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Ginger Powell Julie Peters
August 11, 2020 Article 1 min read

Insurance companies are committing significant research and development (R&D) resources to improve their services and the technology that connects them to agents, partners, and clients. These expenditures may qualify for significant savings under the R&D tax credit.

Business man sitting at a conference room table using his laptop computer and cell phone.The basic principles of the insurance industry haven’t changed much over the years, but the underlying technology used to calculate premiums and deliver services to clients, as well as the regulatory environment in which they operate, shifts constantly. The industry is changing so rapidly, in fact, that companies are investing heavily in technology that may qualify for the research and development (R&D) tax credit. New investments that use technology to automate workflows and eliminate historically manual processes will often meet the eligibility requirements of the R&D tax credit, but many executives aren’t aware that these expenditures qualify for favorable tax treatment.

The industry is changing so rapidly, in fact, that companies are investing heavily in technology that may qualify for the research and development (R&D) tax credit.

The proprietary systems that insurance companies develop to analyze data, track policies, process claims, and improve the experience of portal users often require unique and flexible architecture. Many systems that support back-office functions, like billing and accounting, may also meet the additional eligibility requirements to qualify internal use software for the R&D tax credit, as they’re innovative, not commercially available, and their development involves significant economic risk.

Calculating the R&D tax credit

One of the most challenging aspects of properly calculating the R&D tax credit is accurately tracking the time and expenses that meet the eligibility requirements. The calculation is a complicated process of comparing current-year numbers to figures from the immediate three preceding years. (The official name of the program is the “Credit for Increasing Research and Development.”) However, it can yield significant tax advantages. For example, an insurance company that was able to demonstrate qualified research wages of $1.8 million and contract research expenses of $4.5 million, claimed a tax credit of $550,000 — a direct reduction of their tax owed for the year.

To learn more about how your insurance company’s potential eligibility for this important tax incentive, please contact one of our experts. 

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