August 6, 2020
by Tracy Lustyan
Bringing in approximately $10 billion a year, the Section 41 Tax Credit, sometimes referred to as the R&D Tax Credit, remains the largest credit out there for the benefit of U.S. businesses—and despite what you may have heard, consultants in IT and software and technology industries can indeed qualify for the added tax savings.
If any of the following myths have prevented you from exploring the credit in the past, it would be wise to take a second look at the R&D Tax Credit as an opportunity for your business:
1. My company doesn’t do R&D
This is probably the most common myth (among IT Consultants or otherwise) preventing perfectly eligible companies from claiming the credit—and one that is related to a simple misunderstanding.
When companies hear the term “R&D,” they tend to only think of scientists and test tubes, but the credit’s definition is intentionally expansive, having been broadened over the years to help more businesses. Simply put, applied science counts toward eligibility, meaning the steps taken to improve existing technologies (think version 1.0, 1.1, 2.0, etc.) or to solve customer problems through scientific principles (hypothesize, test, analyze) will generally lead to eligibility for the credit.
2. We don’t qualify because my company does not license the software our client’s use
Consultants may wrongly assume that, since they do not license the suite of products their clients use, that they themselves do not qualify for the R&D Credit. The fact is, that if a consultant is integrating and deploying a technology within a client’s existing IT structure they absolutely could qualify.
If you are a consulting firm who has certified applications, systems, technical architects who are defining or designing data migration (management & reporting) integration solutions and executing on those solutions you are a good candidate for the credit. The credit is driven by your technical employees who are customizing & delivering those solutions so that client realizes the full capability of the suite of products based on their specifications & requirements.
3. I can’t claim the R&D Credit since I have already been paid for my work
If your company is simply being paid based on the service it provides, then you qualify for the R&D Credit. Eligibility for the R&D Credit hinges upon the activities or projects that a company undertakes, not on whether or not the company is compensated.
Unless a contract specifies that a client is directly funding the research activities and will retain the right to license use of the research, then qualifying activities performed in furtherance of your business qualify for credits.
4. Pursuing the credit isn’t worth my return on investment
The numbers would say otherwise; considering that the R&D Tax Credit is a wage-based, dollar-for-dollar credit, based on the salaries of the employees performing the work. Section 41 is the single biggest tax break a business can claim. Software and technology companies are actually among the greatest beneficiaries of the credit, with the industry’s higher employee wages traditionally driving more lucrative credit results.
5. The R&D credit is only for large companies
Wrong—and this is what too many small and mid-sized firms think. There is no red velvet rope barring small and mid-sized companies from the credit, but those companies do need to apply to reap the tax benefits—the IRS isn’t in the business of just handing out tax credits.
The simple fact is there is no reason IT and Software and Tech Consultants should not look into Section 41. There is no single tax incentive that comes close to the value the credit can provide and many tech consultants have already started to claim it. The R&D credit is also significantly larger, on average, than the most popular federal relief loan programs and consultancies are already taking advantage of the funds the credit provides. We have already helped peers in your industry claim this powerful incentive and we want to do the same for you.
Tracy Lustyan is the Managing Director for the Great Lakes Region and is based in alliantgroup’s Chicago office. Her focus is on clients in the Midwest, primarily in Illinois, Missouri, Minnesota and Iowa. Tracy has a vast knowledge of government-sponsored incentive programs that are designed for the benefit of U.S. businesses, including her work with the R&D Tax Credit, IC-DISC, DPD and hiring incentives.