Executive summary
Technology companies often don’t claim tax credits and incentives for all of their qualified innovation work. These companies usually don’t realize what qualifies as research and development, don’t have the finance resources required or don’t think they have enough work to make material claims. The truth is that many of them are doing more qualified work than they realize, and they are missing out on potential tax benefits. When companies take the time to analyze and track their activities, they can factor current and emerging tax benefits into their plans to help fund future innovation.
The common misperception
Countries around the world have tax structures that encourage innovation. Tech firms can benefit the most, but many don’t claim what they could.
When companies claim tax credits and incentives for qualified research and development, they can reduce their effective tax rate, increase cash flow and increase their earnings per share.
But there’s a common misperception.
“The perception can be that these tax credits only apply to companies that have employees in a lab with test tubes and beakers,” said Grant Thornton U.S. Corporate Tax Partner Rob Levin. “That is qualified research — but it's much broader than that.”
Grant Thornton Ireland International Tax Director Martin Noonan agreed, “That’s often the starting position, that people think it's for lab-based work.” Noonan added that other factors can also get in the way. “Sometimes, they say they just literally don't have the finance bandwidth to look into it.”
At small or growing tech firms, finance functions often struggle to keep up with business expansion. That can limit the firm’s growth overall, and it can certainly limit the firm’s ability to claim tax incentives. To claim incentives, companies need to accurately track and account for qualifying work. “Many haven’t set up their finance reports to see the qualifying spend, and haven’t set up their R&D teams to track their time and other requirements,” Noonan said. “They don’t think it’s material enough. Plus, sometimes, the tech teams that are doing the R&D are not incentivized to take the time. They say, ‘That’s not really part of my role.’ So, pushing the finance team to push their R&D team to talk can be a challenge.”
Many companies don’t feel like their innovation work is worth claiming.
“Many times, in our initial discussions, people say they don’t do anything new, or this credit doesn’t apply to them,” Levin said. “Then, we start walking them through the criteria, and it’s like you literally see a light bulb turn on over their head.”
Plus, opportunities for tax benefits could continue to expand in the future, said Grant Thornton Netherlands International Tax Partner Faisal Janjua. “What we see in the Netherlands is more focus on innovation and R&D. It must be seen what they will propose, but their plans are to stimulate innovation.”
“Hopefully, these kinds of measures will create more awareness among companies that have a potential benefit from the patent box,” Janjua said. “It’s an issue of awareness — with the financial director, and the company itself, that these tax benefits are available now, and they need to stay informed.”
You could qualify
What are the qualifiers that companies should be watching, to identify when their work could qualify for innovation tax benefits?
You could be new enough
Levin explained, “This not only applies to new products and processes — and this is where I see a lot of tech companies not claiming it — it’s new functionality and new versioning of existing products qualifies as well.”
Levin said that many companies will set aside products they created years ago. “But for every version you come out with, as you were going in, you looked at the technological feasibility, you had the process of experimentation, you went through a development life cycle. Your software development cycle can bring you back into the development life cycle. And that can qualify for innovation credits.”
You could be unique enough
Innovations might be unique, but the rules about innovation mostly focus on two factors. “The UK and Ireland are very similar, and similar to a lot of countries, including the U.S. When software companies are looking at software development, for example, there are two primary considerations,” Noonan said.
One consideration is the technological uncertainty element, which requires companies to show that they were eliminating an unknown for a capability, method or design. Noonan explained, “Other people might be doing it, but it’s not publicly available. It’s not as if you can go out and buy it off the shelf. So, it’s something that companies have to go out and do themselves.” This work can often qualify under the relevant R&D regime.
Beyond versioning products, many companies create customizations of solutions for client-specific work. “The incremental improvements to certain products — and that could only be specific to a client, for example — that could still qualify as well,” Noonan said.
You could be doing enough
Once companies understand the breadth of work that could qualify for R&D tax credits, they start to understand its potential material value.
“At first we hear a lot of companies say that somebody else is already doing this, or it wasn’t that hard,” Levin said. “They say it in those terms. But then we find out it took 1,000 hours to develop the next generation of product and, although their product is the same as some competitors, it is also different and still qualifies because they meet the criteria.”
“Once we’re able to walk people through what qualifies and what doesn’t, many realize that they have day-to-day tasks that meet the criteria,” Levin said.
To identify, track and claim innovation work, your company will need to include the right teams — that collaboration can pay off more than you anticipate.
This image illustrates how firms need various teams to inform work data, and other teams to inform tax rules, so that the firm can identify the overlap where it has work that it can claim for tax purposes. The teams informing work data include:
- Engineering: Technical development and work documentation
- Product management: Project oversight and alignment
- Executive leadership: Strategic direction and approvals
The teams informing tax rules include:
- Tax function: Compliance and tax strategy
- Finance function: Financial oversight for tracking
- Legal: Regulatory compliance and contracts
Still, teams are reluctant to dive into the details. How do you know if your company is one of those most likely to benefit?
You could benefit
The standards for qualifying work align well with product development, and product development companies arguably have the most untapped potential for tax benefits.
But they’re not the only beneficiaries.
“What I see is that service-based technology companies, like consulting, managed service providers or IT support companies are not taking advantage of the innovation credits that they could,” Levin said.
Noonan said that tracking can again be a factor here. “For software services, they might not track details, or they don't deem it to be the right type of development.” But, Levin said, “It really comes down to a question of: Are they performing research and development, with their self-developed intellectual property, for their customers? They don’t really think of themselves as falling into the patent box. But they are using their developed intellectual property and implementing it into a company.”
“The other type of technology company that's not taking advantage of these credits is tech-enabled companies,” Levin said. Many companies that span other industries, like manufacturing or life sciences, enable their products with proprietary technology but do not think of their work as technology R&D.
Still, even if you qualify, is it worth the investment of time?
It could be worth it
“It can be cash back in your pocket,” Noonan said.
“Under many R&D tax credit regimes, including here in Ireland, the credits can take the form of refunds, rather than just offsets against your corporate income tax liability,” Noonan said. “So, particularly if you're at an early stage, you might be loss-making for corporate income tax purposes due to major investment and limited market success. You can literally get cash back into your pocket, and that’s a very rare thing from a tax perspective.”
To spark participation from your R&D team, point out that this could help fund their most important work. “It ultimately can give you a significant discount on your R&D costs. Taking the example of Ireland, we recently raised our credit to 35% of qualifying spend from 2026” Noonan said. “You don’t have to wait a long time to get a refund back. When you’re trying to make the argument to people, you can say, ‘Listen, I know there’s a bit of set-up to track your activities and maybe look into these projects and clarify that they qualify. But it's the most bang for your buck.’”
Credits remain an attractive benefit, even for multinationals liable to the minimum 15% effective tax rate under the Pillar 2 regime. “Using Ireland as the example, we amended our R&D tax credit regime to ensure it qualifies as a refundable tax credit under the Pillar 2 rules,” Noonan noted. “This means it is not included in covered taxes for the purpose of calculating the ETR, which could have otherwise triggered an equivalent top-up tax. Companies should check the local rules in this regard, but this treatment is not uncommon in many jurisdictions who have agreed to implement the Pillar 2 rules.”
Apart from claiming your current work, innovation tax benefits can also be an important factor to consider as you evaluate where and how your company continues to grow into the future.
So plan it out
Once companies understand the potential value of innovation tax credits, they can even consider them in long-term planning and strategy.
It’s important to start by ensuring your planned claims remain substantive and accurate. “The days of IP holding companies and zero-percent tax jurisdictions are gone,” said Grant Thornton U.S. International Tax Solutions Partner Chris Summer. “It’s really about where your substance is, and how you align that substance with the tax benefits. So, there is a lot of thought that goes into development — but it has to align with the business.”
“A lot depends on understanding your supply chain, where your customers are, and where your development happens, to really take a holistic look and determine the best structure for you,” Summer said. “Determine the best way for you to structure your intercompany transactions, and your transactions with customers in the software and tech space. There’s a lot of flexibility in how you structure those contracts and how you deliver to customers.” As every country tries to match each other with benefits, your understanding of those benefits can directly inform your business planning.
“That will help with your decision-making process,” Levin said. “Where do you want to perform research, looking at these different incentives? As you're looking at ROI, or even capital authorization to develop your next generation of product, this can help vastly with the decision-making process of how you do your R&D, and where you do it.”
Before tech firms incorporate innovation incentives as part of their long-term planning, many need to take some first steps to claim their current work.
And take action
The first step is an analysis of what you’re doing.
“Sit down with someone from IT that understands the initiatives going on for the year, and that typically gives you enough to start with,” Levin said. The next step is to gather the data. “You have a line that says R&D, and maybe it qualifies, maybe it doesn’t — but, there’s also other work that might not be in that R&D line,” Summer said. Understand what activities are going on where, so you can get the details you need from specialists in the company.
“This is where you look at the data, with the requirements for the innovation credits, and you build out a work plan,” Levin said. “You’re saying ‘This department does this, infrastructure does this, APIs do this. Start with the data, go right into talking to someone from IT, to understand how your software development lifecycle can equate to an innovation credit that's either refundable or offsets your taxes. Do you have enough for this to be meaningful?”
The question of value can ultimately drive your decision, and your action.
“Once you determine this could be really meaningful, that gets everybody interested,” Noonan said. “It could be the finance team, if they’re controlling it, or an internal tax team that says ‘We could be missing out on money that is incredibly material to us.’”
With a better understanding of your opportunities, you can achieve benefits now and help inform a larger strategy that collectively informs your business growth.
Contacts:
Partner, Corporate Strategic Federal Tax Services
Grant Thornton Advisors LLC
Rob is a Partner in Grant Thornton’s Strategic Federal Tax Services (“SFTS”) practice in the Atlanta office with over 21 years of experience and serves as the Southeast R&D Tax Credit practice leader, as well as the National Section 199 leader.
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