Using the R&E tax credit to improve profitability

By Tim Finerty

I have previously written about strategies system integrators can implement to maximize their research and experimentation (R&E) tax credit. This article focuses 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, I will be looking at some ways a business can use those savings to attract more customers and improve operations.

Leveraging tax savings

At Clayton & McKervey, we have recommended switching — where feasible — from time and materials contracts to fixed-fee contracts 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 consider 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 that 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. The benefit of this could be twofold. 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.

Note: This article was originally posted to the Clayton & McKervey website.