There is no doubt that when a CPA firm is seen as a trusted advisor, its clients are more receptive to advice that falls outside the scope of standard tax and compliance work. CPAs should always be looking for opportunities to help clients become more profitable – one way to help them do this is to convince them to invest in outsourced R&D services.
Research & Development (R&D) is more than just product testing and development, it includes a wide variety of business operations that many don’t even think about like:
- Computer-aided design (CAD) and computer-aided engineering (CAE) activities including modeling and simulation for a variety of industries
- The development of automation to replace manual processes for a variety of industries
- Design planning for new processes directly related to manufacturing
- Hop breeding in craft brewing
- Construction of prototype dies for die casting
- Design and development of Supervisory Control and Data Acquisition (SCADA) and other control or management systems for engineering firms
These and many other activities are considered R&D and qualify for the R&D tax credit. Your company may be performing regular operations that qualify you for these valuable tax credits without even knowing it – skip to reason #2 to learn more about R&D Tax Credits.
Reason #1: Outsourced R&D is More Cost-Effective Than In-House
The productivity of R&D dollars needs to be regularly assessed to ensure that money isn’t going down the drain.
With that being said, outsourcing can be more cost-effective than in-house and if it is successful, ROI will be higher.
The process of outsourcing R&D can reduce cost and enhance performance. Not paying for things like testing facilities or extra equipment and additional hires for testing has proven to be a huge money saver for companies in many industries.
Your client also won’t sacrifice productivity by using their own people who probably have other important responsibilities and teams they need to support.
A 2014 study from the Center for European Economic Research shows the cost savings that come from outsourcing R&D can easily be overshadowed by the added complexities that come from managing the process. Don’t let this argument end the conversation.
When Procter & Gamble outsourced some of its R&D activities, it boosted its innovation productivity by 60% and generated more than $10 billion in revenue from over 400 new products. While comparing P&G financials to your clients’ financials may be like comparing apples to oranges, the bottom line is that outsourcing can have a positive impact on your client’s bottom line.
Reason #2: R&D Tax Credits
In the same vein of cost savings, R&D tax credits remain one of the best opportunities for businesses to substantially reduce tax liability.
You are likely already aware of R&D tax credits but here is a good way to explain it to your client: Companies like [insert company name] can qualify for significant federal and state tax savings to allow them to hire new employees, invest in new products and service lines, and grow business.
If their company does any of the following, their business will likely be able to get 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
Due to modifications and expansions over the years, more companies than ever before can benefit from this valuable incentive. However, if you choose to outsource R&D activity, those outsourced expenses are reduced from 100% to 65% of the qualified amount, thereby lessening the potential benefit of the credit.
There are a number of factors that contribute to qualifying for this tax credit and you must be able to support, document and substantiate the case for your client to receive an R&D tax credit.
So far our reasons for investing in outsourced R&D services include saving money and being able to create innovative things for their customers.
Reason #3: Control and Manage Risk
Developing innovative products and solutions in-house can be very risky, especially when this is not a core competency held by others within the company. This experimentation can deplete valuable resources, time and money if the solution does not deliver.
By using an outsourced R&D firm, the risk involved in development is passed to a third party and your client’s company reduces their liability.
With in-house R&D, your client may end up overspending because they think they need to in order to get results.
A fixed-price contract with the outsourcing organization can make it easier to manage budgets and keep overspending to a minimum as there will need to be talks with the outsourced firm before more money is spent – a conversation you are hopefully a part of.
Reason #4: Get the Product to Market Faster
Some companies use R&D to find products for their businesses to use. If your client is in this camp, you may want to skip this reason – we will have something for you in reason #5.
Now, if your client uses R&D to help develop and test new products that they create, outsourcing can help get these products onto the market faster than if they did it solely in-house.
If your client’s market is extremely competitive, it would be a smart move to combine in-house and outsourced R&D so that these two parties can help the company capitalize on an opportunity quickly.
Reason #5: Utilize the Latest Technology for a Competitive Edge
Your client may give you an odd look when you bring this into the conversation, but that is okay as this does tie back to revenue.
It can be inefficient to have internal employees test out new, internal tech solutions for a few reasons:
- There will be a learning curve that could last days, weeks or even months.
- If the solution isn’t a good fit, time and money are wasted.
- If new tech isn’t thoroughly tested, performance will suffer once implemented.
Acquiring new technology, although not quite as risky as developing new technology, can eat up your client’s resources if they decide to test it out in-house.
Now, if they decide to have a third-party test this technology and see how it behaves with existing processes and equipment, less direct company time is spent.
If the product works well, it can be implemented into operation and benefit your client’s customers or business operations quickly.
Whether the tech is meant to streamline production, help customers use the product or simply improve project management, it is beneficial to implement something that works as soon as possible to increase revenue.
Reason #6: More Focus on Building Their Business
Yes, R&D is a big part of generating and nurturing business. However, technical aspects of R&D that we don’t normally think about can cause owners to shift focus from more pressing matters.
They can be involved in the R&D process still, but they will still be able to take meetings with investors, new clients, etc. so that they can continue to build a thriving enterprise – which is likely their ultimate goal.
Now that you have some reasoning behind why it can be beneficial to invest in outsourced R&D services, it is time to take action and start the conversation.
Increase Cash Flow with the R&D Tax Credit Experts
Remember the R&D tax credits we talked about earlier? At Tri-Merit we are very experts in the R&D tax credit space and are here to help you assess if your client is qualified to receive this credit, but we won’t stop there!
We simplify the process and help companies determine the size and usability of those credits, and the appropriate method for supporting their credit claims so they hold up, even under IRS scrutiny.
We strive to get those who partner with us the largest possible returns to support innovative business endeavors.