Case Study
This $70M brewing company produces over 275,000 barrels of beer annually and currently sells in over 42 U.S. states plus Washington D.C.
R&D TAX CREDIT QUALIFICATION FOR FOOD AND BEVERAGE
The owner along with the brew master and other employees formulated ideas for brews by drawing from different avenues of inspiration including unique flavors unavailable in the market, culinary pairings, and history. New ideas were often discussed and evaluated by the Innovation Team, which consisted of the owner, brew master, quality control and operations. This group analyzed existing or new experimental hop varieties for quality and potential use. From this research, product viability was determined.
Conceptual flavor profiles were developed and research was conducted on these new flavor profiles. Alternative recipes were created that detailed the types and amounts of hops, malts, yeasts, and flavorings that would be added to the formula to brew the experimental beers.
“
This $65,000 offset in taxes has allowed the company to continue investing in the development of additional brews and reaching $70 million in sales.
The tean considered different variables and ingredients for new brews including, but not limited to, yeast strains, yeast pitching rates and times, heating and cooling temperatures and times, and the type and amounts for their different hop and yeast varieties. Once the Innovation Team approved thaecipe and process, trial runs were conducted. Samples from the first brew were tasted and sent to the lab for analysis on itschemical properties, such as yeast content, color, Alcohol by Volume (ABV), and pH. Depending on the type of trial or recipe, the first run often yielded positive results but required additional development, until the beer or beer component met their design specifications. As a result, changes were made to both the formulation and the process. Another pilot run and round of testing was performed. This process repeated until the specifications were met or determined unfeasible.
Quality personnel performed lab testing on the experimental brews and constantly test new yeast strains and bacteria in small fermentatiorruns. They reviewed the analytics to determine what the yeast was capable of in terms of flavodng, carbonation, and fermentation time. The information gathered from this research allowed the experimental brewer and the Innovation Team to make faster and more informed decisions when it came to developing and reformulating their experimental recipes in allstages of the project.
Upon approving the experimental recipe for production, the Innovation team was ready to scale up the process and recipe for the production equipment. The pilot system does not scale linearly and them was always uncertainty at this phase of which ingredients would be affected since they were working with a much larger system. Since an experimental recipe is typically a mix of malts, multiple hop varieties, and yeast, the team was uncertain which ingredients were being over-extracted consequently affecting the flavor and chemical properties. As a result, the team had to experiment with the ratio of amounts irorder to reproduce the taste,and chemical properties developed in the Lab and pilot runs. The first ran was rarely successful and required multiple runs and recipe/process changes before the production process was perfected.
RESULTS SPEAK FOR THEMSELVES
Source Advisors began conducting R&D tax credit studies for the company when the company's revenues were $10 million. For nearly a decade, the company has benefited from R&D credits averaging $65,000 annually. This $65,000 offset in taxes has allowed the company to continue investing in the development of additional brews and reaching $70 million in sales. The company's ability to grow at this pace is, in large part, driven by sales of its new products.
Benefited from R&D credits
$65,000
Reaching
$70M
This $70M brewing company produces over 275,000 barrels of beer annually and currently sells in over 42 U.S. states plus Washington D.C.
R&D TAX CREDIT QUALIFICATION FOR FOOD AND BEVERAGE
The owner along with the brew master and other employees formulated ideas for brews by drawing from different avenues of inspiration including unique flavors unavailable in the market, culinary pairings, and history. New ideas were often discussed and evaluated by the Innovation Team, which consisted of the owner, brew master, quality control and operations. This group analyzed existing or new experimental hop varieties for quality and potential use. From this research, product viability was determined.
Conceptual flavor profiles were developed and research was conducted on these new flavor profiles. Alternative recipes were created that detailed the types and amounts of hops, malts, yeasts, and flavorings that would be added to the formula to brew the experimental beers.
“
This $65,000 offset in taxes has allowed the company to continue investing in the development of additional brews and reaching $70 million in sales.
The tean considered different variables and ingredients for new brews including, but not limited to, yeast strains, yeast pitching rates and times, heating and cooling temperatures and times, and the type and amounts for their different hop and yeast varieties. Once the Innovation Team approved thaecipe and process, trial runs were conducted. Samples from the first brew were tasted and sent to the lab for analysis on itschemical properties, such as yeast content, color, Alcohol by Volume (ABV), and pH. Depending on the type of trial or recipe, the first run often yielded positive results but required additional development, until the beer or beer component met their design specifications. As a result, changes were made to both the formulation and the process. Another pilot run and round of testing was performed. This process repeated until the specifications were met or determined unfeasible.
Quality personnel performed lab testing on the experimental brews and constantly test new yeast strains and bacteria in small fermentatiorruns. They reviewed the analytics to determine what the yeast was capable of in terms of flavodng, carbonation, and fermentation time. The information gathered from this research allowed the experimental brewer and the Innovation Team to make faster and more informed decisions when it came to developing and reformulating their experimental recipes in allstages of the project.
Upon approving the experimental recipe for production, the Innovation team was ready to scale up the process and recipe for the production equipment. The pilot system does not scale linearly and them was always uncertainty at this phase of which ingredients would be affected since they were working with a much larger system. Since an experimental recipe is typically a mix of malts, multiple hop varieties, and yeast, the team was uncertain which ingredients were being over-extracted consequently affecting the flavor and chemical properties. As a result, the team had to experiment with the ratio of amounts irorder to reproduce the taste,and chemical properties developed in the Lab and pilot runs. The first ran was rarely successful and required multiple runs and recipe/process changes before the production process was perfected.
RESULTS SPEAK FOR THEMSELVES
Source Advisors began conducting R&D tax credit studies for the company when the company's revenues were $10 million. For nearly a decade, the company has benefited from R&D credits averaging $65,000 annually. This $65,000 offset in taxes has allowed the company to continue investing in the development of additional brews and reaching $70 million in sales. The company's ability to grow at this pace is, in large part, driven by sales of its new products.
Benefited from R&D credits
$65,000
Reaching
$70M
This company specializes in de veloping complex and highly sophisticated electronic products including emergency response systems, communic ations systems, data networks, digital m edia hubs, and various technologies for use in urban environments. The company may also design and develop the internal componentry of its products including mechanical, electrical, and software systems. Research is performed by designers, mechanical and electrical engineers, software developers, computer engineers, CNC programmers, CAD designers, machinists, quality control and technicians.
R&D TAX CREDIT QUALIFICATION FOR MANUFACTURING & DISTRIBUTION
The company begins each project with brainstormingsessions to determine feasibility and achieve a basicframework for the concept. At this stage, hypotheses will be developed as to what the company believes
will be the most likely development track. The project then moves to the detailed design and engineering phase where the team will address form, fit, material, and performance issues. Calculations and computer models are evaluated and modified as necessary. Issues with configuration, material composition, and manufacturability are also addressed. For example, how electronic components fit together on a printed circuit board is a major area of redesign requiring the evaluation of different design alternatives in order to manufacture successfully.
“
This $40 million manufacturing company generates over $415,000 of annual R&D tax credits...
Prototypes are developed to evaluate various configurations of components and their resistance to environmental conditions such as vibration or heat. The primary materials used during the prototyping process include structural metals, circuit boards, PC boards, transistors, circuits, wiring, plastics, and the housing. Oftentimes, multiple prototypes or samples are constructed and tested to validate the alternative or experimental designs. Testing of gain and bandwidth are also included for performance and reliability. It is common for tests to fail as circuitry, power, and electronic components are modified, and the testing environment is activated in an attempt to deliver new products to meet customer specifications. This development process is repeated until a successful component is designed and manufactured.
RESULTS SPEAK FOR THEMSELVES
This $40 million manufacturing company generates over $415,000 of annual R&D tax credits with R&D expenses of about $6.5 million.
Annual R&D tax credits
$415,000
R&D expenses
$6.5M
This study surrounds a financial technology company that specializes in algorithmic cryptocurrency trading by utilizing sophisticated probabilistic models to drive automated trade execution. Launching in 2020 with a minimal three-person team, the owners served a vital role in the platform development, and continue to be an integral part of the company's future. From signal identification to the creation of trading algorithms, they remain imperative to all aspects of their workflow.
R&D TAX CREDIT QUALIFICATION FOR GAME DEVELOPMENT
One of the challenges of development when it comes to blockchain and cryptocurrency is that it is still in its relative infancy. Most developers do not have the types of resources available to development teams working on traditional software and platforms. As such, when this company started its work much of it was from a blank slate. This started with the development of their alpha model. Their first model for predicting market movement was based on analysis and identification of signals in the data they were receiving in real-time from the various exchanges that represented larger market trends.
The research process at this company was highly collaborative and was focused on improvement in the performance, functionality, and reliability of these systems. Initial alpha model development began with a manual study of long positions. They simultaneously worked on developing a model for short-term strategies that changed daily. Once their alpha model was developed, the team began the perilous process of testing their model and trading algorithms. Unlike companies with history and strong capitalization, being a small entity forced the team to utilize their capital to test their trading system.
“
The total combined federal and state tax credit for this company was approximately $250,000 for their first full year of development.
Through continued trade execution, analysis, and evaluation, the team was able to validate the accuracy of their probabilistic model and the reliability of their trading algorithms for order execution.
Another area where this company spent a lot of development effort was data warehousing. Like most companies that specialize in algorithmic trading, the need for historic data storage was paramount. This would allow them to back-test their alpha mode utilizing real historic data in a simulation environment without the need to utilize their actual managed funds to test future models and algorithms.
RESULTS SPEAK FOR THEMSELVES
The total combined federal and state tax credit for this company was approximately $250,000 for their first full year of development. While the company did qualify for the startup small business payroll tax offset, their immensely successful first year allowed them to take their credit against their normal tax liability.
The total federal and state tax credit
$250,000
For their first full year of development
This plastics company has been an innovator in the use of industrial plastics in new applications with roots in identifying products that could be produced using plastics. The company offers urethane casting, thermoforming, machining and plastic injection molding services. The company constantly evolves to expand its offerings into new industries and applications.
R&D TAX CREDIT QUALIFICATION FOR PLASTICS & INJECTION MOLDING
The R&D activity at this company started with a customer request. Meetings were held between the customer and their contact, whether it was the sales department or the owner to identify the design of the product, as well as the specifications, performance, and functionality requirements the product must meet. Often times, for more challenging projects, the heads of the different departments, including CNC, Fabrication, Injection Molding, Casting as well as the design engineers, and operations managers would also get involved to perform more in-depth preliminary engineering calculations.
“
... have expanded to exceed $1.4 million equating to an annual R&D tax credit of over $105,000.
Product they prefer mass produced, technical sales and engineers to perform a detailed design for manufacturability review and would more often than not have to redesign the customer’s provided design drawings and prototypes to ensure that it is manufacturable on a large scale. This often included the development and fabrication of molds, casts, or other custom tooling needed for production purposes.
A preliminary engineering analysis was performed to determine if the product should be injection molded, fabricated or molded with urethane. This lead to the experimentation with molds and casts to determine, ifflow and cure rates were consistent in order to develop a repeatable process. Qualifying activity continued with design engineers creating CAD/CAM design documents that were utilized as the basis to develop the CNC programming. In addition to developing the part and process designs, design engineers were responsible for developing custom tooling and fixtures to support the production process.
Once the part and process designs were complete, the team began producing prototypes for validation. More often than not, molds, casts, and the parts themselves went through a validation process to determine if quality, regulatory, and performance standards are met. This process was highly iterative and required numerous trials to solve all the technical issues that were a ubiquitous part of any development process.
Following the finalization of the process, the company needed to produce first articles and perform validation to determine if both the part and the production process were working properly which was also a qualified activity. The first article sample rarely produced a part that met all of their specifications. The team worked through an iterative process of optimizing the code, performing another trial run, analyzing the samples, and further refining the process multiple times before they were able to create a product that met their customer’s specifications. Once this stage was complete, multiple units were produced and the company continued to scale up production while monitoring the quality of the final product.
RESULTS SPEAK FOR THEMSELVES
With the complexity of their production process, and the significant investment in technology and man hours, this company depends on R&D to remain a leader in the plastic injection molding industry. Qualified research expenditures totaled nearly $900,000 in the initial study performed by Source Advisors in 2012. Through the years, the company’s areas of research and development have expanded to exceed $1.4 million equating to an annual R&D tax credit of over $105,000.
Areas of research and development have expanded to exceed
$1.4M
R&D expenses
$105,000
This company develops specialized digital signage solutions requiring significant software development
R&D TAX CREDIT QUALIFICATION FOR SOFTWARE DEVELOPMENT
This company continuously looks to integrate options that will offer scalable and flexIble solutions. Research sMited with a collaborative conceptualization process, which included a high-level feasibility analysis related to functionality, performance, quality and reliability. Developers followed standwdlized, but situationally adaptive and precIse coding guidelines, to generate code. Solutions evolved through a collaborative, cross.funchonal effort where developers were assigned a task, or user story, to complete In a single development cycle. The development cycle, or spnnt, was an heratWe time box in which a user story was accomplished in a span of a few weeks. During this time, the developer designed, coded, tested, and hilly Teary or optimized the user story. Depending on the cornpledty of the effort, Me team met daily or weekly to track the progress of each Msk and discuss Me technical issues and design challenges.
“
This software developer with annual sales of $2.7 million realized a combined federal and state tax credit of over $101,000.
A simulation environment was also created to be an advanced computing platform with the capability of creating production-like environments for alpha testing. This allowed the company to evaluate the soundness of the software along with any problems that the development team did not foresee during development. Once it passed simulation testing it moved to limited testing in the field or beta testing. Early software iterations typically would not function or perform as designed so the development team analyzed the test results to determine where the code needed to be optimized, refined, or completely redesigned. As the software failed, the testing process repeated from the beginning and the software cycled through revisions before it was deemed ready for deployment.
Analysis took place throughout the development life cycle. Each iteration involved the entire team and included full software development cycles (planning, designs, requirement analysis, coding, and testing). Because the applications were unpredictable, these incremental cadences allowed a demonstration of the functionality. The requirements of a user story map to real-world scenarios, framed the acceptance criteria of the project. The goal was to try out different conditions so programmers could write unit tests, one-by-one, to obtain insight at each stage so that the company can review the code base in small modular units. Static code analysis tools were often used while the stories are sized and prioritized so that weaknesses, security vulnerabilities, or potential concurrency issues could be identified. This methodology fosters a no-time-delay strategy between coding and testing so that results can be optimized, refined, or completely redesigned quickly.
Once all iterations of the systematic testing process were completed, the product was released.
RESULTS SPEAK FOR THEMSELVES
This software developer with annual sales of $2.7 million realized a combined federal and state tax credit of over $101,000.
Annual sales
$2.7M
Federal and state tax credit
$101,000
This structural engineering firm employs the most advanced engineering techniques and processes. Their expertise is in performing intense studies and analyses of structural components utilizing technologies such as radar, lasers, acoustics, pulse velocity or impact, fiber optics, x-ray, ultrasonics, and a variety of monitors for cracks, tilts, winds and environments for extensometers and large scale movements. In addition, the firm is increasingly embracing concepts of sustainability and “green” construction techniques and processes.
R&D TAX CREDIT QUALIFICATION FOR ARCHITECTURE & ENGINEERING
Principles of engineering and physical science were relied upon to create new or improved designs, methods, and processes. The firm designed and evaluated alternatives to ensure that the plans would meet specific requirements. The firm’s research and development cycle was continuous and iterative as each phase of development yields additional data that was leveraged to achieve a result. Numerous R&D initiatives were simultaneously pursued each year, and each initiative was unique.
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Total federal credits for this A&E firm in the current year were $275,000 ...
Initially, the firm reviewed drawings and technical specifications then identified areas for improvement with a core focus on alternative material usage and the improvement of the structure. Team members took the proposed designs and converted them into a digital format where in-depth analysis of the designs took place. Research activities often included, Green Building Design/LEED, seismic analysis, alternative material experimentation, load and grade computations, acoustical quality improvements, and stress factor evaluation. Strength and stiffness were critical considerations when designing a building as proper load support must be introduced to avoid stresses caused from seismic activity. At this stage, hypotheses was developed as to what engineers believed would be the most likely development track, capturing technical information relative to codes and by-laws, principles of physics, and overall risk.
Problem solving was iterative and included the evaluation of alternative solutions through studies, topographical data, material performance under various environmental conditions, and load stresses.
This firm utilized software tools to develop 2D, 3D, mathematical, and analytical models. The firm used REVIT, BIM and CAD software platforms to determine if engineering calculations met specification requirements related to geometry, materials, and constructability. Data was collected to evaluate failures, errors, and related performance requirements. At this stage, the process returned to research and conceptual design if the failure was significant.
During testing, the firm ran simulations to test digital prototypes created within the modeling phase of development. Virtual tests were used to test multiple design scenarios against numerous criteria. As an example, to predict design failure before it occurred in the field, they ran static and dynamic simulations to evaluate the performance of the design over time.
Detailed design and development, and construction often run concurrently due to technical complexities encountered in the field. Once construction began, certain aspects of plans often failed or needed to be redesigned in order to execute the correct sequence of work.
RESULTS SPEAK FOR THEMSELVES
Total federal credits for this A&E firm in the current year were $275,000 given annual R&D expenses of approximately $4.7 million.
Federal credits for this A&E firm
$275,000
Annual R&D expenses
$4.7M
Founded more than 15 years ago, this mid-sized hedge fund has become one of the most respected names in their industry. The company currently manages approximately $5 billion in assets primarily for pensions, endowments, and foundations. The company’s trading strategies span equities, fixed income, commodities, foreign exchange, credit, and convertible bonds globally.
R&D TAX CREDIT QUALIFICATION FOR FINANCIAL SERVICES
Several years ago, the decision was made to primarily build vs. buy software systems to provide the firm and their investors with a competitive advantage in the market. In order to optimize trading performance and risk management, the firm relies on their various proprietary software platforms. This unique software platform required extensive research, development and testing to ensure that it could function within the constantly evolving and volatile markets. The advanced trading platform and automated risk systems enables them to trade more profitably, at a lower cost.
The research process at this firm was collaborative between traders, risk management and developers. Research into and improvement in the performance, functionality and reliability of these systems was continuous and iterative. Testing and simulations of software prototypes and complex algorithms was ongoing throughout the life of an R&D project. The company’s software developers conducted extensive tests and simulations to verify and validate the software specific to its purpose for gathering and processing data and distributing that data, compiling reports, building a database of information for traders, and enabling real-time trading and risk management.
“
Given the firm’s growth and continued focus on innovation, they now realize an annual credit of about $250,000.
Larger projects with longer durations represented investments that transform the business while building a non-replicable competitive advantage. Technology enabling business transformation and market-leading product design were often the types of projects undertaken by this company. On average, in the early phases of the project, approximately one-third of the design time goes to initial design and specifications based on requirements, one-third to coding development and unit tests, and one-third to testing and issue resolution. The project team included the CTO, portfolio managers, traders, risk management, software engineers, and QA functions.
The performance-testing environment was especially critical to preparing a software release for production. If the new product was to replace an older version, parallel testing of performance data often was conducted. Verification and validation were iterative experimental protocols to ensure the technology met performance and precision expectations before being released to production and offered to portfolio managers. Even in production and in verification and validation efforts undertaken by traders, any deficiencies were addressed and solutions developed through additional research, rewriting, and retesting.
Risk management systems were also an important part of proprietary software development at the firm. The Risk department was charged with understanding the current positions of the entire firm and their potential impact. The makeup of the various funds led to a highly complex order book, with positions in over 15,000 securities. Advanced models and intellectual property from the risk team was crucial in building out the risk monitoring systems, position reports, and alerts. The advanced models and analytics created by the risk team were generally passed on to developers who automate many of the risk management functions.
Back office systems were also either internally developed or integrated with third party systems to provide for enhanced real- time and efficient reporting that could not be done by off-the-shelf systems. Back office development supported various functions, building out systems and automation, facilitating straight through processing, and other time efficiency initiatives. These teams were responsible for development related projects from non-trading functions. They helped service compliance, tax and operations.
RESULTS SPEAK FOR THEMSELVES
Total combined federal and state tax credits for this hedge fund were $225,000 for the first year. Given the firm’s growth and continued focus on innovation, they now realize an annual credit of about $250,000.
Total federal and state tax credits
$225,000
Annual credit
$250,000
This $70M brewing company produces over 275,000 barrels of beer annually and currently sells in over 42 U.S. states plus Washington D.C.
R&D TAX CREDIT QUALIFICATION FOR FOOD AND BEVERAGE
The owner along with the brew master and other employees formulated ideas for brews by drawing from different avenues of inspiration including unique flavors unavailable in the market, culinary pairings, and history. New ideas were often discussed and evaluated by the Innovation Team, which consisted of the owner, brew master, quality control and operations. This group analyzed existing or new experimental hop varieties for quality and potential use. From this research, product viability was determined.
Conceptual flavor profiles were developed and research was conducted on these new flavor profiles. Alternative recipes were created that detailed the types and amounts of hops, malts, yeasts, and flavorings that would be added to the formula to brew the experimental beers.
“
This $65,000 offset in taxes has allowed the company to continue investing in the development of additional brews and reaching $70 million in sales.
The tean considered different variables and ingredients for new brews including, but not limited to, yeast strains, yeast pitching rates and times, heating and cooling temperatures and times, and the type and amounts for their different hop and yeast varieties. Once the Innovation Team approved thaecipe and process, trial runs were conducted. Samples from the first brew were tasted and sent to the lab for analysis on itschemical properties, such as yeast content, color, Alcohol by Volume (ABV), and pH. Depending on the type of trial or recipe, the first run often yielded positive results but required additional development, until the beer or beer component met their design specifications. As a result, changes were made to both the formulation and the process. Another pilot run and round of testing was performed. This process repeated until the specifications were met or determined unfeasible.
Quality personnel performed lab testing on the experimental brews and constantly test new yeast strains and bacteria in small fermentatiorruns. They reviewed the analytics to determine what the yeast was capable of in terms of flavodng, carbonation, and fermentation time. The information gathered from this research allowed the experimental brewer and the Innovation Team to make faster and more informed decisions when it came to developing and reformulating their experimental recipes in allstages of the project.
Upon approving the experimental recipe for production, the Innovation team was ready to scale up the process and recipe for the production equipment. The pilot system does not scale linearly and them was always uncertainty at this phase of which ingredients would be affected since they were working with a much larger system. Since an experimental recipe is typically a mix of malts, multiple hop varieties, and yeast, the team was uncertain which ingredients were being over-extracted consequently affecting the flavor and chemical properties. As a result, the team had to experiment with the ratio of amounts irorder to reproduce the taste,and chemical properties developed in the Lab and pilot runs. The first ran was rarely successful and required multiple runs and recipe/process changes before the production process was perfected.
RESULTS SPEAK FOR THEMSELVES
Source Advisors began conducting R&D tax credit studies for the company when the company's revenues were $10 million. For nearly a decade, the company has benefited from R&D credits averaging $65,000 annually. This $65,000 offset in taxes has allowed the company to continue investing in the development of additional brews and reaching $70 million in sales. The company's ability to grow at this pace is, in large part, driven by sales of its new products.
Benefited from R&D credits
$65,000
Reaching
$70M
This company specializes in de veloping complex and highly sophisticated electronic products including emergency response systems, communic ations systems, data networks, digital m edia hubs, and various technologies for use in urban environments. The company may also design and develop the internal componentry of its products including mechanical, electrical, and software systems. Research is performed by designers, mechanical and electrical engineers, software developers, computer engineers, CNC programmers, CAD designers, machinists, quality control and technicians.
R&D TAX CREDIT QUALIFICATION FOR MANUFACTURING & DISTRIBUTION
The company begins each project with brainstormingsessions to determine feasibility and achieve a basicframework for the concept. At this stage, hypotheses will be developed as to what the company believes
will be the most likely development track. The project then moves to the detailed design and engineering phase where the team will address form, fit, material, and performance issues. Calculations and computer models are evaluated and modified as necessary. Issues with configuration, material composition, and manufacturability are also addressed. For example, how electronic components fit together on a printed circuit board is a major area of redesign requiring the evaluation of different design alternatives in order to manufacture successfully.
“
This $40 million manufacturing company generates over $415,000 of annual R&D tax credits...
Prototypes are developed to evaluate various configurations of components and their resistance to environmental conditions such as vibration or heat. The primary materials used during the prototyping process include structural metals, circuit boards, PC boards, transistors, circuits, wiring, plastics, and the housing. Oftentimes, multiple prototypes or samples are constructed and tested to validate the alternative or experimental designs. Testing of gain and bandwidth are also included for performance and reliability. It is common for tests to fail as circuitry, power, and electronic components are modified, and the testing environment is activated in an attempt to deliver new products to meet customer specifications. This development process is repeated until a successful component is designed and manufactured.
RESULTS SPEAK FOR THEMSELVES
This $40 million manufacturing company generates over $415,000 of annual R&D tax credits with R&D expenses of about $6.5 million.
Annual R&D tax credits
$415,000
R&D expenses
$6.5M
This study surrounds a financial technology company that specializes in algorithmic cryptocurrency trading by utilizing sophisticated probabilistic models to drive automated trade execution. Launching in 2020 with a minimal three-person team, the owners served a vital role in the platform development, and continue to be an integral part of the company's future. From signal identification to the creation of trading algorithms, they remain imperative to all aspects of their workflow.
R&D TAX CREDIT QUALIFICATION FOR GAME DEVELOPMENT
One of the challenges of development when it comes to blockchain and cryptocurrency is that it is still in its relative infancy. Most developers do not have the types of resources available to development teams working on traditional software and platforms. As such, when this company started its work much of it was from a blank slate. This started with the development of their alpha model. Their first model for predicting market movement was based on analysis and identification of signals in the data they were receiving in real-time from the various exchanges that represented larger market trends.
The research process at this company was highly collaborative and was focused on improvement in the performance, functionality, and reliability of these systems. Initial alpha model development began with a manual study of long positions. They simultaneously worked on developing a model for short-term strategies that changed daily. Once their alpha model was developed, the team began the perilous process of testing their model and trading algorithms. Unlike companies with history and strong capitalization, being a small entity forced the team to utilize their capital to test their trading system.
“
The total combined federal and state tax credit for this company was approximately $250,000 for their first full year of development.
Through continued trade execution, analysis, and evaluation, the team was able to validate the accuracy of their probabilistic model and the reliability of their trading algorithms for order execution.
Another area where this company spent a lot of development effort was data warehousing. Like most companies that specialize in algorithmic trading, the need for historic data storage was paramount. This would allow them to back-test their alpha mode utilizing real historic data in a simulation environment without the need to utilize their actual managed funds to test future models and algorithms.
RESULTS SPEAK FOR THEMSELVES
The total combined federal and state tax credit for this company was approximately $250,000 for their first full year of development. While the company did qualify for the startup small business payroll tax offset, their immensely successful first year allowed them to take their credit against their normal tax liability.
The total federal and state tax credit
$250,000
For their first full year of development
This plastics company has been an innovator in the use of industrial plastics in new applications with roots in identifying products that could be produced using plastics. The company offers urethane casting, thermoforming, machining and plastic injection molding services. The company constantly evolves to expand its offerings into new industries and applications.
R&D TAX CREDIT QUALIFICATION FOR PLASTICS & INJECTION MOLDING
The R&D activity at this company started with a customer request. Meetings were held between the customer and their contact, whether it was the sales department or the owner to identify the design of the product, as well as the specifications, performance, and functionality requirements the product must meet. Often times, for more challenging projects, the heads of the different departments, including CNC, Fabrication, Injection Molding, Casting as well as the design engineers, and operations managers would also get involved to perform more in-depth preliminary engineering calculations.
“
... have expanded to exceed $1.4 million equating to an annual R&D tax credit of over $105,000.
Product they prefer mass produced, technical sales and engineers to perform a detailed design for manufacturability review and would more often than not have to redesign the customer’s provided design drawings and prototypes to ensure that it is manufacturable on a large scale. This often included the development and fabrication of molds, casts, or other custom tooling needed for production purposes.
A preliminary engineering analysis was performed to determine if the product should be injection molded, fabricated or molded with urethane. This lead to the experimentation with molds and casts to determine, ifflow and cure rates were consistent in order to develop a repeatable process. Qualifying activity continued with design engineers creating CAD/CAM design documents that were utilized as the basis to develop the CNC programming. In addition to developing the part and process designs, design engineers were responsible for developing custom tooling and fixtures to support the production process.
Once the part and process designs were complete, the team began producing prototypes for validation. More often than not, molds, casts, and the parts themselves went through a validation process to determine if quality, regulatory, and performance standards are met. This process was highly iterative and required numerous trials to solve all the technical issues that were a ubiquitous part of any development process.
Following the finalization of the process, the company needed to produce first articles and perform validation to determine if both the part and the production process were working properly which was also a qualified activity. The first article sample rarely produced a part that met all of their specifications. The team worked through an iterative process of optimizing the code, performing another trial run, analyzing the samples, and further refining the process multiple times before they were able to create a product that met their customer’s specifications. Once this stage was complete, multiple units were produced and the company continued to scale up production while monitoring the quality of the final product.
RESULTS SPEAK FOR THEMSELVES
With the complexity of their production process, and the significant investment in technology and man hours, this company depends on R&D to remain a leader in the plastic injection molding industry. Qualified research expenditures totaled nearly $900,000 in the initial study performed by Source Advisors in 2012. Through the years, the company’s areas of research and development have expanded to exceed $1.4 million equating to an annual R&D tax credit of over $105,000.
Areas of research and development have expanded to exceed
$1.4M
R&D expenses
$105,000
This company develops specialized digital signage solutions requiring significant software development
R&D TAX CREDIT QUALIFICATION FOR SOFTWARE DEVELOPMENT
This company continuously looks to integrate options that will offer scalable and flexIble solutions. Research sMited with a collaborative conceptualization process, which included a high-level feasibility analysis related to functionality, performance, quality and reliability. Developers followed standwdlized, but situationally adaptive and precIse coding guidelines, to generate code. Solutions evolved through a collaborative, cross.funchonal effort where developers were assigned a task, or user story, to complete In a single development cycle. The development cycle, or spnnt, was an heratWe time box in which a user story was accomplished in a span of a few weeks. During this time, the developer designed, coded, tested, and hilly Teary or optimized the user story. Depending on the cornpledty of the effort, Me team met daily or weekly to track the progress of each Msk and discuss Me technical issues and design challenges.
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This software developer with annual sales of $2.7 million realized a combined federal and state tax credit of over $101,000.
A simulation environment was also created to be an advanced computing platform with the capability of creating production-like environments for alpha testing. This allowed the company to evaluate the soundness of the software along with any problems that the development team did not foresee during development. Once it passed simulation testing it moved to limited testing in the field or beta testing. Early software iterations typically would not function or perform as designed so the development team analyzed the test results to determine where the code needed to be optimized, refined, or completely redesigned. As the software failed, the testing process repeated from the beginning and the software cycled through revisions before it was deemed ready for deployment.
Analysis took place throughout the development life cycle. Each iteration involved the entire team and included full software development cycles (planning, designs, requirement analysis, coding, and testing). Because the applications were unpredictable, these incremental cadences allowed a demonstration of the functionality. The requirements of a user story map to real-world scenarios, framed the acceptance criteria of the project. The goal was to try out different conditions so programmers could write unit tests, one-by-one, to obtain insight at each stage so that the company can review the code base in small modular units. Static code analysis tools were often used while the stories are sized and prioritized so that weaknesses, security vulnerabilities, or potential concurrency issues could be identified. This methodology fosters a no-time-delay strategy between coding and testing so that results can be optimized, refined, or completely redesigned quickly.
Once all iterations of the systematic testing process were completed, the product was released.
RESULTS SPEAK FOR THEMSELVES
This software developer with annual sales of $2.7 million realized a combined federal and state tax credit of over $101,000.
Annual sales
$2.7M
Federal and state tax credit
$101,000
This structural engineering firm employs the most advanced engineering techniques and processes. Their expertise is in performing intense studies and analyses of structural components utilizing technologies such as radar, lasers, acoustics, pulse velocity or impact, fiber optics, x-ray, ultrasonics, and a variety of monitors for cracks, tilts, winds and environments for extensometers and large scale movements. In addition, the firm is increasingly embracing concepts of sustainability and “green” construction techniques and processes.
R&D TAX CREDIT QUALIFICATION FOR ARCHITECTURE & ENGINEERING
Principles of engineering and physical science were relied upon to create new or improved designs, methods, and processes. The firm designed and evaluated alternatives to ensure that the plans would meet specific requirements. The firm’s research and development cycle was continuous and iterative as each phase of development yields additional data that was leveraged to achieve a result. Numerous R&D initiatives were simultaneously pursued each year, and each initiative was unique.
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Total federal credits for this A&E firm in the current year were $275,000 ...
Initially, the firm reviewed drawings and technical specifications then identified areas for improvement with a core focus on alternative material usage and the improvement of the structure. Team members took the proposed designs and converted them into a digital format where in-depth analysis of the designs took place. Research activities often included, Green Building Design/LEED, seismic analysis, alternative material experimentation, load and grade computations, acoustical quality improvements, and stress factor evaluation. Strength and stiffness were critical considerations when designing a building as proper load support must be introduced to avoid stresses caused from seismic activity. At this stage, hypotheses was developed as to what engineers believed would be the most likely development track, capturing technical information relative to codes and by-laws, principles of physics, and overall risk.
Problem solving was iterative and included the evaluation of alternative solutions through studies, topographical data, material performance under various environmental conditions, and load stresses.
This firm utilized software tools to develop 2D, 3D, mathematical, and analytical models. The firm used REVIT, BIM and CAD software platforms to determine if engineering calculations met specification requirements related to geometry, materials, and constructability. Data was collected to evaluate failures, errors, and related performance requirements. At this stage, the process returned to research and conceptual design if the failure was significant.
During testing, the firm ran simulations to test digital prototypes created within the modeling phase of development. Virtual tests were used to test multiple design scenarios against numerous criteria. As an example, to predict design failure before it occurred in the field, they ran static and dynamic simulations to evaluate the performance of the design over time.
Detailed design and development, and construction often run concurrently due to technical complexities encountered in the field. Once construction began, certain aspects of plans often failed or needed to be redesigned in order to execute the correct sequence of work.
RESULTS SPEAK FOR THEMSELVES
Total federal credits for this A&E firm in the current year were $275,000 given annual R&D expenses of approximately $4.7 million.
Federal credits for this A&E firm
$275,000
Annual R&D expenses
$4.7M
Investment and speculation are the main drivers for the extremely high valuations of various cryptocurrencies. Since the infancy of the cryptocurrency industry, there have been numerous efforts to replicate the success that algorithmic trading has offered investors in the traditional world of publicly traded securities. Development of these platforms and the algorithms that drive them are another highly-qualifying R&D activity with regard to the R&D tax credit.
This includes developing automated trading and risk management platforms, developing performance-testing environments with real-time data feeds, data connections to existing exchanges, developing front-end experiences to deliver functionality to users and administrators, developing advanced algorithms to accurately identify signals in the market, creating systems to meet regulatory requirements, and finally validating these systems for accuracy and performance. In this constantly changing landscape, developing, deploying, and maintaining systems is a never-ending task. That perpetual change lends itself to ongoing annual R&D credits. Further, these tend to grow with the size and scope of the company conducting the research.
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Total federal credits for this A&E firm in the current year were $275,000 ...
R&D TAX CREDIT CASE STUDY: NON-FUNGIBLE TOKENS (NFTS)
Another growing segment for blockchain is the NFT market. Non-fungible tokens are essentially digital certificates confirming ownership of a digital asset on a specific blockchain. Since the birth of smart contracts, NFTs have exploded and now cover items such as digital works of art, virtual trading cards, and even digital land deeds for game and VR environments. Developing the assets themselves will not always qualify, but the time in creating new blockchain infrastructure, mechanisms for minting (creating) NFTs, custodial infrastructure, unique user experiences, and even testing can qualify for the R&D tax credit. Within the NFT world, companies may also have extensive hosting requirements. Where this is done via traditional cloud servers, costs for any development sandboxes can also be qualified for the credit as long as the environment is purely for testing and development.
R&D TAX CREDIT CASE STUDY: DECENTRALIZED FINANCE (DEFI)
The ultimate demonstration of the utility of cryptocurrency is the push toward decentralized finance (DeFi). DeFi is a blockchain-based form of financial infrastructure that does not rely on traditional banks, exchange, or other financial institutions to deliver financing, hedge against risk, and earn interest via smart contracts to create a trustless financial network. Development of this type of infrastructure is cutting edge and much of it, like its other blockchain counterparts qualifies for the R&D tax credit. Functionality such as development of liquidity pools, collateralized lending pools, flash loan infrastructure, among others are all considered qualifying activity. Once development on these types of features is completed, additional time can be qualified for the testing and validation of these elements within the platform.
Founded more than 15 years ago, this mid-sized hedge fund has become one of the most respected names in their industry. The company currently manages approximately $5 billion in assets primarily for pensions, endowments, and foundations. The company’s trading strategies span equities, fixed income, commodities, foreign exchange, credit, and convertible bonds globally.
R&D TAX CREDIT QUALIFICATION FOR FINANCIAL SERVICES
Several years ago, the decision was made to primarily build vs. buy software systems to provide the firm and their investors with a competitive advantage in the market. In order to optimize trading performance and risk management, the firm relies on their various proprietary software platforms. This unique software platform required extensive research, development and testing to ensure that it could function within the constantly evolving and volatile markets. The advanced trading platform and automated risk systems enables them to trade more profitably, at a lower cost.
The research process at this firm was collaborative between traders, risk management and developers. Research into and improvement in the performance, functionality and reliability of these systems was continuous and iterative. Testing and simulations of software prototypes and complex algorithms was ongoing throughout the life of an R&D project. The company’s software developers conducted extensive tests and simulations to verify and validate the software specific to its purpose for gathering and processing data and distributing that data, compiling reports, building a database of information for traders, and enabling real-time trading and risk management.
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Given the firm’s growth and continued focus on innovation, they now realize an annual credit of about $250,000.
Larger projects with longer durations represented investments that transform the business while building a non-replicable competitive advantage. Technology enabling business transformation and market-leading product design were often the types of projects undertaken by this company. On average, in the early phases of the project, approximately one-third of the design time goes to initial design and specifications based on requirements, one-third to coding development and unit tests, and one-third to testing and issue resolution. The project team included the CTO, portfolio managers, traders, risk management, software engineers, and QA functions.
The performance-testing environment was especially critical to preparing a software release for production. If the new product was to replace an older version, parallel testing of performance data often was conducted. Verification and validation were iterative experimental protocols to ensure the technology met performance and precision expectations before being released to production and offered to portfolio managers. Even in production and in verification and validation efforts undertaken by traders, any deficiencies were addressed and solutions developed through additional research, rewriting, and retesting.
Risk management systems were also an important part of proprietary software development at the firm. The Risk department was charged with understanding the current positions of the entire firm and their potential impact. The makeup of the various funds led to a highly complex order book, with positions in over 15,000 securities. Advanced models and intellectual property from the risk team was crucial in building out the risk monitoring systems, position reports, and alerts. The advanced models and analytics created by the risk team were generally passed on to developers who automate many of the risk management functions.
Back office systems were also either internally developed or integrated with third party systems to provide for enhanced real- time and efficient reporting that could not be done by off-the-shelf systems. Back office development supported various functions, building out systems and automation, facilitating straight through processing, and other time efficiency initiatives. These teams were responsible for development related projects from non-trading functions. They helped service compliance, tax and operations.
RESULTS SPEAK FOR THEMSELVES
Total combined federal and state tax credits for this hedge fund were $225,000 for the first year. Given the firm’s growth and continued focus on innovation, they now realize an annual credit of about $250,000.
