The mythical unicorn. A magical, winged equine distinctively ornamented with an elegant horn protruding from its forehead. Fabled to be rare and elusive, this peaceful creature has galloped from long ago tales of enchantment into modern reality as a common moniker for the uncommon or scarce.
In a recent article, the New York Times dubbed a generation of tech startups as “unicorns,” as their $1 billion valuation was once as uncommon as the fanciful steeds. But as more fledging tech companies hit the billion-dollar threshold -often by converting old school businesses (taxis, food delivery, hotels, etc.) into modern mobile models (Uber, Airbnb) - their rarity wanes.
However, according to an analysis conducted for the New York Times by CB Insights, a new species of unicorn is breeding: software startups dedicated to specific industries, such as farming, banking, and life science businesses.
Farming, in particular, may feel like an incongruous territory on which to build software infrastructure, but as the agriculture sector acclimates to the 21st century, it requires the tech and software capabilities of any other contemporary industry.
As is the case with most every industry around the globe. We are a digitized world, and even ‘non-tech’ sectors find necessity in software to conduct business…and software companies–big and small, established and new - are heeding the call.
Finding Prince Charming
CB Insights suggested some of these young software businesses could ring the $1 billion bell quickly as $100 million funding rounds are no longer the contributions of fairytales. But not all worthy startups may be so lucky.
For those ‘Cinderella’ companies that have not yet found Prince Charming investors to show them the money, they must search for strategies to subsidize their innovation and facilitate growth. Enter research and development (R&D) tax credits.
This federal corporate income tax credit can help software startups secure a dollar-for-dollar reduction in federal tax liability for qualifying research and development activities. Particularly for software and other tech companies, R&D potentially offers a magic wand that can transform ideas into revenue.
Any qualified organization can capture R&D tax credits for designing, developing, or improving products, process, techniques, inventions, formulas, or software. However, the software industry is particularly well positioned to leverage several potentially qualifying development activities for steep savings, such as:
- Developing code for new software architecture or algorithms
- Developing flexible, high-quality, and scalable rule engines to manage and automate complex business structures and models
- Developing functional enhancements and new capabilities for existing applications designed to create a competitive advantage
- Developing interactive software to support the delivery of multimedia entertainment such as streaming music or video or Internet video games
- Developing specialized technologies such as artificial intelligence or voice recognition applications
Spending on R&D Magic Beans
R&D credits are not just for the struggling, under-financed startups. Burgeoning software businesses of all financial grades could—and should—take advantage of the tax-savings opportunities available to them. The consulting firm Zinnov reported that software companies pushed the highest year-on-year growth at over 18%.1
Another survey revealed that software-as-a-service (SaaS) businesses invested 23% of their revenue in R&D. The ever-expanding digitization of our world is expected to propel that to 37% by 2023. With that level of expenditure and growth, the degree of savings through R&D credits stands to be significant.
Fairytale to Reality
Yet, so many startups are either not aware of or fail to seize the possible software R&D credits lying in wait. Some simply don’t know where to look, and others may be intimidated by the mysteries and seemingly dark, daunting tax credit landscape.
One of the best ways to navigate the tax credit terrain and turn fairytale savings into reality is to call upon a tax specialist for assistance. An R&D tax expert can guide startups through hazards and unlock saving secrets to help revitalize revenue and power success.
1. Software and Internet companies have stepped up R&D spending more than any other industry, Business Insider, January 2019