Unveiling the Top Industries That Harness R&D Tax Credits: Driving Innovation & Increasing Cash Flow

Innovative technology helps companies stand out, but long-term success depends on scalable growth and continuous cost management. Enter: the R&D tax credit, a powerful tax incentive benefiting businesses of all types and sizes. This credit can boost your potential to innovate by reimbursing you for work you're already doing. Many companies are eligible but aren't aware and we’re on a mission to change that. Startups and other emerging growth companies in SaaS, AI, digital assets, life sciences, and robotics often qualify. You can extend your runway and decrease your tax rate with the R&D tax credit. Ready to learn more and take advantage? 

Qualifying for the R&D Credit

Do you develop new or improved products, processes, techniques, software, or formulas? If you answered yes, then you likely qualify for the Research & Development (R&D) Tax Credit. The R&D credit is a dollar-for-dollar offset against tax liability and can lower your tax expense and improve cash flow. Even if your project is unsuccessful or does not reach the marketplace, you may still qualify for the credit. Companies of any size can benefit from the R&D credit, so don't miss out on this lucrative strategic tax planning tool.

TLDR; if you answer yes to any of these questions you likely qualify -

1. Do you have US-based W2 or 1099 technical employees?
2. Do you have cloud related expenses?
3. Do you have expenses for supplies or materials that are related to the production of a product?

Common SaaS company qualified activities 

Numerous activities regularly performed by companies in the SaaS industry will qualify for the R&D tax credit. Examples of activities (non-exhaustive) that will potentially qualify for the credit include:

• Development of new constructs, architectures, or algorithms for the initial release of an application software
• Development of new database management techniques for the initial release of an application software
• Development of system software
• Development of an operating system
• Development of compilers
• Development of proper resolution of software development uncertainties related to process scheduling, memory management designs, or instruction execution optimization
• Development of specialized technologies including image processing, artificial intelligence, or speech recognition
• Development of software as part of a hardware product wherein the software interacts directly with that hardware in order to make the hardware/software package function as a unit

Common AI company qualified activities 

Numerous activities regularly performed by companies in the Artificial Intelligence (AI) industry will qualify for the R&D tax credit. Examples of activities (non-exhaustive) that will potentially qualify for the credit include:

• Developing and testing natural language understanding (NLU)
• Developing and teaching robots to interact with patients
• Developing software to make recommendations based on customer patterns 
• Developing an AI customer support software
• Improving robots efficiencies to help workers on an assembly line

Common Blockchain & Digital Assets qualified activities 

Numerous activities regularly performed by companies in the blockchain and cryptocurrency space will qualify for the R&D tax credit. Examples of activities (non-exhaustive) that will potentially qualify for the credit include:

• New or improved developments to the digital ledger of transactions including Proof of Work, Proof of Stake, and Proof of Importance
• Development of new secure payment technologies by tracking past transactions with the use of blockchain
• Development of source code for a new or improved web or digital wallet
• Development of APIs for third party integration of cryptocurrencies and/or wallets
• Utilizing blockchain technology principles to develop decentralized applications
• Development of a new or improved hashing algorithm to better secure data
• Development of custom blockchains to perform internal tasks more efficiently
• Development of Proof of Capacity (PoC) projects to evaluate a specific technology’s applicability, performance, or scalability
• Development of new or improved technologies to bridge blockchain and businesses solutions and better harness advances in data technology, management, and security
• New or improved development of smart contract technology in object-oriented, high-level languages such as Solidity, C++, Python, and JavaScript

Common Life Sciences company qualified activities 

Numerous activities regularly performed by companies in the life sciences industry will qualify for the R&D tax credit. Examples of activities (non-exhaustive) that will potentially qualify for the credit include:

• Designing and developing new drugs and therapeutics
• Designing and developing prototype medical devices
• Developing or refining testing methods
• Developing new or improved manufacturing processes
• Improving shelf life and reducing side effects of existing products

Common Robotics company qualified activities 

Numerous activities regularly performed by companies in the robotics industry will qualify for the R&D tax credit. Examples of activities (non-exhaustive) that will potentially qualify for the credit include:

• Developing new or improved products, processes, formulations or technologies
• Establishing electronic interfaces and functional relationships between various software modules
• Improving the production of Robots to lower system engineering and installation costs
• Developing new mechatronics systems
• Prototyping for the use of lighter or more environmental friendly material
• Improving voice, sight and/or sound recognition

Capture R&D tax savings for your business 

The R&D tax credit has been around since 1981, but it only became permanent in 2015 with the PATH Act. Before then, startups didn't use the credit because they didn't have any income to offset it. The PATH Act fixed that by allowing companies to take the credit against payroll taxes instead of income tax. This added billions of dollars to the system, but many companies don't know about it.

Now, the Inflation Reduction Act has doubled the credit, making it even more valuable. Starting in 2023, startups with less than $5 million in gross receipts can use the R&D tax credit to cover up to $500,000 in payroll taxes each year. This is a huge boost for young companies and an incentive to keep creating new ideas.

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While these are the most common industries that qualify for the R&D tax credit, there are plenty of other companies we’ve helped in other industries as well. If you’d like to learn more about TaxTaker’s services and how we can help you extend your runway, schedule time with our team!