5 Top Industries that Qualify for R&D Tax Credits

Innovative technology helps companies stand out, but long-term success depends on scalable growth and continuous cost management. Enter: the R&D tax credit, a powerful tax incentive benefiting businesses of all types and sizes.

This credit can boost your potential to innovate by reimbursing you for work you're already doing. Many companies are eligible to claim the credit but aren't aware of how it works. We’re on a mission to change that.

Startups and other emerging growth companies in SaaS, AI, digital assets, life sciences, and robotics often qualify. You can extend your runway and decrease your tax rate with the R&D tax credit. Ready to learn more and take advantage?

Qualifying for the R&D Credit

Do you develop new or improved products, processes, techniques, software, or formulas? If you answered yes, then you likely qualify for the Research & Development (R&D) Tax Credit. The R&D credit is a dollar-for-dollar offset against tax liability and can lower your tax expense and improve cash flow. Even if your project is unsuccessful or does not reach the marketplace, you may still qualify for the credit. Companies of any size can benefit from the R&D credit, so don't miss out on this lucrative strategic tax planning tool.

TLDR; if you answer yes to any of these questions you likely qualify -

1. Do you have US-based W2 or 1099 technical employees (i.e. engineers, developers, designers)?
2. Do you have cloud related expenses?
3. Do you have supply expenses for raw materials related to the production of your product?

Top Industries specific R&D Tax Credit

As mentioned above, Industry Specific R&D tax credits provide a financial boost to businesses investing in research and development within their specific sectors. Qualifying industries span from technology to manufacturing, encouraging innovation across the board.

To benefit, your company must demonstrate a commitment to advancing industry knowledge, developing new products/processes, or improving existing ones.

Software-as-a-Service (SaaS)

SaaS businesses can tap into R&D tax credits by investing or innovating in software development. Qualified research expenses encompass employee wages, cloud computing costs, and contractor (1099) expenses.

Common SaaS company qualified activities

Numerous activities regularly performed by companies in the SaaS industry will qualify for the R&D tax credit. Examples of activities (non-exhaustive) that might qualify for the credit include:

• Creating new frameworks, structures, or problem-solving methods for the first version of a software application.
• Inventing new ways to organize, store, and retrieve data for the first version of a software application.
• Building software that helps run the computer and manage its resources, like the programs that control hardware devices.
• Creating the main software that manages all other software and hardware on a computer.
• Building software that is specifically designed to work with a particular piece of hardware, making them work together seamlessly as a complete product.

Artificial Intelligence (AI) Industry

In the AI industry, qualifying activities generally include algorithm enhancements and addressing technical challenges. Let’s look at the list of some of the common qualified activities.

Common AI company qualified activities

Numerous activities regularly performed by companies in the Artificial Intelligence (AI) industry will qualify for the R&D tax credit. Examples of activities (non-exhaustive) that will potentially qualify for the credit include:

• Creating and refining technology that allows computers to understand and interpret human language as it is spoken or written.
• Creating programming to communicate and assist patients, like in healthcare settings.
• Building software that analyzes what customers do or like, and then suggests products or services they might be interested in.
• Creating a program that uses artificial intelligence to help answer customer questions and resolve issues, often used in customer service.
• Building AI systems that analyze large amounts of data to predict future market trends and behaviors. This involves creating algorithms that can sift through historical data to forecast future market changes or consumer demands.
• Developing advanced artificial intelligence algorithms to improve cybersecurity. This includes creating AI systems capable of detecting, analyzing, and responding to security threats more efficiently than traditional methods, thereby enhancing the security of digital systems and data.

Blockchain and Digital Assets

In the Blockchain and Digital Assets industry, R&D tax credits can incentivize technological advancements. Qualifying for the tax credits can significantly offset development costs of your business, fostering growth and competitiveness.

Common Blockchain & Digital Assets qualified activities

Numerous activities regularly performed by companies in the blockchain and cryptocurrency space will qualify for the R&D tax credit. Examples of activities (non-exhaustive) that will potentially qualify for the credit include:

• New or improved developments to the digital ledger of transactions including Proof of Work, Proof of Stake, and Proof of Importance
• Development of new secure payment technologies by tracking past transactions with the use of blockchain
• Development of source code for a new or improved web or digital wallet
• Development of APIs for third party integration of cryptocurrencies and/or wallets
• Utilizing blockchain technology principles to develop decentralized applications
• Development of a new or improved hashing algorithm to better secure data
• Development of custom blockchains to perform internal tasks more efficiently
• Development of Proof of Capacity (PoC) projects to evaluate a specific technology’s applicability, performance, or scalability
• Development of new or improved technologies to bridge blockchain and businesses solutions and better harness advances in data technology, management, and security
• New or improved development of smart contract technology in object-oriented, high-level languages such as Solidity, C++, Python, and JavaScript

Life Sciences Industry

For healthcare-focused companies diving into research and development, R&D tax credits offer big financial perks. They're like a financial boost, easing the money pressure that comes with ground-breaking discoveries.

Common Life Sciences company qualified activities

Numerous activities regularly performed by companies in the life sciences industry will qualify for the R&D tax credit. Examples of activities (non-exhaustive) that will potentially qualify for the credit include:

• Designing and developing new drugs and therapeutics
• Designing and developing prototype medical devices
• Developing or refining testing methods
• Developing new or improved manufacturing processes
• Improving shelf life and reducing side effects of existing products

Robotics

In the Robotics industry, R&D tax credits offer a significant financial boost. You can claim a percentage of qualified expenses, such as employee wages and prototype testing.

Common Robotics company qualified activities

Numerous activities regularly performed by companies in the robotics industry will qualify for the R&D tax credit. Examples of activities (non-exhaustive) that will potentially qualify for the credit include:

• Developing new or improved products, processes, formulations or technologies
• Establishing electronic interfaces and functional relationships between various software modules
• Improving the production of Robots to lower system engineering and installation costs
• Developing new mechatronics systems
• Prototyping for the use of lighter or more environmental friendly material
• Improving voice, sight and/or sound recognition

Capture R&D tax savings for your business

The R&D tax credit has been around since 1981, but it only became permanent in 2015 with the PATH Act. Before then, startups didn't use the credit because they didn't have any income to offset it. The PATH Act fixed that by allowing companies to take the credit against payroll taxes instead of income tax. This added billions of dollars to the system, but many companies don't know about it.

Now, the Inflation Reduction Act has doubled the credit, making it even more valuable. Starting in 2023, startups with less than $5 million in gross receipts can use the R&D tax credit to cover up to $500,000 in payroll taxes each year. This is a huge boost for young companies and an incentive to keep creating new ideas.