Using Commercial AI and the R&D Tax Credit

In the United States, there are numerous innovation-driven tax incentives. The Research and Development (R&D) Tax Credit is a crucial tool for businesses seeking to offset the costs associated with developing new products or processes. Regardless of the industry, artificial intelligence (AI) is a concept that every business is looking to leverage.

However, developing in-house AI solutions can be resource-intensive and time-consuming. This is where commercial AI tools come into play, offering accessible and cost-effective solutions that enable businesses to harness the power of AI without the need for extensive technical expertise. While the common understanding is that the benefits of the R&D credits would apply more to the actual development of internal AI for a specific use case and goal, due to the constant evolution of AI, we are now seeing how expenses related to the use of commercial AI in development can also qualify for the credit.

Research activities must meet specific criteria outlined by the Internal Revenue Code (IRC), such as being technological in nature, involving the application of scientific principles, and seeking to eliminate uncertainty through a process of experimentation. AI has become increasingly prevalent in research and development across various fields due to its ability to analyze vast amounts of data, discover patterns, and generate insights that may not be immediately apparent to human researchers.

Activities related to commercial AI tools offer a unique opportunity for businesses to expand their R&D efforts and further qualify for additional credits. However, it’s important to note that simply using commercial AI tools does not necessarily qualify for the credit. By incorporating AI-driven solutions into research processes, businesses can enhance productivity, accelerate innovation, and reduce the time and resources required to develop or improve products.

Some ways in which commercial AI tools can contribute to qualifying R&D activities include:

1. Algorithm Development: Developing and refining machine learning algorithms to analyze data, recognize patterns, or make predictions can qualify as R&D activities, especially when they involve overcoming technical challenges or addressing areas of uncertainty.
2. Model Training and Optimization: Training and optimizing AI models to achieve higher accuracy, efficiency, or performance levels can involve iterative experimentation and problem-solving, meeting the criteria for qualified research under the R&D Tax Credit.
3. Natural Language Processing (NLP): Research activities focused on advancing NLP capabilities, such as developing new algorithms for sentiment analysis, language translation, or text summarization, may qualify for the R&D credit if they involve significant technical challenges or innovation.
4. Computer Vision: Activities related to enhancing computer vision systems, such as improving object detection algorithms, developing new image recognition techniques, or refining image processing algorithms, can qualify as R&D under the tax credit.

Maximizing the benefits of the R&D Tax Credit when utilizing commercial AI tools requires careful planning, documentation, and collaboration. By strategically leveraging these tools for research and development purposes, businesses can not only drive innovation and competitiveness but also realize valuable tax savings that fuel future growth and investment. When utilizing commercial AI tools and claiming the R&D Tax Credit on the activities related to the use of AI, businesses should keep detailed records of AI-related research activities, including the technical challenges addressed, methodologies employed, and outcomes achieved.

We advise our clients to emphasize the innovative aspects of AI research and development activities when preparing R&D Tax Credit claims. Emphasizing how the utilization of commercial AI tools has allowed the business to make substantial progress or improvements beyond the existing knowledge or capability in the field increases the chances of qualifying for the credit. Providing this documentation is crucial for proving the eligibility of AI activities for the R&D Tax Credit.

It’s important for businesses to consult with tax professionals who specialize in R&D Tax Credits and are familiar with the technical aspects of AI. These experts can provide valuable guidance on maximizing eligible credits while ensuring compliance with IRC guidelines. The integration of commercial AI tools into research and development activities presents a significant opportunity for businesses to leverage the U.S. R&D Tax Credit to offset innovation-related expenses.

By harnessing the power of AI to drive technological advancements and product innovations, businesses can not only enhance their competitiveness but also realize valuable tax savings that fuel future growth initiatives. As AI continues to play an increasingly prominent role in driving business innovation, businesses should explore how they can strategically leverage commercial AI tools to maximize their R&D Tax Credit benefits and propel their innovation agendas forward.

If you have any questions about AI or how it intersects with the R&D credit, please do not hesitate to contact our R&D Tax Credit team.