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The Financial Services Industry and the Research and Development Tax Credit

The financial services industry is an essential component of the U.S. economy that provides liquidity to companies and individuals, is responsible for safeguarding and investing assets, and offers insurance to allow businesses to take on risks in the marketplace. Innovation has long been considered a cornerstone of growth for the industry, leading to new products and processes, including new trading applications, new online and mobile banking functionality, and automation of previously manual processes. In addition, most firms in the industry have begun to focus on cyber security, given the rise in detected incidents.

Many businesses within the financial services industry, including banking and capital markets, asset management, and insurance, routinely develop new or improved proprietary trading systems or valuation models; experiment with new software methodologies for improved security or stability; modify algorithms; develop novel algorithms for investment funds; and implement new coding techniques to improve processing volumes or speeds. Numerous activities associated with these initiatives will qualify for the research and development (R&D) tax credit, often an overlooked and misunderstood opportunity for taxpayers.

This article is aimed at taxpayers who are involved in qualified research activities and want to minimize their tax liability. It will discuss the definition, history, and recent developments of the R&D credit. Also, it describes examples of product and process improvements within the financial services industry that satisfy IRS guidelines for R&D credits.


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