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.
2. Employee Retention Credit
The Paycheck Protection Program (PPP) was the star of the CARES act when it was first passed early in the pandemic. However, the Employee Retention Credit (ERC), was also launched alongside the PPP and allowed businesses impacted by the pandemic to claim thousands of dollars in credits per employee. At the time, the ERC was largely ignored because taxpayers could not claim both the ERC and the PPP. Luckily, the federal government fixed that problem in December, and now taxpayers can claim the ERC in addition to the PPP, even if a PPP loan has been forgiven.
The IRS has dictated two main ways to qualify for the ERC: a reduction in gross receipts, or a full or partial shutdown of the business stemming from a governmental order. Notably, the credit is meant to be very expansive -- even if a business wasn’t affected by an order, they can still qualify if their supply chain and vendors were affected or if they were forced to reduce overall services.
Many IT consultants fared well during the pandemic, but even these firms can benefit from the ERC. In many cases, sales departments were impacted even for firms that were doing well, particularly if sales employees were required to travel. Even if there was only a temporary disruption for the sales department, the firm could still qualify.
3. Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is another credit available to IT consultancies that rewards businesses that hire people from targeted groups. Its value is generally less than the previous two credits, but the WOTC can be combined with the R&D and ERC credits to create significant savings. Depending on the employee’s wages and the classification the credit can be worth up to $9,600 per eligible employee. The eligible target groups include veterans, ex-felons, residents of empowerment zones or rural renewal counties, and more.
With the tax deadline extended for this year, there’s more time for IT consultants to make sure they qualify for these credits and claim the incentives they’ve earned. In my opinion, maximizing the R&D credit will be the most beneficial strategy for this industry in the long-term.
Rick White is a former U.S. Congressman and a founder of the Internet Caucus in Congress. He currently serves as a member of the Strategic Advisory Board at alliantgroup, a tax-consulting firm based in Houston, Texas, and principal at the Woodbay Group, a consulting firm for start up companies in Seattle.