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  1. Home
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  3. Using the R&E Tax Credit to Improve Profitability

Using the R&E Tax Credit to Improve Profitability

Posted by Tim Finerty and Bryan Powrozek on June 26, 2019

Tim Finerty Tim Finerty

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. To discuss other options or strategies to maximize the credit contact us today.

Our team is always ready to help.

Please contact us for more information.

Tim Finerty

Tim Finerty

Shareholder, Industrial Automation

Contact Tim   |   Read Tim's bio

Bryan Powrozek

Senior Manager, Industrial Automation

Contact Bryan   |   Read Bryan's bio

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Using the R&E Tax Credit to Improve Profitability

Posted by Tim Finerty and Bryan Powrozek on June 26, 2019

Tim Finerty

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. To discuss other options or strategies to maximize the credit contact us today.

Our team is always ready to help.

Please contact us for more information.

Tim Finerty

Shareholder, Industrial Automation

Contact Tim   |   Read Tim's bio

Bryan Powrozek

Senior Manager, Industrial Automation

Contact Bryan   |   Read Bryan's bio

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As we’ve seen in the first two installments of this series, business owners often miss out on the R&D tax credit opportunity and the bottom-line infusion it can provide. Many…

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Doing Business in Mexico: What to Expect this Year

Without a doubt, this year will be interesting for Mexico. To start, it’s an election year and we all know what that means…a lot of uncertainty. As the global pandemic…

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What Expenses Qualify for R&D Tax Credits?

The R&D tax credit is one of the most overlooked opportunities to boost your bottom line. Many business owners fail to claim it under the mistaken belief that they’re not…

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Clayton & McKervey Launches The Sound of Automation Podcast

Media Contact: Denise Asker, dasker@claytonmckervey.com; 248.936.9488 Southfield, Mich.—February 17, 2021—Clayton & McKervey, a certified public accounting and business advisory firm helping growth-driven companies compete in the global marketplace, is excited…

Read full story

Misconceptions About the Research & Experimentation Tax Credit

As companies put more emphasis on Industry 4.0 and business processes become more automated and accessible, the opportunities for Research & Experimentation tax credits increase. The Research and Experimentation (R&E)…

Read full story

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  • Beth Butchart
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  • Clayton & McKervey
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  • Ruben Ramirez
  • Sarah Russell
  • Sue Tuson
  • Tarah Ablett
  • Teresa Gordon
  • Tim Finerty
  • Tim Hilligoss
  • Wendy Reedy

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