This year, IT consultants are eligible for powerful tax incentives that can help fund their innovation efforts and keep their technical workers on staff.
The $1.9 trillion stimulus package recently enacted by Congress and the Biden Administration has something in it for almost everyone, and IT consultants are no exception. When combined with the previous round of incentives passed during the last days of the Trump administration, it creates a very attractive set of financial resources that consultants should not ignore. Credit programs, which allow businesses to reduce their tax payments, got the biggest boost. These bills are thousands of pages long, but I’ve picked out the three most relevant provisions that IT consultants need to pay attention to this year.
The most valuable credits for tech companies are payroll-based incentives based on the wages of employees. Most IT consultancies employ technical workers like engineers, designers and developers, and the typically high salaries of those employees can drive the most powerful tax credits. Additionally, the three incentives outlined below can also be combined to maximize financial benefits for firms:
1. The R&D Tax Credit
The R&D tax credit is the single largest tax incentive available to IT consulting companies, but in my experience, most of these businesses severely underestimate the potential value this credit can provide.
As a quick recap, the R&D credit rewards businesses that are either improving existing or creating new products or processes. Companies can also qualify for the credit if they develop innovative solutions for their clients. Because the parameters for claiming this incentive are quite broad, most IT firms have either championed or participated in qualifying activities, especially amidst the pandemic.
For instance, IT consultants that are developing on a low-code platform, like Appian or Salesforce, to create custom solutions for clients qualify for the R&D credit. Likewise, a digital transformation company that is migrating a client to cloud software could also qualify.
I’m often surprised, however, by the extent to which IT consultants underclaim this credit. This is a wage-based incentive, so it’s possible that the financial advisors who are in charge of claiming the credit for these companies do not fully understand the scope of technical work that qualifies.
To maximize the value of the credit, there needs to be an employee-by-employee analysis conducted by a technical expert with a similar background to the workers. At the end of the day, a software engineer will do a much better job of identifying qualifying activities than an accountant will, and this could mean the difference between a few thousand dollars in credits or a few hundred thousand dollars in credits for those in the IT industry.
