How Payment Facilitators Can Leverage the R&D Tax Credit

At a glance:

• Are you eligible? Businesses — including those that facilitate payments — can reap major savings from the R&D tax credit, but many miss out on the benefit because they don’t think they qualify.
• Get your questions answered: If you are a payment facilitator and unsure of how the R&D credit works, check out our list of FAQs to demystify the credit and calculate your potential savings.
• Take the next step: If you need assistance with navigating the R&D tax preparation and application process, contact Aprio’s R&D Tax team.

The full story:

The research & development (R&D) tax credit is one of the most valuable benefits available to companies of any size and in any industry. But it’s a credit that often falls out of sight and out of mind because many businesses mistakenly believe they don’t qualify for it.

If you’re a payment facilitator, you could very well be eligible to reap R&D tax benefits; you just need to know where to start. Below, we review some frequently asked questions and share the information you should know to get the credit your business deserves.

How do I know whether I’m eligible for the R&D tax credit?

Any company that designs, develops or improves products, processes, techniques, formulas or software may be eligible. For instance, if you have implemented software to assist with payment facilitation or enhanced your service process to incorporate payment facilitation to improve the customer experience, then you could qualify for the R&D tax credit.

If your team uses an iterative process based on hard sciences, such as engineering or computer sciences, their time also qualifies for the R&D tax credit. These roles may include engineers and software developers, among others.

How does the R&D tax credit help my business save money?

The R&D tax credit results in an immediate benefit to your business by reducing federal tax liability for current and future years, creating a ready source of cash. The credit provides a dollar-for-dollar offset against taxes your business owes or paid, which differs from a deduction.

Here is an example of the R&D credit in action: let’s say that your business has qualified salaries totaling $2,000,000. The potential federal savings you could reap are 7% of that total amount, which equals $140,000 (note that this number could potentially be higher if you live in a state that offers additional R&D incentives).

What’s more, starting with the 2016 tax year, businesses that are subject to alternative minimum tax (AMT) can use the R&D tax credit to offset regular taxes and AMT.

Many companies use their R&D tax savings to hire strategic talent, offset operating costs or develop new products to grow their business into the future.

What potential pitfalls should I watch out for, as they relate to the R&D credit?

A 2019 ruling (which you can read about here) underscored how important it is to both retain and document your company’s rights and risks to development work for the R&D tax credit. Though your business doesn’t need to retain exclusive rights to your R&D activities, you do need to retain substantial rights to your completed research activities in order to qualify for the credit.

To acquire substantial rights to your development project, you must retain all risk for the development activities you performed during a study year by bearing the expense of development, even if your research is unsuccessful.

You can document your rights to intellectual property and financial risk by retaining contracts, invoices and purchase orders that prove your business would bear the financial risk if your development project were unsuccessful.

Related Resources

• Aprio R&D Tax Credits and Incentives
• Federal and State R&D Tax Credit Studies
• IRS Issues Final R&D Tax Credit Regulations for Internal Use Software

The bottom line

Though this list of FAQs isn’t extensive, it should provide the basic knowledge you need to take the next step and apply for the R&D tax credit. If you need assistance compiling the appropriate documentation and navigating the application process, contact Aprio’s R&D Tax team. We help companies save billions of dollars in tax obligations every year through R&D tax credits.

Click here to get in touch with us today.