The Research and Development (R&D) Tax Credit is frequently overlooked by the retail and apparel industry. These companies aren’t aware of the several advantages this strategic financial planning tool can offer their business. They are also unaware about the new IRS regulations which have broaden the spectrum as to what qualifies as R&D which makes it easier and more beneficial to claim. Retail and apparel companies need to recognize that they continuously perform qualifying research activities (QRA) that meet the IRS Four Part Test.
Most of the activities that occur within the product’s design and development stage are considered QRAs. Examples of activities that would certainly qualify for the R&D Tax Credit include:
- Developing or improving the construction or integrity of fabrics
- Embroidery techniques
- Weather resistant clothing and footwear
- Dye formulas
- Manufacturing processes
- Comfort and shoe fit techniques
It is important to notice that aesthetic changes to clothing or footwear don’t, unless it is technical in nature, qualify for the tax credit.
Moreover, a company’s software development may also be considered a qualified research expense (QRE). The internal use software won’t be considered a QRE if it’s commercially sold or allows the taxpayer to communicate with third parties or have third parties revise their files or documents on the taxpayer’s platform system. Apparel and retail companies constantly develop software to create process and product efficiency, which is an important part of the R&D Tax Credit. Customer-facing channels like e-commerce platforms and point of sale solutions and internal process like supply chain management systems are examples of qualifying internal use software.