Research and product development is considered a set of activities undertaken by organizations in an effort to develop new products and improve ones that already exist. Research and development (R&D) is the key to creating new technologies that will shape our future.
Chances are your business already performs “R&D,” (even if you think it doesn’t) because these activities are typical in businesses that work to remain competitive.
There is much to gain by investing in R&D. Below, we will discuss ways to save on the cost of product research and development and how our team can help you receive R&D tax credits for your efforts.
Why Research and Development Is an Important Investment
There are several reasons why investing in R&D is a good idea, chief among them being the following.
Product or Service Development
People are always clamoring for something new. Take Facebook for example. The R&D department at Facebook is constantly performing development research to determine how they can improve the Facebook platform and appeal to the wide-ranging and ever-changing desires of their target audience.
Whether it is a digital or physical product, people love to see improvement. Dedicating part of your budget to the development of new products and the improvement of product design will raise your customer satisfaction.
Customers appreciate quality-of-life improvements and love to invest in the newest iteration of a particular product.
Appealing to Your Target Market
By targeting particular focus groups and demographics, you can effectively turn your R&D department into a marketing focus.
In both the B2B and B2C space, corporations are constantly marketing the advancements of their products or claiming to have come up with never-before-seen products, services, and technologies.
People love to see the evolution and creation of new products, so use that to your advantage. With effective market research, you can create advertising campaigns that complement the activities of your R&D department.
This can increase your market share by giving people something they have never seen before.
Ways to Save Money on R&D Expenditures
There are a number of ways that you can save your business money on R&D costs. The following are some of the most effective ways.
Eliminating Inefficiencies and Unnecessary Costs
This is the most basic way to save money on research and development. Consider engaging in a comprehensive analysis of your R&D activities (which could involve bringing in a third-party expert) to determine what areas can be improved.
If a certain area of research has not proved to be fruitful, then it may be a good idea to cut it out entirely and focus on other, more prosperous areas.
Reevaluating Your Staff
This method goes hand in hand with the previous one. Considering a reduction of non-essential staff can go a long way in reducing expenses.
Thanks to developments in artificial intelligence and computer automation, some activities that used to require manual implementation by less experienced personnel can now be completed in less time with oversight from existing, more highly trained staff.
In addition, there are several different staffing models to consider. You could outsource service providers who can put the proper technicians and researchers in place to carry out R&D duties. Some managed services providers (MSPs) even take full accountability for the efficiency and effectiveness of the research and product development process.
Utilizing a Lab-as-a-Service Provider
An increasingly popular trend in R&D departments is the utilization of a Lab as a Service (LaaS) provider. These services not only provide personnel to work on research and development projects but also comprehensive results-oriented solutions.
LaaS providers have proven themselves to be very efficient and can remove a significant burden from your or another manager’s shoulders.
Utilizing the R&D Tax Credit to Reduce Expenses
One significant and often overlooked way to save money on research and development costs is the proper utilization of the R&D tax credit.
Does Your Company Qualify for the R&D Tax Credit?
If you’re reading this article, then you need to ask whether your company is doing work that would qualify under Section 41 of the Internal Revenue Code. The R&D tax credit was created to promote the development and improvement of products and services.
Companies and startups that are rooted in industries such as technology, contract manufacturing, agriculture, and architecture, among many others, are all eligible to receive aid from the R&D tax credit.
There are numerous R&D activities that count towards the credit. Many of these activities may not even be what the typical person thinks of as R&D. Read through the following list of activities to determine which of your expenses could be covered under the R&D tax credit.
- Have you designed or developed new products, processes, or software?
- Have you made improvements or added new features to an existing product?
- Have you made improvements to or streamlined existing processes?
- Do you develop proprietary technology?
- Have you ever improved the technology used to power your products and services?
- Do you take on unique or custom projects that have associated challenges?
- Have you built a prototype of a product?
If any of those questions ring a bell for you, then your company likely engages in qualified research activities for the R&D tax credit!
In addition, the tax credit can also reimburse you for R&D-related expenses, such as contract research, rental or lease costs of computer equipment, supplies used for research purposes, and W-2 taxable wages for those involved in the R&D process.
How Do You Apply for the R&D Tax Credit?
Tri-Merit understands that most CFOs and CPAs will need guidance to work through the intricacies of the R&D tax credit process.
The vast majority of businesses are pleased to find a reliable resource like Tri-Merit to help walk them through the R&D tax credit steps while including their CFOs and CPAs throughout the process.
As you might expect, applying for the R&D tax credit can be a complex process, but it doesn’t have to be difficult. It can be done, but you may require a little help to ensure your calculations and documentation meet IRS guidelines and avoid needless issues under potential audits.
There are three major steps involved in the process of claiming your credit.
Conduct a Study of Your R&D Activity
Having an experienced project team, consisting of engineers, software developers, and other technical personnel, who have expert knowledge on how the credit works and know the right questions to ask, is important for optimizing your return.
Fully understanding the type of research that is being done and knowing the ins and outs of your product life cycle is crucial, and with the right partner in place, staff time should be minimal.
File Your Credit Claim with the IRS
Make sure you file all relevant information with the correct documentation in order to qualify for the tax credit. Include proof of your R&D expenses and list out all of the expenses that you would like to claim.
Having an experienced team who understands what the IRS needs and has a successful track record for audit defense is also important. Claiming the credit doesn’t mean you will be audited, but if it’s your first time doing so, you should not want to risk getting into a situation with an inexperienced partner.
Apply the Credit
If your claim is approved, then the credit is usually applied against income tax liabilities and under certain situations through payroll tax liabilities. Tri-Merit will work with each business to fully assess utilization scenarios.
This extensive process can be simplified with the assistance of a partner like Tri-Merit. We can make sure that the claim you’re filing is completely proper and fully encompasses the expenses related to your company’s R&D activity.
How Much Money Can You Save With the R&D Tax Credit?
The size of the benefit is dependent on the number of qualified expenditures associated with qualified research activities. As a rough rule of thumb, the R&D tax credit can be worth around 5-15% of your total spend on the research and development process depending on industry and state.
Tri-Merit Can Ensure the Optimum Amount on Your Tax Return
If you need assistance determining whether or not your business qualifies for the R&D tax credit, then you need to partner with Tri-Merit. Our specialty tax professionals will work with you and your CPA to help you make the best financial decisions for your business and ensure you the optimum amount on your tax return.