Tax Tips: Incentives for Technology Research and Development
By Alvin Bruney
In this tough economy, it may help to know there are government programs available that provide incentives for technology research and development. These incentives help encourage innovation by providing eligible companies a tax credit or a tax refund based on the cost of the development effort for the software. Let s examine several of these programs from around the globe.
Canada: Scientific Research and Experimental Development (SR&ED) Tax Incentive Program
(http://www.cra-arc.gc.ca/txcrdt/sred-rsde/menu-eng.html) According to the website, "the SR&ED program is a federal tax incentive program, administered by the Canada Revenue Agency (CRA), that encourages Canadian businesses of all sizes, and in all sectors to conduct research and development (R&D) in Canada. It is the largest single source of federal government support for industrial R&D."
The website further explains, that "Generally, a Canadian-controlled private corporation can earn an investment tax credit (ITC) of 35% up to the first $2 million of qualified expenditures for SR&ED carried out in Canada, and 20% on any excess amount. Other Canadian corporations, proprietorships, partnerships, and trusts can earn an ITC of 20% of qualified expenditures for SR&ED carried out in Canada."
To put this in perspective, if your company spent $100,000 on qualified software development, the government may cut a check for as much as $35,000 to the company! To qualify, the company must show innovation in such fields as engineering, design, computer programming, or data collection, to name a few. Full details are located at http://www.cra-arc.gc.ca/txcrdt/sred-rsde/bts-eng.html.
United States: Research & Development (R&D) Tax Credits
(http://www.irs.gov/businesses/small/industries/article/0,,id=100123,00.html) The R&D tax credit, part of the US Internal Revenue Code, was established by the Economic Recovery Tax Act of 1981. This program has been in effect continually, in one form or another, ever since. However, a large number of companies have never taken advantage of it, in part because of the confusing language of the tax credit. Consultation with a tax expert is highly recommended if you intend to apply for this tax credit.
In addition to the federal tax credit, many states provide similar incentives. Federal law even allows for filing amended returns for the last three years so that companies can claim R&D tax credits for previous years. While the tax credit has lapsed in the past, part of President Obama s plan is to make sure these changes are permanent; see the section titled "Technology, Innovation and Creating Jobs: Make the Research and Development Tax Credit permanent" at http://change.gov/agenda/economy_agenda.
England: UK Research & Development Tax Credits
(http://www.hmrc.gov.uk/randd/) According to the website, "the R&D tax credit works by allowing companies to deduct up to 175% of qualifying expenditure on R&D activities."
The site defines R&D research as "any project which seeks to, for example,
- extend overall knowledge or capability in a field of science or technology; or
- create a process, material, device, product or service which incorporates or represents an increase in overall knowledge or capability in a field of science or technology; or
- make an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes; or
- use science or technology to duplicate the effect of an existing process, material, device, product or service in a new or appreciably improved way ..."
There are similar programs for the European Union and most developed countries. I m sure you get the idea by now. These programs actually work; it s not smoke and mirrors. I encourage you to talk to your managers today about exploring the tax credits and refunds these programs provide. In this economy, your job may just depend on it.
Alvin Bruney ([email protected]) is a Technology Specialist working for Royal Bank of Canada in the .NET Centre of Excellence program. He is a Microsoft Press author and a long-time ASP.NET MVP.