Innovation is a tricky subject for tech companies. On one hand, they can surge ahead of the competition by making technological breakthroughs. On the other, it can be difficult to justify the costs of research and development when less disruptive products can still sustain a business. Tax incentives seek to make things easier.

The government offers several promising tax cuts and similar programs that can spur innovation. Here’s a closer look at how.

1. Reducing R&D Expenses

The most obvious way incentives drive tech advancement is by funding R&D. Businesses can increase their cash flow by as much as 40% in some states by qualifying for research-related deductions. Even if these laws don’t directly fund R&D like some grants do, they have a similar effect by lowering the tax burden.

When organizations lose less to taxes, it frees more capital to invest in developing new technologies. As a result, the relative impact of innovation’s high upfront expenses drops. Such changes are most beneficial for smaller teams that may be unable to justify the spending otherwise.

R&D tax credits are not the only way incentive programs lower such costs, either. Enterprises can deduct tech purchases like software and computing infrastructure to make high-end research more accessible.

2. Attracting Top Talent

Government incentives also promote innovation by making it easier to attract and retain talent. The labor market is competitive — 56% of tech leaders say they’re concerned about a shortage of candidates. This employment gap makes it difficult to make technological progress, but tax credits can help by justifying higher salaries.

Several studies show compensation is one of the most important factors determining employee retention. At the same time, enterprises can only afford to pay their workforce so much before they are no longer profitable.

Lowering ongoing costs by reducing the company’s taxes leaves more room in the budget for wages and benefits packages. They can then hire and retain workers with market-leading skills, driving advancement.

3. Promoting Focus on Promising Technologies

In some cases, the availability of talent and funding for R&D is not the issue. It may be a case of other, less disruptive business models being more profitable. For example, brands may not want to invest in renewable energy when fossil fuels have proven to be a dependable revenue driver.

Tax credits help because organizations can typically only claim them by focusing on specific areas of research. They must generate qualified forms of green energy to get the renewable electricity production tax credit. These rewards are also higher for wind power and similar, more eco-friendly alternatives to more carbon-heavy options.

By tying incentives to certain technologies, these programs improve the relative bottom line of more innovative products and services. By contrast, playing it safe with older, less advanced options loses its profitability edge.

Incentive-Fueled Innovation in Action

These programs have fueled many significant innovations across the tech industry. Apple invests tens of billions of dollars in R&D each year. The only way to justify such massive spending is through careful capitalization of tax breaks and credits. As a result, strategic planning has led to game-changing technologies like the iPhone and Siri.

More recently, Ford poured $3.5 billion into a battery facility after the Inflation Reduction Act (IRA) increased tax benefits for sustainable tech. The company hopes this factory will make electric cars more accessible. It will also produce nickel cobalt manganese batteries, which may perform better and be more eco-friendly than lithium-ion alternatives.

Steps for Capitalizing on Tax Incentives

Tech businesses cannot ignore the opportunity these incentives provide, but taking advantage of them requires careful planning and execution. First, they must review applicable programs and ensure they know how they can use the resulting credits.

Under the IRA, for example, organizations can secure up to $500,000 toward payroll taxes. However, $250,000 of this must go toward Medicare payroll tax liability. Enterprises do not get a check to spend on what they deem fit, so it’s important to understand these limits to remain compliant.

Tech brands should also consider additional funding opportunities. On top of R&D tax credits, they may apply for grants or other public-private partnerships. Combining these programs with a reduced tax burden will produce the greatest amount of savings.

Of course, not all innovation qualifies for incentive programs. Consequently, companies must review the language of any applicable tax documents to know what counts and what doesn’t. This information can guide more cost-effective R&D investments.

Corporations must also be careful not to try to game the system too much. They can face fines of up to $500,000 for attempted tax evasion. Those worried about accidentally falling under such noncompliance may want to hire a tax and accounting service to help.

Tech Companies Should Act on Available Incentives

Innovation drives the tech industry, but it can be complicated to manage. Tax credits and similar incentive programs make the necessary research more cost effective, so they deserve attention. Once companies understand these opportunities, they can create a more forward-thinking business plan to remain competitive.