Over the last decade we have seen some monumental changes in the digital world. We rely on the internet for entertainment, to conduct business, to market our business, to search for goods and services, and so much more. As society becomes more dependent on technology, there are more and more opportunities to develop and improve the processes and procedures we use daily. New technology and innovations drive the market these days. In order to remain relevant and competitive one must constantly seek new ways to improve the process, develop new applications, and bring on the next big thing. Which brings us to research and development and the R&D tax credit.
What Is The R&D Tax Credit
The R&D tax credit was first introduced in 1981. While initially it was intended as a 2 year incentive, it has been a part of our tax code ever since. It is used as a way to reward companies who invest in research and development for the current tax year. It is available to any business who seek to develop new, improve, or technologically advanced products or procedures. Advances in technology are deemed an economic stimulus to the US economy. However, research and development is not without risk and it can be costly and time consuming. The R&D tax credit was designed to offset some of the risk and financial burden of research and development.
Prior to 2015, there were some limitations to the R&D tax credit, which the PATH Act addressed. The PATH Act made the R&D tax credit a permanent addition to the tax code, and paved the way for small businesses, startups, and other industries including digital marketers, to take advantage of the benefits the R&D tax credit has to offer.
Who Is Eligible For The R&D Tax Credit
With advances in technology and provisions made by the PATH Act, many industries that were previously prevented from taking the R&D tax credit can now partake. However, there are some income restrictions that do apply; to qualify companies must have gross receipts of less than $5 million per year, and gross receipts for no more than 5 years.
How Can Digital Marketers Benefit From The R&D Tax Credit
Under the recent changes to the R&D tax credit, many new industries are able to take advantage of its benefits, digital marketers included. Due the dynamic nature of digital marketing, there are plenty of areas that are in need of new and improved procedures, and technological advances. Part of digital marketing is adapting to change and embracing new an innovative ways to create brand awareness. Over the course of developing new or improved apps, programs, or procedures, you may incur certain costs that can be offset by the R&D tax credit.
In order to considered a qualified research expense the research activities must involve experimenting, development, and testing of procedures that have an impact on the work you do. Activities must be technological or scientific in nature, and eliminate any uncertainties. Research activities that qualify include:
- Development of software that tracks and monitors advertising campaigns.
- Writing code that delivers website, applications, or SaaS services to third party clients.
- Designing databases to help improve speed and efficiency for clients.
- Developing algorithms to improve SEO, PPC, and other advertising campaigns.
- Creating and improving data collection algorithms.
- Developing and integrating CRM software.
Qualified Research Expenses
Qualified research expenses include the research, development, testing, and certain processes. Some expenses that qualify for the tax credit include:
- Wages paid to employees conducting research.
- Supplies used and consumed during the research process.
- Contract expenses paid to third party consultants performing qualified research activities, regardless of success. This is up to 65% of the actual cost incurred.
- Payments made to educational institution and scientific research organizations. Allowed at up to 75% of cost incurred.
With the R&D tax credits availability to digital marketers there is a lot of potential for marketers to devote more time and resources to developing new apps and improving procedures that could help them remain relevant and competitive. At the end of the day it all boils down to numbers, and the ability to drive results for clients. For example, with the R&D tax credit, you may be more incentivized to spend the money to develop a new app that might revolutionize the way your clients reach their customers.
Tax credits are great because they help reduce the amount of tax owed dollar per dollar. The R&D tax credit is a great option for digital marketers because it encourages innovation, which in turn could have a positive economic effect. The R&D tax credit may also be available to you on previous years taxes. If you missed the credit in prior years, you can amend the tax return to get back taxes you’ve already paid. In many cases, this means getting a refund for thousands of dollars. For more information about the R&D credit, check out our partner’s page here or reach out to one of the R&D tax experts at Tax Hack Accounting Group, who specialize in digital marketing tax strategies