Leverage AI R&D Tax Credits to Accelerate Your Startup

Michael Smith

Michael Smith, Managing Director of Taxes at Graphite

It’s safe to say that 2023 was the year of artificial intelligence. Over 75% of companies were using or exploring the use of AI this year. 

Many of our SaaS clients specifically have begun to fully grasp the potential of AI to transform their business. And in some cases, to keep them in business. It’s quickly become a necessity. 

Whether it’s incorporating AI into your team’s internal processes, the back-end of your product, or the customer-facing side of your product, this forward-looking strategy is only likely to accelerate as we head into 2024. 

According to a report by Omdia, it’s estimated that nearly every new SaaS product will have AI as a component by 2024, and the global AI SaaS market will be worth $118.6 billion, a massive increase from 2018’s $9.5 billion. 

If you don’t want to be left behind, it’s clear you need to jump on board. 

However, especially when you’re considering weaving AI into your product, the costs can be substantial. Even in times of economic prosperity, these costs can be a massive barrier. But in times of economic uncertainty, as we’re experiencing now, they may seem fully prohibitive. 

Many SaaS startups in the long term can’t afford to not invest in AI. To make this feat more manageable, we’d recommend digging into how you can use AI R&D tax credits to foot the bill for a lot of the strategic work you’ll be taking on in the next few years.  

Understanding R&D Tax Credits

Research and development (R&D) tax credits are there to incentivize innovation. They’re designed to help offset the costs of pursuing new technologies and scientific research by reducing a company’s tax liability. 

Generally, the types of activities that make companies eligible for these tax credits involve developing or improving products, processes, software, or technologies. 

To qualify, you need to be able to demonstrate that these activities involve some degree of uncertainty and that you’re conducting systematic experimentation or planning to overcome this uncertainty. 

This includes activities like prototyping, conducting trials, and software development. 

The great thing about these credits is the variety of costs that can be claimed, including wages for relevant staff, cost of materials used in R&D, and subcontractor expenses—among others. 

Take advantage of the tax credits available to you

AI R&D Tax Credits

Given the guidelines laid out for these R&D tax credits, artificial intelligence is a prime opportunity to take advantage of the ability to offset costs. 

With so much unknown surrounding AI and how it can be used in business, the possibilities to explore are seemingly endless. And this is true for established tech giants as well as early-stage startups. 

Due to this broad scope, the ongoing investments in AI will likely be substantial, perhaps more substantial than your run-of-the-mill research and development projects. Likely, this will involve extensive testing and multiple iterations across a potentially lengthy timeline. 

Whether your startup is looking to make small improvements using AI, or if you’re looking to do a full overhaul of your product or processes, tax credits can make it possible. 

AI-Related R&D Projects

A wide range of AI projects and related expenses can qualify for R&D tax credits, as long as they meet the aforementioned criteria surrounding innovation and technical uncertainty. 

Some potential avenues to explore include: 

  • Development of new machine learning algorithms
  • Improvement of existing AI models for enhanced accuracy
  • Research into reducing biases in AI systems
  • Adding AI-driven features to your product
  • Leveraging advanced personalization in your user experience

All expenses related to these projects are eligible for credits. This includes costs incurred in data collection and processing, which is a fundamental part aspect of training AI systems.

Wages for AI researchers, engineers, trainers, and data scientists directly involved in R&D activities also quality, as do expenses for necessary hardware and software. Costs associated with testing and validating AI models, including pilot runs and simulations, can also be included in this tax credit claim. 

Don’t Let Cost Stand in the Way of Innovation

It’s almost certain that AI is not going to be a fleeting fad. Just like with any other technological development in history, companies will have to adapt to continue to thrive, or even survive. 

Whether you’re already pursuing this innovation, or you’ve been dragging your feet because of the costly scope of AI projects, let these AI R&D credits be the tool and the motivation you need. 

Want to find out how much you stand to benefit from R&D credits? Check out our easy-to-use calculator to estimate the credit you can expect. 

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