A recent study from the International Federation of Accountants found that the largest challenge for small- and medium-sized accounting practices is attracting new clients, with 47% of responders rating this challenge as high or very high. Meanwhile, retaining existing clients also posed a significant challenge to 24% of responders. While attracting new clients is an obvious means of generating more revenue, accounting practices might find it easier–and more cost-effective–to improve their bottom line by introducing additional services to their clients, thereby increasing their customers’ benefits and retaining their loyalty.
One such service is the Federal Research & Development Tax Credit, which, valued at more than 12 billion dollars per year, is one of the most lucrative tax incentives available to U.S. businesses. While most CPAs are aware of this tax credit, claiming the tax credit is notoriously complicated and the procedure usually deters businesses from realizing the credit’s benefits. However, some CPA firms have found the value in partnering with a specialty firm dedicated to helping companies claim the R&D tax credit. Working with these niche firms could prove to be advantageous in many ways: first, these specialized firms lend the expertise to thoroughly identify all qualifying activities to yield the maximum credit value; second, working with R&D experts could boost the CPA firm’s credibility when offering the service to its clients; and third, a partnership with a specialty firm could incentivize both existing and new clients through value-added services.
With the most recent changes to the R&D Tax Credit, cementing the credit as a permanent provision of the tax code and significantly increasing its accessibility to small businesses, more companies will be jumping at this opportunity, and CPA firms will be tasked with meeting their demands and providing the means to access this credit. This service offering could be pivotal to a CPA firm’s success, as the value of the credit can be significant. Some companies can realize up to millions of dollars in tax credits, and moreover reduce their tax liability for future years. In a sample of our success stories, we found that an engineering company with a revenue of $27 million can claim a credit of $500,000; a manufacturing company with a revenue of $15 million, a credit of $166,000; and a software company with a revenue of $10 million, a credit of $450,000. Evidently, the value of this tax credit is reason enough for accounting firms to go back and mine their databases for qualifying clients.
On top of the tremendous value of the Federal R&D Tax Credit, many states offer their own version of a research tax credit—including California. The credit rate in California nearly matches the federal version’s at 15% (as opposed to 20%), and companies applying for both the state and federal credits can see their credit value double. In fact, due to a slight difference in the way that R&D intensity is calculated, some companies may find the California credit amount to be even larger than the federal credit. To top it off, unused California research credits can be carried forward indefinitely, whereas the federal credit has carryforward limitations.
California accounting firms have a huge opportunity in introducing the R&D Tax Credit to their clients, especially with the growing number of innovative clusters within the state—six metropolitan areas in California rank among the top 20 technology centers in the U.S. and Canada. As California leads the country in R&D spending, it’s crucial that accounting firms provide their qualified clients with the support they need to claim this valuable credit. Partnering with the right R&D tax credit provider could be the solution for CPA firms to retain and attract clients, and ultimately improve their bottom line.