While it might not seem like it, many financial institutions are prime for research and development opportunities. With these types of activities, you could take advantage of the research and development (R&D) tax credit. Is your bank missing an opportunity?
What are research and development tax credits?
The R&D tax credit provides a dollar-for-dollar reduction in tax liability based on “qualified activities” undertaken by a company each tax year. The primary requirement for activities to qualify is that they be consistent with the purpose of the incentives: to promote design and development activities within the United States and the subsequent hiring and retention of technical staff to accomplish these tasks.
There are several great benefits of the R&D tax credit.
How do I know if my bank qualifies for the research and development tax credit?
This credit can be beneficial to companies across many industries. However, those in the financial services industry are often hesitant to utilize this credit because they likely do not understand that they may qualify.
Many financial institutions invest significantly in software development and/or enhancement. This may include software to stay up to date with current trends and cybersecurity, development of online and mobile banking applications, or software targeted at automating various processes that once were manual.
Financial institutions often develop or customize software to increase productivity/security, develop new functionality, edit current algorithms, or make other changes in an attempt to improve company operations.
Technology needs for banks are constantly evolving. Learn more about the types of technology you need to consider.Why In-House IT May Be Too Old School for Your Financial Institution
The activities that many financial institutions perform on a day-to-day basis may qualify for the R&D Tax credit. These activities include, but are not limited to:
Once it has been determined that a company is performing qualifying R&D tax credit activities, certain costs related to those activities must be identified and allocated to the qualifying R&D tax credit activities.
The three areas of qualifying expenses include:
The R&D tax credit is based upon a percentage of the qualifying expenses, therefore the larger the allocation of these expenses to qualifying R&D activities, the larger the amount of the credit.
Legislative and regulatory impacts to the research and development tax credit
Internal Use Software
Regulations dealing directly with “internal use software” were finalized in 2016 and provide guidance for financial institutions undertaking software development efforts. The rules outlined in the regulations are very favorable for taxpayers and loosen prior restrictions on claiming R&D credits for internal use software development.
Offset of AMT for Eligible Small Businesses
In the past, one limitation of the R&D tax credit was the fact that the credit could not be used to offset Alternative Minimum Tax (AMT); however, this recently changed. Starting in 2016, an eligible small business can use the R&D tax credit to offset AMT. An eligible small business is defined as a corporation whose stock is not publicly traded, a partnership or sole proprietor and whose average annual gross receipts for the three-year period preceding the tax year do not exceed $50 million.
Additionally, the corporate AMT was repealed as part of the 2017 Tax Cuts and Jobs Act (TCJA), as a result, AMT is no longer a limiting factor for utilizing the R&D credit for C corporations.
The impact of the research and development tax credit on your bank
R&D tax credit claims are extremely complex and are generated using the unique facts and circumstances of each company. In order to maximize available credits, it is recommended that companies seek the assistance of knowledgeable specialists who have technical, tax and legal expertise in this area.
Ready to take advantage of the R&D tax credit?