Engineers apply cutting-edge scientific technologies to solve problems across every industry imaginable. From working to mitigate the effects of climate change, to developing new drugs to help fight the next global pandemic, engineers provide invaluable services to our society. In the rapidly changing world we live in today, it is vital for engineering companies to acquire the resources they need to meet our world’s growing challenges head-on.
Federal and state governments understand this necessity, which is why billions in R&D tax credits are given to corporations every year to help catalyze their research projects while maximizing their profitability.These R&D tax credits raise engineering companies’ bottom line,allowing them to continue doing what they do best – solve the world’s problems.
R&D Tax Credits in the Engineering Industry
The R&D Tax Credit was first introduced in the United States through the Economic Recovery Tax Act of 1981. With worries that the U.S. was falling behind in production and innovation relative to the global economy, the Economic Recovery Tax Act aimed to stimulate the U.S. economy and encourage investment within the United States. Though this tax credit was originally only anticipated to last for two years, the PATH Act of 2015 permanently extended the R&D Tax Credit due to the immense value that research and development brings to the U.S. economy each year.
How does an Engineering company qualify for the credit
There is a four – part test used to determine whether a company has a project that qualifies for the R&D Tax Credit. If you have a project that meets each of the four quadrants below, your project most likely qualifies
Technological in nature
- Discover information that fundamentally relies upon principles of Hard Sciences (i.e. Physical Sciences, Biological Sciences, Engineering, Computer Science, etc.)
- Not social, economic, or psychological Permitted Purpose
Permitted Purpose
- Develop a new, or improve an existing, product or process
- List Item #2Related to Functionality, Performance, Reliability, Quality, Significant cost, Savings, etc.
- Not Aesthetics
Eliminate Uncertainty
- Capability
- Uncertain if able to achieve desired result
- Methodolgy
- Uncertain of optimal design or process to achieve project goals
- Goals to show there were issues and potential alternate solutions
Process of Experimentation
- Evaluate and test alternative design or process to identify optimal solutions
- Methods to use
- Prototyping
- Modeling
- Systematic Process of Trial and Error
- Simulation
- Computer Science Testing (Validation, Beta, etc.)
Once a company determines that their project meets these criteria, three expense categories factor into the tax credit calculation:
Wages
- Employees involved in conducting or carrying out qualified research.
- Employees providing supervision of qualified research.
- Employees providing support for qualified research activities.
Supplies
- Resources consumed or used up during the carrying out of qualified research.
Contract Research
- 3rd parties paid to assist in the conducting or carrying out of qualified research.
- Requires the Company to maintain rights to the project (i.e. research performed on behalf of the Company)
- Requires the Company to bear the expense if the research is unsuccessful.
All disciplines within the engineering industry are capable of qualifying for these R&D tax credits. Some of the major disciplines that routinely claim these tax credits each year include:
Computer Engineering
With the rise of big tech and the massive fortunes generated by software companies each year, computer engineering is perhaps the most fast-paced, dynamic industry in the United States. Startups and large software corporations, alike, are in a constant R&D battle to innovate the next big thing or be rendered obsolete. Qualifying R&D activities that a computer engineering company might partake in include:
- Creating a new software or hardware to bring to the market.
- Developing a new feature to add to an existing software package.
- The building out of a new software to integrate with an existing technology (e.g. a new app to integrate with a Fitbit watch), or vice versa.