Real Estate Professional designation.
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