Using the R&E Tax Credit to Improve Profitability
We have previously discussed strategies systems integrators can implement to maximize their Research & Experimentation (R&E) tax credit. Here, we focus on ways that businesses can use those credits to drive improvements in their revenue and profitability. Most system integrators have heard that the R&E tax credit can have an immediate impact on a company’s cash position as it frees up money that ordinarily would have been used to pay annual or estimated taxes. Specifically, we will be looking at some ways a business can use those savings to attract more customers and improve operations.
Leveraging Tax Savings
We have recommended switching – where feasible – from time and materials contracts to fixed-fee contracts in order to increase the number of qualifying projects. Typically, when quoting a new project companies will develop their proposal based on an estimate of the costs required to design and build the requested product. They will also include a targeted amount of profit. Very few take into account the potential tax savings that would be available if the project qualifies for the R&E credit. Based on a company’s understanding of what types of projects do and do not qualify for the R&E credit, it could use the potential savings from the credit as a built-in discount during the quoting stage of a project. While not something you would want to do on every project, this strategy could be a good option on jobs where there is stiff competition, to strategically attract a new customer, or to defend an existing customer from a competitor.
Reinvesting in the Business
Since the R&E credit can have an immediate cash impact if used during strategic and tax planning, this frees up cash to be used in operations. One such use would be to reinvest in the business. Are there capital acquisitions that the company has been considering, but held off on due to cash constraints? By accounting for the R&E credit in the annual budgeting process, this may allow the company to pull forward some investments which could improve operational efficiency or capabilities. Another option would be to set aside a portion of the R&E savings into a bonus pool that can be used to reward employees involved in the R&E activities. This benefit of this could be two fold. First, by tying the incentive to completing projects on time this could prevent timing overruns, which would allow the company to complete more projects during the year with the same resources. Second, if the incentive was tied to completing projects on budget this could help prevent cost overruns on the project. The net result of these two strategies would be an increase in revenues as more projects are completed during the year and with increased profitability.
These are just a few of the ways system integrators can utilize the cash savings afforded by the R&E tax credit.