The R&D Big 3: Tax Credits in Focus
Learn about federal research and development (R&D) tax credits for manufacturing, software development and biotechnology/pharmaceutical companies.
More than 80% of startups and small-to-midsize businesses are not taking federal, state and local tax credits - either because they lack awareness of their qualifications or don't think getting them is easy. Not capitalizing on the R&D tax credit is like leaving money on the table for both CPAs and the clients they serve.
For 50 years, innovation has powered the U.S. economy. Since 1981, the R&D tax credit has been driven by an exponential expansion of private investment in industries that may ultimately benefit from it, fueling the argument that the incentive has helped spur the growth of manufacturing, software development and biotechnology/pharmaceuticals (the "Big 3").
Even though available to all business types, considering that approximately $15 billion - $20 billion in credits are claimed annually, these industries —which by their nature are driven by innovation — rise to the top of the claimant pile and generate a significant portion of the annual R&D tax credits claimed.
When it comes to R&D, it's not the size or type of business that drives qualification, but rather the scale and vision for their innovation initiatives that matter most. When these things are paired with a roadmap for aligning their activities with tax credit recovery efforts, obtaining R&D tax credits is in clear view. The path to getting tax credits is easier than you think.
- With foresight, tax credit recovery plans can be seamlessly integrated into business models which generally have to incorporate R&D activities to remain competitive in today's commercial environment.
- Qualified small businesses can claim R&D tax credits for research expenses that increase over time, providing further incentives to focus on these credits as part of growth planning.
A snapshot of each of these industries highlights how vital these endeavors are to our economy and how having confidence about tax credit recovery helps to ensure these industries remain competitive:
Manufacturers contributed $2.17 trillion to the United States economy, which is nearly 12.1 percent of the U.S. GDP and drives 35% of productivity growth, 60% of exports, and 70% of private sector R&D.
Small business makes up almost half of all manufacturing jobs, representing nearly 700,000 businesses. Significantly, credits for this sector span more than the systematic trial and error necessary to get a product "right" and ready for commercialization.
Many, if not most, industries are looking to leverage software applications and the digital environment to drive business volume and serve customers in new ways. This industry makes up almost 19% of all global R&D spending. Startups leveraging software development to create a product or platform benefit significantly from the option to elect to claim the R&D tax credit against the employer portion of payroll withholding taxes.
Ultimately, because intensive and systematic trial and error goes into the coding of software products, platforms and applications, software development dovetails effectively with the statutory requirements of the R&D tax credit.
Pharmaceuticals and biotechnology
In 2019, the pharmaceutical industry spent $83 billion dollars on R&D, which is about 10 times what the industry spent per year in the 1980s. Small and medium-sized companies generate greater than two-thirds of the clinical candidates in the pharma and biotech industry.
High wages and significant laboratory supply costs frequently yield strong R&D tax credits for businesses developing these drugs and therapies. In addition, regulatory and safety requirements that require repetitive testing and independent third-party verification can increase credit returns.
While qualifying for credits can be complex and burdensome for the small and midsize businesses and startups that are the heartbeat of these industries, they are nevertheless designed in a way that makes claiming them as easy as possible. This requires focus and coordination of effort across business units, personnel and the utilization of automation tools to ensure eligible activities are properly documented and aligned with R&D tax credit compliance guidelines.
Balancing data-driven decision-making with imaginative forecasting is essential to being in the right place at the right time to capitalize on your innovations. Partners that have the experience and a proven track record of successfully capturing credits with a focus on evolving technologies are best positioned to identify the ways to guide businesses that want to leverage tax credits and incentives to ensure they can pursue their growth goals with a financial return.
Accountants: to learn more about the Big 3 industries and how to navigate complexities when it comes to R&D tax credits, visit our R&D tax credit support page.