The internet, gaming, and media industries rely on cutting-edge and groundbreaking technology advancements to thrive.

Many of these advancements, even if they aren’t new to the world, could qualify for the R&D tax credit. An often-overlooked opportunity, the R&D tax credit is a significant incentive available to companies that develop new products, software, platforms, processes, formulas, inventions, or techniques.

In fact, many companies in the internet, gaming, and media industries continue to improve their products or processes, which could qualify for this savings opportunity.

COVID-19-Related R&D Credit Opportunities

There’s been a substantial increase in consumer spending in the internet, gaming, and media industry as individuals spend more time at home—including working hours.

In response, the industry has adapted to the new environment by increasing R&D investment to expand product offerings and enhance current products. These offerings could qualify for the R&D credit if they improve the company’s products or processes.

For example, a company could benefit from the R&D tax credit if it designs and develops a new, interactive gaming platform. While this might not be a new concept to the market, it’s new to the company and thus requires a development process to eliminate uncertainties regarding the best method for achieving its design objectives.

What’s the R&D Tax Credit?

Let’s start with the basics. The R&D tax credit is a dollar-for-dollar tax savings that directly reduces a company’s tax liability. There’s no limitation on the amount of expenses and credit that can be claimed each year. If the R&D credit can’t be used immediately or completely, any unused credit can be carried forward for up to 20 years.

In addition, previously filed tax returns can typically be amended for up to three years to claim the R&D credit retrospectively, providing an avenue to recoup previously paid taxes.

New or small business may be eligible to apply the R&D tax credit against their payroll tax for up to five years starting in 2016. The R&D credit is available both at the federal and state level for certain states, such as California.

How Much Can a Company Save with R&D Tax Credits?

There’s no limit to how much a company can claim for the R&D credit. However, there are several factors that can impact tax savings. The amount of tax credit available depends on how many qualified costs a company incurs during a specific tax year. See below for details on qualified costs.

In general, a company has the ability to save 7%–10% of annual R&D costs for federal purposes. The savings could be even greater if that company has an income tax filing obligation in a state that also offers an R&D credit.

Which Expenses Qualify for the R&D Tax Credit?

Internet, gaming, and media companies may benefit from the following types of qualified expenses:

• Employee wages for software and hardware development
• Cloud computing
• Computer hosting
• Extraordinary utilities for development
• Prototype and modeling supplies
• Expenses to engage third-party companies that perform development-related tasks requiring specialized knowledge

Which Internet, Gaming, and Media Activities Qualify for the R&D Credit?

Here are some examples of R&D activities that have been claimed by companies in the internet, gaming, and media industries:

• Designing new or enhanced software architecture or algorithms
• Creating software in which scale and complexity present technological challenges
• Designing interactive software to support the delivery of multimedia entertainment, such as internet video games
• Designing new or improved databases
• Testing coding solutions
• Beta testing or prototyping software or hardware
• Optimizing code
• Developing new or improved manufacturing processes for hardware components

Next Steps to Determine Eligibility

If you think your company could qualify for the R&D credit, there are four main steps to take before applying:

1. Collect preliminary information about your company’s potential qualified activities
2. Develop an estimate of the credit benefit your company could receive
3. Identify other R&D-related tax planning opportunities based on the preliminary information
4. Create a plan for qualifying, quantifying, and documenting R&D tax

The goal is to have enough information to make an informed decision about whether an R&D credit analysis is worthwhile.

We’re Here to Help

Each company’s goals, values, and resources are unique, which makes it important to develop a customized project plan to identify, calculate, and support your company’s R&D credits and activities.

With increased IRS scrutiny around R&D credits, it’s crucial to understand what’s necessary to substantiate a credit claim. To learn more about R&D tax credits, see Five Misconceptions about R&D Tax Credits—and if Your Company Qualifies or request a complimentary credit benefit estimate to see how much your company could save.