You developed your technology, acquired new customers, delivered outstanding solutions and received a nice reward for your efforts. Still, you’re not happy with how much money is left after you pay your employees, contractors and other business expenses. You embarked on numerous process improvement and cost-cutting initiatives to improve your bottom line, but you’re still waiting to reap the benefits.
If you’re in this boat like many of us, there’s another strategy that could boost your profits immediately. And it relies primarily on work you’ve already done when you developed products or delivered your services. If you qualify for the R&D Credit, you could get an average of 10 cents for every dollar you spent in product, process or software development.
How does the R&D Credit impact my profits?
Great question! See, tax credits are a dollar-for-dollar offset of tax liability. Unlike a deduction, they reduce your existing tax at face value. Let’s say you owed $10,000 in income taxes to the IRS but can claim a $9,000 R&D tax credit, you now only owe $1,000. It’s really that simple.
Most businesses require a range of time-consuming activities to generate $1 of profit. You spend a great deal of time developing a product (or at least a concept you can sell) then more time to procure a ready-and-able buyer, and even more time convincing them to buy from you. All while you develop a tailored solution, working through all the development and production issues before you deliver. Each of these activities are necessary and even desired. After all, they are integral parts of growing your business and critical to succeeding on your mission.
R&D credits can complement your growth strategy and help you achieve your goals faster. While the activities mentioned above take a lot of your company’s time, calculating and claiming the R&D Credit on your tax returns will take just a few hours. Most of the heavy lifting can be done by experts who understand how engineering processes happen in your business to maximize your credit claims.
From credits to profits
Ok, you’ve heard enough. Now, “show me the money.” Fair enough. Here’s how R&D credits can impact your business.
As mentioned earlier, on average, you can get credited 10 cents for every dollar spent in R&D (i.e. product, process or software development). So let’s just say you spent $1 million dollars in R&D last year. Those expenses will generate approximately $100,000 in R&D credits. That’s $100,000 that will add to your bottom line because that’s how much less you’ll have to pay in taxes. Just like that, you generated $100,000 in profit.
The road to generating an additional $100,000 in profit from your ordinary business activities can be arduous. Let’s assume you have a fairly robust Net Profit Margin of 20%. So, for every dollar generated in gross sales, you keep 20 cents as profit. That’s really good! At this net profit margin, you would need to generate $500,000 in sales to profit $100,000. That is no small feat considering the combined effort (and time) of sales, engineering, production and management personnel to make that happen.
Simply put, the Return on Investment for each dollar of “profit” you received from R&D credits is sky-high compared to the ROI on your other ordinary activities. No one is suggesting that you can run a business on R&D credits alone. However, you could be leaving real profits on the table if you’re not claiming and/or maximizing your R&D credit.
Increase your bottom line
Your time is valuable running and growing your business. Talk to experts in this field who can guide you through the R&D credit process and handle most of it for you. Our tax consultants and engineers are well-equipped to help you maximize your dollars and give you the peace of mind if you need to convince an IRS auditor that your R&D activities qualify.
One conversation with our engineers will get you well on your way to boosting your profits with R&D credits.