The In’s and Outs of SR&ED with Ed Levinson.

Launch Academy was pleased to host Ed Levinson (@EdLevinson) for a fireside chat to discuss the ins and outs of the SR&ED program. The Launch Academy café was packed with a large crowd of entrepreneurs, showing the necessity of entrepreneurs in today’s day in age to explore any and all access paths to government capital. So what exactly is the SR&ED program? It is The Scientific Research and Experimental Design tax incentive program. Introduced in the 1980’s the SR&ED program is designed to encourage businesses of all sizes to tackle innovation. It is Canada’s largest federal program in support of research and development and provides over $4 billion in tax credits each year to 18,000 + claimants. Of this group 75% are small businesses.

The SR&ED program covers costs in: • Experimental development • Applied research • Basic research • Support work (critical and often missed)

Think of the SR&ED program as the blood circulating through the Canadian tech community. The program is critically important for entrepreneurs and small businesses as it provides a way for these entities to compete on research and development without risk of bankrupting the company.

While the attendees listened and questioned Ed intuitively, the elephant in the room was the frustration in dealing with The CRA. The rules, policies, and procedures of these programs hinder an entrepreneurs progress, making the task of gaining capital from government entities that much harder. It is also becoming more difficult to make claims and the Canadian Revenue Agency is looking for avenues to decline applicants.

With that being said, the number one takeaway from the meeting was the importance of documentation. If you are applying for tax incentives be sure to document every piece of information that goes into the claim. This will beef up your report and protect you from audit in which from Ed’s experience he says around 10-25% of claims are put through.

In documentation be sure to include: • Time records • Test plans/ Experiments • Source code

“Documentation is the CRA sword and your shield” Ed Levinson.

When filing a report for the SR&ED program, your application will comprise of two parts. 1. Financial Calculations of the tax credit 2. Report

The report is always in three parts.

1. The technological Advance

A technological advance covers a wide range of innovations. • Performance improvement of any size • Design and coding of a prototype • Integration of software components • Architectural improvements • Framework extension • New or improves algorithms • Any kind of reverse engineering • Some types of factoring

2. Technological Obstacles/ Uncertainties

The technological obstacles are the most important part of the report. This is proof that the work is not “routine.” The CRA tends not to understand the technical innovations developers are challenging and want to see a clear and simplified problem for them to understand. Ed’s tip was to identify the problems at the beginning of the project and document everything that goes into it. From his experience, developers tend to forget to identify problems and just take things on. It is crucial this step is well thought out before hand and updated over time.

3. Work Done (War Story)

This section of the report encompasses the work that you have done to solve the problem. It is important to note that you do not have to be successful to make a successful claim. Ed’s tip for writing this section was to think of it as a High School science experiment. Best practice: be simple and to the point for the bureaucrats evaluating your claims.

Overall the SR&ED program is one of the leading research and development programs in the world. Any entrepreneur involved in technology should be well aware of the strengths and weaknesses of the program and should use, abuse and maximize the tax credit as efficiently as possible.

For a more detailed look at Ed’s presentation you can find his presentation on slide share @ http://www.slideshare.net/EdLevinson1/sred-for-agile

This is a guest post by Ryan Iacoviello. Ryan is a Community Development Intern at Launch Academy. Follow him on Twitter @ryaniac