In 2019, $60 billion of the $92 billion R&D tax credits available went unclaimed (from the most recent data). That’s a problem you can help with. All that money is available, many of your clients don’t know they’re eligible, and you can tell them. One firm we work with built a $250k line of business by letting clients know they might be eligible.
There are a lot of misconceptions about the R&D tax credit, and here, we aim to dispel them. Whether your client is in agronomy or architecture, facilities management or finance, they could qualify. Gusto’s R&D tax credits team has plenty of examples of organizations that are not software startups claiming their well-deserved credit.
Plus, if you suspect a client may be eligible, you really should be starting the conversation early. Not only can pre-revenue startups claim it, but it’ll be much easier to substantiate things if they start thinking about it now.
First off: Let’s talk qualified activities
The R&D tax credit is a cash incentive for US companies to invest in innovation. Companies can apply it to income taxes or, if they’re a qualified small business (aka QSB; an active domestic C-corp whose assets do not exceed $50 million), to payroll taxes. If used for payroll, it can offer up to $250,000 per year for up to five years. The key is, of course, proving they are innovating, and they do this by demonstrating they’ve been doing research toward qualified activities.
Those activities might include developing and testing a new software program, testing improvements in existing products, customizing hardware for internal use, or developing a proprietary method or technology like a toolkit or algorithm.
You can learn more about the qualifications here, but broadly, that research must be:
- To learn something where the outcome is unknown
- Technological in nature
- A process of experimentation (and the outcome need not be successful!)
- For a permitted purpose — to increase function, performance, reliability, or quality
All that means it can, and does, apply to virtually every industry.
Types of companies, and potentially qualifying activities
Please note: This list is not exhaustive, and it’s for informational purposes only, and not tax or accounting advice.
Activities around computer-aided design (CAD), modeling, finite element analysis (FEA) simulation, and all manner of design, testing, and prototyping are worth looking into. Also, any work done optimizing the manufacturing process behind aerospace components, or testing components to meet regulatory and safety standards, might qualify a company.
Architecture and engineering
Look into work put toward achieving leadership in energy and environmental design (LEED) certification, evaluating different design alternatives, and designing new foundations or earthworks for novel site conditions. Look into improved scaffolding or support structures, new software applications (including off-the-shelf software that’s been heavily customized), and developing schematic designs.
Companies working on Web3 projects (let’s bundle it all within that) may qualify if they build smart contracts on top of a blockchain like Ethereum, a new distributed finance application, a platform for NFTs, or cryptocurrency mining hardware.
Just conducting repetitive work probably won’t qualify. For instance, mining crypto or creating NFTs to sell on platforms like OpenSea.
Wait, what are NFTs and crypto, again? Gusto’s experts explain.
Breweries, wineries, and vineyards
Nearly everything around improving production and packaging may be qualified. For example, new bottle conditioning, capping, corking, filtration, wastewater, packaging design, recipes, prototyping methods, and tests for microbiological qualities.
Wineries and vineyards might look at all the above plus developing grape strains to improve aroma profiles, irrigation systems, mixing techniques, sustainable energy, recycling management, and soil and rootstock processes.
Building new communication hardware or software, such as new handheld devices, frequency-management protocols, or VoIP calling systems may count. According to our data, communications companies tend to receive twice as large of a credit on average.
Look into activities around developing prototypes and modeling, developing new and more reliable products (e.g. a method of roofing), or design improvements for LEED or energy-efficient projects. Also consider the work on unique assembly or construction methods, experimentation with new building materials, improving construction equipment, or any project that requires extra testing or certification upon completion.
Consulting services are often trickier than other industries because your client will have to demonstrate the activities were conducted for their own business, not on behalf of a client. If the activities were paid for by a customer, that customer is the one who’s eligible for the credit. (The deciding factor here is intellectual property rights ownership.)
If the consulting service builds things for itself such as custom software, new products or processes, and proprietary technology like an algorithm or toolkit — or heavily customizes tools, software, and processes — it may be a candidate.
Consumer packaged goods (CPG)
Any research and development into providing the function or quality of products, including the packing and distribution is worthy of a look. This could include far-fetched ideas and moonshot projects that don’t pan out. Research doesn’t have to result in a new product — only knowledge. (Learning that something doesn’t work is still a win for science!)
If an agency builds its own process to deliver better products to clients, it may qualify. For example, Arizona-based Heckler Design creates “exacting” internal standards for the function and aesthetics of their hardware products — audio/visual office hardware such as iPad stands, monitors, and video meeting setups. All that research into better design and fabrication ended up being qualified research.
Success story: Heckler design discovered $380,000 in R&D tax credits.
Any research into new trading algorithms, payment methods, fraud detection systems, or customer identity verification methods may qualify. For example, a wealth management app that develops a unique portfolio rebalancing system, or a community bank that devises its own double-factor authentication method.
According to Gusto data, finance companies tend to receive a higher-than-average credit.
Potentially qualifying activities include the research into and design of new antiseptic products, ventilation methods, prosthetics, or software to help route emergency responders.
According to Gusto data, healthcare companies receive three times the average credit.
Life sciences companies may qualify by developing and implementing hardware and software systems like in-lab robots to handle trays and assays. Or, they could design and manufacture prototype mechanical devices, drug delivery systems, or pharmaceutical packaging. They could be developing and testing new drugs, therapies, biologics, synthetics, and other medical compounds. And, look at all the activities around passing clinical trials, building a manufacturing operation, and testing at scale.
Also don’t forget work that supports direct research activities such as quality testing, maintaining lab equipment, data collection, and regulatory compliance may also qualify.
An agency may develop a software that tracks, monitors, and optimizes a client’s marketing campaign, and develops and retains that technology for itself. Or, if it redesigns a database to improve its speed, efficiency, or user-friendliness. Really, any custom development. (Which could include customizing a common CRM software, provided the outcome is unknown).
Anything manufacturers are improving where the outcome is unknown may qualify. For example, making a battery last longer, or hardening it against abuse. Thermodynamic research to help a component shed heat could qualify. Shrinking a component so it fits into a smaller box could count. Developing new quality assurance processes, developing a process to meet regulatory requirements, designing in a CAD system, building robots, improving the filling and sealing of products, and 3D printing designs and prototypes are all worth considering.
Consider work done building a software application or digital property for holding fitness classes online. Or, developing a platform or regimen that relies on wearable devices (as with Peloton or Orangetheory). They might also qualify if they’re building new fitness classes using experimentation and the scientific method, or if they’re able to demonstrably measure increases in cardiovascular health through medical tests or obtain certification for their classes.
Software and tech
Software and hardware technology startups are the poster child of R&D tax credits, largely because that’s more or less the kind of development Congress was hoping to inspire when they launched the R&D tax credit in 1981. Work developing, customizing, and improving hardware and software are worth investigating, as are supporting activities like contract development work, product marketing to understand the customer’s needs, and management work to guide the development.
Code that’s developed and then discarded still qualifies. One need not use the result of the work. (Though it does have to be undertaken with the intent to innovate.)
Companies may qualify if they’re pioneering new safety methods, new vehicles, new navigation systems, or laying out new infrastructure. For example, research into improving the battery life of electric vehicles, or a new, more efficient network of charging stations.
Utilities may qualify if they’re conducting research into energy efficiency, new interfaces, and software to help customers achieve their savings goals, or new, more efficient transmission infrastructure.
According to Gusto data, utilities tend to receive a 50 percent higher credit than the average company.
Qualifying activities may include research into making logistics networks more efficient, software to help with inventory and sorting, heavy customization of purchase software such as ERPs and CRMs, and anything that goes into researching customer needs and new products.
According to Gusto data, nearly half of all R&D tax credit recipients fall into this category, and they tend to receive larger-than-average R&D tax credits.
And, this isn’t even the full list
There are plenty of other scenarios where companies qualify. But hopefully this provides a starting point from which to begin to advise your clients that they too can claim their portion of the billions of dollars allocated each year.
Have questions about a particular client? Contact your Gusto account manager.