R&D Tax Credits for Hedge Funds Using AI and Machine Learning

R&D Tax Credits for Hedge Funds Using AI and Machine Learning

Posted by Jeffrey Feingold on 02.07.19

Hedge funds across the United States are increasingly turning their attention towards artificial intelligence (AI) technology to get an edge on their competition when it comes to trading strategies.  Just as machine learning systems are revolutionizing the medicine industry, so too they are re-shaping the way money management is being conducted. The use of machine learning and AI is quickly becoming a common day to day practice among hedge fund managers. AI and related technologies are being used to find the most efficient way to execute trades. Scanning online documents or financial reports for trading signals, and gathering information to take advantage of the market momentum, are just a few  applications of machine learning used in financing. Rather than solely relying on market analysis, managers are building teams of engineers and data scientists to build advanced quantitative models, with AI and machine learning at the heart of these missions. This new technology and improved methods of machine learning require a great deal of experimentation and research to develop. Most money managers are not aware the daily R&D activities taking place can be rewarded in federal and state research and development tax credits.

Reasons to use Machine Learning and AI in Finances:

  • Reduced operational costs thanks to process automation
  • Increased revenues thanks to better productivity and enhanced user experiences
  • Better compliance and reinforced security

Security threats in finance are increasing along with the growing number of transactions, users and third-party integrations. Machine learning algorithms are excellent at detecting fraud. Process automation technology allows companies to replace manual work, automate repetitive tasks and increase productivity with AI. As a result, machine learning enables companies to optimize costs, improve customer experiences and scale up services. Security and process automation are just a few of the most common applications of machine learning in finance. 

Many opportunities exist for research credits when applying computer systems to tasks that once required human intelligence. The Research & Development Tax Credit is a federal program designed for companies that perform manufacturing in the U.S. The R&D Tax Credit, originally enacted as part of the Economic Recovery Tax Act of 1981, was designed to encourage investment in innovation. The credits are also intended for activities related to process design and development. Examples include new techniques, formulas, processes, software, and the use of innovative materials to create more reliable, energy-efficient products or processes. R&D tax credits can help you continue your work and inject your business with valuable cash or reduce your Federal tax obligations. Regardless of your company size, any investment in AI development will provide ample opportunity to benefit from these tax initiatives.

Four-Part Test for Eligibility

R&D tax credit eligibility largely depends on wheth­er the work you are conducting meets the criteria established by the IRS in its four-part test:

  1. Developing a new or improved business component (The Business Component Test): The research’s purpose must be to create a new or im­proved product or process, resulting in increased performance, function, reliability or quality.
  2. The activity is technical in nature: The process of experimentation must rely on the hard sciences, such as engineering, physics, chemistry, biology or computer science.
  3. Elimination of technical uncertainty: You must demonstrate that you’ve attempted to eliminate uncertainty about the development or improvement of a product or process.
  4. Process of experimentation: You must demonstrate – through modeling, simulation, systematic trial and error or other methods – that you’ve evaluated alternatives for achieving the desired result.

Watch this video: How to Qualify for R&D Tax Credits: The Four-Part Test

Listed are a few examples of the types of activities and projects most likely to contain qualified research:

  • Developing new or improved products, processes, formulations or technologies
  • Designing, developing and testing product prototypes
  • Refining algorithms
  • Developing quantitative techniques for idea generation & use them for portfolio construction
  • Developing deep learning technology that perceives, integrates, understands, and analyzes diverse types of sensor data at levels beyond human abilities
  • Programming software source code
  • Establishing electronic interfaces and functional relationships between various software modules
  • Developing fraud detection AI used to spot anomalies in large data sets, empowering human agents to investigate results
  • Using cognitive systems that learn what makes for effective performance and identify deviations from these learned models
  • Exploring better sight and sound recognition
  • Testing human-robot collaboration

Request a free assessment to determine qualifying R&D tax credit eligibility

Artificial intelligence (AI) is a quickly emerging technology in the hedge fund area of money management and advancements in this field can solve a number of technological challenges. Engineers and computer scientists are constantly making developments within this sector. Hedge fund managers are leveraging advanced algorithms and human judgment to deliver smarter investment decisions. One of those decisions should be to cash in on the R&D being conducted. As this technology evolves and the best algorithms are open-sourced, it’s hard to imagine the future of any financial services without machine learning. If your company or hedge fund manager is performing daily R&D you should be utilizing those R&D tax credits come tax season.

Tax Point Advisors, a firm with expertise in working with small and midsize companies, can help to determine if activities performed by your company qualify for major cash-saving tax credit opportunities. For more information, call us at 800-260-4138 or please leave us a message below.


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