Tax & Business Technology – Year-End Tax Considerations for Technology Businesses

NEW YORK–LAWFUEL – Technology Business & Legal –As we approach year-end, many technology businesses are eligible to claim tax credit benefits for expenditures to develop or improve their products, manufacturing processes, or software. Although recent developments have eliminated several obstacles to such claims and substantial uncertainty regarding the standards of qualification, many companies, particularly technology start-ups, are still missing valuable opportunities that they should address before year-end.

Chris Bard and Jonathan Forman of the Technology Practice at accounting and consulting firm BDO Seidman, LLP, encourage technology businesses to carefully evaluate their credit potential before 12.31.2007, especially regarding:

“Start-Ups.” Generally, the credit equals 20% of qualifying expenses over a “base amount.” Determining a company’s correct base amount is therefore critical to ensuring a company isn’t over- or under-stating its credit. Because there are different ways to calculate the base amount, and because several factors affecting the base amount’s calculation have changed recently, many companies are misstating their credits. A major consideration affecting the base amount’s calculation is whether a company is a “start-up company” under the credit rules, or whether the company is a member of a group of commonly controlled companies that itself is such a company. Many companies assume they are a start-up, or conversely that they are not a start-up, when in fact they are the opposite. If they’ve misinterpreted their status, they may well be significantly under- or over-claiming the amount of credit available to them.
Thinking Outside the R&D Box. R&D frequently occurs in settings in addition to traditional “research and development” cost centers. Areas commonly overlooked by technology companies include: manufacturing process improvements; design validation testing by quality assurance and other personnel; field application engineering; beta testing done by employees; the development of software to be used internally; and direct supervisory and support activities.
Discovering New Information. Many companies believe—because tax authorities used to say—that companies need to be “venturing into uncharted waters,” or exceeding, expanding, or refining the common knowledge of skilled professionals, in order to qualify for the credit. This is not the case. For technology companies, many day-to-day activities—developing new products or processes, or improving existing products and processes—qualify for the credit and are precisely of the kind the credit was enacted to incentivize.
To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be 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 tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.

Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs.

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