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Life Health > Running Your Business

Life Insurance, Annuities and R&D Tax Credits

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What You Need to Know

  • The PATH Act of 2015 extended the tax credit to startups and small businesses.
  • Insurtech firms can use the credit to eliminate up to $250,000 in federal payroll taxes.
  • One challenge is documenting compliance.

The life insurance and annuities industries are changing with the times and becoming more tech-savvy.

Insurance technology advances make life easier for both customers and agents, from customers reporting a claim to agents interfacing with clients.

Insurtech also helps insurance companies stay visible in a crowded market.

As a result, digital experiences, technology solutions, operational efficiencies, and process automation are all on strategic roadmaps for insurtechs.

Fortunately, America’s largest tax incentive, the research and development (R&D) tax credit, applies to life insurance and annuity distributors developing software and other technology solutions.

Unfortunately, there are companies that either don’t embrace the creation of innovative proprietary technologies or are unaware of how best to handle the R&D tax credit process.

Here are three important pieces of the R&D puzzle that every company should know to optimize and defend their R&D tax credits:

1. The History

Each year, the federal government provides billions of dollars to innovative businesses for developing and improving technologies, products, and processes.

The R&D tax credit was created in 1981, as part of the Economic Recovery Tax Act.

The original version allowed for a temporary tax credit, of up to 13%, on spending for qualified research on products and processes that had been developed or improved through the application of the principles of either the physical sciences, biological sciences, computer science, or engineering.

This spending could include costs associated with developing a patent, a new product or service offering, or even a new technology that was sold to third parties.

Then, in 2015, the Protecting Americans from Tax Hikes Act, or PATH Act, permanently extended the R&D tax credit and expanded its benefits to startups and

small businesses.

Starting in 2016, early-stage businesses, including insurance industry-related fintech startups, could use the credit to eliminate up to  $250,000 per year in federal payroll taxes.

2. The Applicability:  Insurance Use Cases/Insurtechs

In 2021, venture capital firms invested over $11 billion in insurtechs, doubling the total amount from the previous year.

From car to home to life insurance, there have been significant advances fueled by technology that make it easier for both the customer and agent to do business.

In today’s world, the development of technology to interact with and attract new customers is simply a cost of doing business in the insurance industry, and the R&D credit can meaningfully reduce that cost.

Now that everyone has a smartphone available, customers are accessing sites that compare plans and are changing insurance providers like never before.

Apps are available at the ready, so customers can easily check the status of their accounts or claims. And life and annuity distribution companies that don’t offer this innovative technology risk clients switching to competitors. The “attention economy” has become a buzzword for insurers everywhere.

Data analytics is a game-changer for the insurance industry and any data-collecting practices are important to consider for the R&D tax credit.

Digital health data and predictive methods continue to evolve and gain adoption.

Both traditional IT coding and low-code platforms can be covered via the tax credit.

Low-code and no-code platforms allow businesses to build solutions without major coding investment using flexible templates that increase the experience and overall efficiency.

Relevance:  A Case Study

An insurtech company developed technology to help businesses purchase insurance, eliminating inefficiencies in the industry that increases prices and leads to frustrating customer experiences.

From machine learning to artificial intelligence, the company has made policies more tailored, less expensive, and easier to purchase.

The company claimed $180,000 in its first year of applying for the credit.

3. The Required Documentation:  Meeting the 4-Part Test

While the benefits associated with the R&D credit are significant, documentation is crucial.

Historically, the cost and work involved in meeting the documentation requirements have kept many businesses from participating.

In short, IRS regulations outline a straightforward 4-part test that creates a fairly low bar for qualification.

As you read the test, you can see that the development and testing — even time spent questioning if the advancements might work — are things that should be considered.

  1. Permitted Purpose: Are you developing or improving a product, process, formula or software system?
  2. Technological in Nature: Is your work within the physical or biological sciences, engineering, or computer sciences?
  3. Elimination of Uncertainty: Are you asking questions like, “Can we develop it?” or “How do we develop it?”
  4. Process of Experimentation: Are you systematically evaluating one or more alternatives?

Examples of projects that can qualify might include systems in areas such as online insurance quotes, claims management, customer relations management and billing administration.

Although meeting the four-part test can be relatively straightforward, documenting compliance appropriately can be cumbersome.

However, technology can play a role here as well.

Our firm’s software makes meeting the documentation requirements outlined above much easier to administer. (And yes, we claimed an R&D credit for the costs of developing our software.)


Brent JohnsonBrent Johnson, is the co-founder of Clarus R+D, a financial technology software company that helps clients use R&D tax credits.

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(Image: Adobe Stock)