For most manufacturers, the first thing that comes to mind when you have capital to invest is new machinery / equipment. Here at Black Line Group, we help manufacturers find qualifying R&D Tax Credit activities in their business, which can give them tens of thousands to millions of dollars in tax credits that they can reinvest in their business -- often in new or upgraded equipment.
But when does it make sense to invest in software? We sat down with our VP and Manufacturing Practice Leader, John Madsen, to discuss various alternatives for additional investment in your business. A software investment could mean helping your business grow faster, be more competitive, and increase profitability.
Evaluating Your Current Software
Do you have security or business reliability concerns? Is your current system no longer supported by the vendor or does it crash often? How well is it meeting your current business needs? Take note of what your employees are doing to solve the inefficiencies in your current software platform. "Your team can be innovative in solving problems, but at what cost?" says John. "Are they making excel spreadsheets to track data outside of the system? Are they handwriting notes from several screens to collect data? Are your customer service people walking the shop floor gathering data to answer customer questions? All of these are signs it may be time to consider a software upgrade."
When it comes to upgrading software, the cost to the company is more than simply the purchase of the system. Training and implementation are a soft cost that can overwhelm and delay original predictions for improvements. The R&D Tax Credit can offset some of this expense when qualified research and development activities are conducted. In fact, there are generally numerous activities within a software project that contain Qualified Research Expenses (QREs). The R&D Tax Credit was designed to encourage companies to not only develop new products and processes, but also to improve existing products and process - To give you an edge in a competitive market. Take a close look at your new software project to understand the ways in which it can be innovative and improve your existing processes.
When implementing new software, another consideration is how the new system talk to your existing systems? Also, it’s important to have a defined objective for the new system like resource planning, job flow, identifying labor cost, and monitoring equipment output. What is the problem you are trying to solve? Looking ahead, what data do you need from your software systems to support artificial intelligence?
True, the purchase of new equipment is often an easier and more comfortable ROI, but at some point, the software systems and overall platform must be addressed. Smart planning that includes research and development considerations can help you identify opportunities to reduce your tax burden and help fund further investment in your business.
The Four-Part Test
For any activity to qualify as R&D, it must first pass the Four-Part Test. The four parts of the test are:
- Permitted Purpose. This is the activity intended to make or improve either a product or process that results in improved function, performance, reliability, quality or cost efficiency.
- Technical Uncertainty. This is the activity intended to eliminate technical uncertainty when developing or improving a product or process related to methodology, design, techniques, formulas or inventions.
- Process of Experimentation. This is the activity that includes a process of experimentation to eliminate or resolve technical uncertainty. During the process, various alternatives and approaches are evaluated by modeling, simulation, trial and error, prototyping and other methods.
- Technological in Nature. The process of experimentation must rely on the hard sciences (engineering, physics, biology, chemistry, computer science).
Talk with a specialist about how the R&D Tax Credit can help your business be even more profitable. Working with a professional tax adviser throughout this complex process is the best way to ensure a thorough and accurate claim is prepared for filing in order to maximize your return on investment in software.
For more manufacturing guidance, check out our Manufacturer's Guide in 2020: Top 8 Issues Facing the Manufacturing Industry in 2020.