Posted by Jeffrey M. Feingold on 06.16.16
Insurance may seem as far removed from research and development (R&D) as a scientist is to a risk analyst, but that comparison relies on outdated notions of the insurance industry. To remain competitive, today’s insurance companies must constantly develop innovative ways to deliver customer services and access information and technology. And now, many of the activities driving that innovation may qualify an insurance company for valuable federal and state R&D tax credits to help support further advancement. The R&D tax credit incentivizes certain research activities by reducing a company’s liabilities for spending money on that research. The credit is equal to a certain percentage of a business’ qualified research expense (QRE) in excess of a base amount. Expenses that qualify are more comprehensive than you may think—QREs can include the salaries of employees and supervisors who are conducting research, supplies and even some of the research that is contracted out.
A homeowner receives an alert on his smart device when someone is trying to enter his home. A patient is able to view test results online and share those results with other physicians. A new car owner is able to receive a discounted insurance rate for a monitored pattern of safe driving practices. Each of these examples illustrates just how far the insurance industry has come in making technological innovations that help provide customers with better, faster and safer services. As insurance companies increasingly turn to data that help them track certain behavioral patterns, they are able to become more adept at accurately setting rates per customer. At the same time, consumers want smart data to work in their favor to receive customized pricing that rewards them for safe practices, such as getting wellness exams, protecting their homes from disasters and driving safely.
When Congress made the federal tax credit permanent through the Protecting Americans from Tax Hikes Act of 2015 (PATH) last December, the Act included provisions making the credits available to a wider variety of businesses. Further, the IRS announced new regulations in 2015 that expand and clarify which activities can be claimed under the R&D tax credit. Together, these changes raise the opportunity for more insurance companies to qualify for R&D credits than ever before.
In enacting the PATH legislation in 2015, Congress not only made federal tax credits permanent; members also added two attractive provisions that benefit startup and small businesses, as well as those that pay the Alternative Minimum Tax (AMT). By eliminating the AMT for small businesses and allowing startups to take the credit against payroll tax, Congress greatly expanded the number of qualified businesses that will benefit. Now, businesses with less than $5 million in annual revenue can take the tax credit against their payroll taxes, assuming they have employees engaged in R&D for up to five years. Additionally, companies with $50 million and less in gross receipts, based on a three-year average, can apply the R&D tax credit against the AMT. This is big news for shareholders of qualifying pass-through entities, such as S corporations and partnerships which have an AMT liability. The new AMT provision is effective January 1, 2016 and later.
Another positive change in 2015 took place when the IRS proposed regulations concerning the treatment of internal-use software (IUS) and non-IUS for the purpose of calculating the R&D credit. For the insurance industry, the regulations mean that if software improvements benefit third parties – such as customers and vendors – those improvements will no longer be treated as IUS, and therefore could result in tax credits. Qualified IUS development must meet three standards:
Examples of insurance solutions that may qualify for R&D credits include online insurance quotes, claims management, customer relations management and even billing administration.
When insurance companies are able to base quotes on more intelligent information or use software apps that increase the rate at which a customer can get a quote, there is a good chance they can save significant costs in the form of federal and state tax credits. In fact, insurance and finance corporations reported more than $200 million in R&D credits in 2012.
Find Out if Your Industry Qualifies
Does your insurance company resolve technological challenges through the innovative use of products and processes? The R&D credit can be a lucrative incentive for innovative businesses. Given these changes and the new permanent nature of the tax credit and the new IUS guidelines, now is the time to consider whether activities performed by your insurance company qualify for major cash-saving tax credit opportunities. Consider making the R&D tax credit part of your long-term strategic planning and make sure you’re not leaving money you’ve earned on the table. To learn more about whether your industry and company activities qualify for the R&D tax credit, request our free assessment today. A tax professional with R&D tax credit expertise can assist your business with qualifying for and claiming the credit.
Tax Point Advisors, a firm with expertise in working with small and midsize companies, works with businesses that may qualify for R&D tax benefits. For more information, please contact (800) 260-4138 or please leave us a message below.