Tax Solutions: How to Claim Tax Credits for Product Development and Process Improvement

That's it. I've had enough. I refuse to use the phrase "R&D Tax Credits" any longer. Doh. I just used it again. Ok, I'll be done with it by the end of this article, I swear. The most common misconception I've seen in my half decade of calculating tax credits is people thinking their company does not qualify for this credit. The IRS really pulled a fast one on us by calling it the "R&D" tax credit. A much better name would be the "Product Development and Process Improvement Tax Credit" but I guess that doesn't have the same ring to it. To all my IRS friends reading this, I'm just teasing. You're still my besties.

The title really does discourage people though who are very deserving of this tax credit. The issue is when we (as in the Internal Revenue Code 'we') say "R&D", we don't mean "R&D" in the colloquial sense - you're thinking a new Tesla that makes and feeds you fresh protein smoothies while driving you to work. No no, friend. Tesla certainly gets a nice chunk o' tax credit change, but this credit is made for a much broader range of companies.

Since I'm a big fan of fitness, let's take an example of an app that counts macros. Do you know what a macro is? I didn't either. But all you need to know is that if you're low on your carb macro intake for the day but can't have any more fat, red wine fits the bill. Lots of red wine. I digress. Say this company makes an app that takes in your weight, your height, your age, and tells you how many macros you should be eating. There's lots of apps that do this. BUT that doesn't matter! This company still gets an R&D tax credit because this app is a new development FOR THEM.

Then let's say the following year, they add a new feature where you can input your fitness level and the app tells you what workouts you should be doing. This new product improvement can also qualify!

Ok, you're saying, I'm not stupid Kim, I already knew this. Put down your smoothie and tell me something I don't know. So you know software companies can qualify for the credit, and you're claiming the costs for your software developers. But wait....there's more! Many people do not realize that the direct support and direct supervision of qualified activities ALSO qualify. Are you claiming the QA team testing the software for bugs? Are you claiming the people supervising the software people?

Fine, you say, but we have a slight problem here.... our company isn't making any money. Ok, maybe that's not a slight problem, but we can talk about that later. The relevant point here is that the R&D tax credit can now offset payroll tax. So even if you're not paying taxes, you can still get cash benefit from the credit.

These are just a few examples of how to qualify and benefit from an R&D tax credit study. There's many more industries that qualify and other tax credits that are worth pursuing as well. Don't become a tax credit tragedy. Call me or have your CPA call me or have your self-driving Tesla call me, and let's see if we can help.

Kim Hopkins, Ph.D. (818) 877-9211, [email protected]