How do you get two bites of the apple? Let’s say you spend $500K on R&D development. The first bite of the apple is that you get a tax deduction of $500K – this increases your taxable loss which is nice, but there is no immediate benefit until you are profitable and can offset those profits with your accumulated losses. The second bite is big, though. You can take that same $500K and throw it into the R&D Credit equation, which typically results in a 7% to 10% credit. What this means: The IRS sends you a check for $35K to $50K.
What qualifies as R&D Credit? If you are working on a new products or releases, those costs are typically eligible for R&D credit. The product must be of significant innovation and carry some market risk for the company to develop. If a product has already been released, bug fixes and updates on existing released software are typically not eligible for R&D credit.
Why do you need an R&D study? The R&D Credit is an IRS Tier 1 issue – that means if you get audited, you better have good documentation and justification for the Credit. Consider your R&D study as good insurance which serves as proof of your R&D work. Documentation: Contemporaneous timekeeping data is considered by many as the gold-standard of evidence to protect your R&D credit. eTaxConnect uses data from your version control system to get this information and compile a report which is completely audit-ready.