Your Cloud Migration Could Actually Save You Money
By Carli McDonald, partner-in-charge of R&D Tax Credit Services
Are you in “the cloud” or considering moving a portion of your company to the cloud? If so, you may be eligible for the Research and Development (R&D) Tax Credit.
Shifting to “the cloud” or operating businesses via the cloud is an emerging trend in many industries, and the software industry has been driving this change. Companies have been forced to rapidly design and develop cloud solutions to remain competitive. It is quite common for software companies to list their cloud computing services either in addition to their current product/service line or as an add-on, thereby attracting new customers and satisfying existing customers. As a result, these companies are investing a substantial amount of resources into providing cloud computing services to remain competitive in the marketplace and expand their services. Transitioning to the cloud can be an expensive endeavor, one that may be alleviated in part by taking advantage of the R&D Tax Credit.
The federal R&D Tax Credit was enacted in 1981 to promote development efforts and scientific innovation in the United States, and several states have enacted state R&D Tax Credits that are either the same or very similar to the federal R&D Tax Credit. If your company’s R&D activities occur within the United States and meet the IRS’ qualification criteria, you may be able to take advantage of this lucrative credit.
Am I engaged in R&D? If you answer “yes” to these four questions, you probably are!
- Are you developing or improving a product, process, software or innovation’s function, reliability, quality or performance? Example 1: Company XYZ may be transitioning to a cloud server to provide clients with enhanced features and functionality. Example 2: Company ABC is shifting to the cloud to maintain a competitive edge and provide enhanced customer service.
- Do your activities have a foundation in a “hard science” (e.g., biology, chemistry, computer science or engineering)? For companies that are shifting to the cloud, they are typically using software developers with a background in computer science or computer engineering.
- Do you have some level of technical uncertainty at the outset of your project? For example, a company may be unaware of how to shift their current servers to the cloud or struggle with ways to operate their product securely in a cloud environment.
- Did your development team undergo a process of experimentation to eliminate the technical uncertainty? Company XYZ may be testing new solutions on the cloud to ensure they are functioning appropriately. The process of experimentation may involve engaging in trial and error, white boarding or brainstorming sessions, or the iterative process of development.
Your cloud expenses may qualify for an R&D Tax Credit if:
- You are engaging in product testing or development in the cloud;
- You are using the cloud space to test scalability during prototyping;
- Your developers are writing code in order to make your product compatible within the cloud environment; or
- You are testing prototypes using several different cloud service providers to ensure software functionality.
The R&D Tax Credit provides significant monetary and operational benefits to businesses by reducing tax liability and allowing companies to utilize those savings and reinvest in innovation. To remain competitive in the market, software companies must continuously engage in R&D; however, many companies are not taking advantage of federal and state R&D Tax Credits. If you are currently shifting to the cloud or transitioning your services to the cloud, it is important to make sure that you are not leaving valuable tax benefits on the table. The process to obtain the R&D Tax Credit benefit is highly complex, so it is important to seek out a highly-experienced tax professional for assistance.
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.