Tax SeasonRobert Wonish is a director at the alliantgroup.

Considering the expensive and rapidly rising costs of the software industry, the game development cycle has become increasingly difficult to sustain. Many companies are feeling trapped by rising overhead and have been forced to outsource development to compensate. Luckily, tax incentives are available to software companies that can ensure crucial product developments remain in-house and even be the deciding factor that keeps a company’s doors open.

More often than not, software companies will discover that they qualify for the benefits of tax incentives, such as the R&D tax credit; however, many are simply unaware of its existence or assume that it doesn’t apply to them. If your company has invested time, money, and resources toward the advancement and improvement of designs and processes, then you most likely meet the requirements of the R&D tax credit.

More gaming activities may qualify than you think. In addition to designing and testing new games, software coding, hardware development, and iterative testing can make a company eligible for incentives. A gaming developer of innovative video arcade games had annual sales of $38 million and qualified for $650,000 in state and federal R&D tax credits. During the development process, the company created code for their new products to load into customized arcade devices.

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If you are a game developer and the above activities sound in any way similar to what your company does on a day-to-day basis, the R&D tax credit is an available and powerful government endorsed incentive to which you are most likely entitled. If you would like to find out how you also can obtain thousands to millions of dollars in tax credits, read on.

R&D qualifications

The R&D credit is a reward for taxpayers that perform qualified research activities domestically. If you think that you have to have developed groundbreaking software platforms for Fortune 500 software companies to be conducting qualified activities as defined by the Internal Revenue Code, think again.

Game developers simply need to develop new or improved software features or functionality and go through a development process (agile, waterfall, prototyping, spiral, RAD, and so on).

If you don’t ask, you won’t receive

Firms of any size may qualify for this incentive. A smaller developer of gaming software with annual sales of $2 million developed touchscreen, video-based casino games. To develop new products, the company created innovative solutions to simulating games of chance. By utilizing custom algorithms, the company simulated real-world statistics and scenarios. Additionally, they created efficient and streamlined methods of delivering premium sound and graphics from compressed resource files. This company received over $250,000 in state and federal credits.

Sadly, it remains the case that one of the biggest roadblocks for businesses taking the R&D tax credit is self-censorship. It was recently reported in the Wall Street Journal that 19 out of 20 small and medium businesses that are eligible for tax incentives, such as the R&D tax credit, fail to take advantage. This is overwhelmingly due to self-censorship. Small and medium business owners frequently think that only Nobel Prize winners and rocket scientists should bother applying.

Happily, in the rare example of Congress getting tax policy right, the R&D tax credit is intended to support a broad range of industries and is focused on encouraging not only the new thing but also improvements and modifications to existing products and processes based on known scientific principles.

Act now

This incentive is one of the largest available to game developers, but is also one that is often overlooked. “The federal R&D credit has been in place for several decades, and it has become more generous over the years. Businesses that looked at the credit in the past and determined that they didn’t qualify may now realize significant benefits due to the credit’s broader applicability,” Mark Everson, alliantgroup Vice Chairman and former IRS Commissioner, said. “I can certainly attest to the complexity of the tax code, and the requirements for the R&D tax credit are no exception. That having been said, at almost $10 billion a year, the R&D credit is one of the most generous tax benefits established by Congress.”

With a challenging economy and costs continuing to rise, it is essential that every company avoid self-censoring and take advantage of the R&D tax credit.

While this incentive can be of extreme benefit to game developers, it is also complex, and fully identifying the proper substantiation for capturing the credit requires a deep understanding of the tax code. For this reason alliantgroup, a specialty tax firm, has developed a Software Specialization Group that includes industry experts with educational backgrounds and hands-on analytical and developmental experience.

The available federal and state R&D tax credits can offer substantial financial support to gaming developers. At over $10 billion credits awarded a year, if you did not think you qualified in the past, it pays (literally) to take a second look!

Image source: Warner Bros.

Ron WonishRobert Wonish, J.D., is a director in alliantgroup’s Tax Controversy Services department. Robert holds a bachelor’s in business administration in information systems and international business and a J.D. The alliantgroup is a national specialty tax service provider, working with businesses to ensure companies receive the full benefit of available federal and state tax incentives.