Story by Rick White, alliantgroup Strategic Advisory Board Member and Former U.S. Congressman
When the Apollo 13 spacecraft had problems on its way to the moon in 1970, NASA engineers mobilized to find a solution. They meticulously considered every possible option for getting the astronauts home safely – except one.
Taking the attitude that became a core principle of NASA’s Mission Control group, they agreed that “failure is not an option,” and they successfully brought the spacecraft back to Earth.
That was the right attitude for NASA, but it doesn’t really apply to the software and technology industry. In fact, for most tech companies failure is not just an option, it’s a requirement. And this requirement exists at both the micro and macro levels.
At the micro level of day-to-day development, trial and error is the basis of every successful product. Steve Jobs, the famous founder of Apple, embraced failure, and attributed his company’s overall success to the many times he failed along the way.
Software development in particular involves one iteration after another before the bugs are eliminated and the product reaches its full potential.
At the macro level, failure may be even more important. When I founded the Internet Caucus in Congress in the late 1990s I had an influx of visitors from other countries. They wanted to know how they could create a Silicon Valley in their own country and make the benefits of an innovation economy available to their citizens.
My visitors were usually surprised when I told them that — in addition to universities, venture capital, and a free enterprise economy — an essential element of an innovation economy is the ability to fail.
The reason is simple: if trying a new idea but failing creates a permanent stigma, as it does in many societies, very few people will be willing to start new companies and try new things. Failure isn’t the goal. But creative failure, i.e., failure that is necessary to test new ideas and create new products, is absolutely essential to innovation.
An Existing Incentive
Of course, although creative failure is necessary, it’s also painful and expensive.
It’s hard to do much about the pain, especially for those who have spent long years trying to realize a dream that never happens. But in the United States (and several other countries) we’ve been wise enough to create a government program that can actually do something about the expense.
The Research and Development Tax Credit (R&D Credit), was established by Congress in the early 1980s to stimulate domestic innovation so that American businesses could do a better job of competing in the international economy. And it worked. It has helped thousands of U.S. businesses mitigate the costs of creative failure.
Although the economy was suffering a devastating downturn at the time, the R&D Credit helped U.S. businesses reinvest in themselves in order to bring on new jobs, become more competitive, and innovate at a higher degree. It was an important reason that the economy recovered quickly in the mid-1980s, and it helped set the stage for the technology boom of the 1990s.
The incentive, which now saves U.S. companies roughly $10 billion each year, was made permanent in 2015 under the PATH Act, which expanded the credit’s applicability to companies whose gross receipts were less than $50 million.
As a result, companies from small to large can now qualify for the R&D Credit if they invest time, money and resources into the advancement or improvement of a product or process. And the credit applies broadly to research of all kinds — no test tubes or lab coats are required, and both start-ups and established businesses can take advantage of it.
How to Qualify
The trial-and-error nature of the software and tech industry makes these businesses prime candidates for claiming the credit. Even when proposed innovations don’t work, the credit can be used to reinvest in new innovation efforts, pushing along the process of trying and failing to the point where companies can succeed.
There are several ways that software and tech companies can qualify for the credit, but here are a few recent examples of qualifying research activities:
- Providing customized solutions for various applications
- Designing and implementing cloud-based IT solutions
- Migrating and integrating data platforms into existing systems
- Designing and developing software or hardware platforms
- Testing and evaluating software features or functionality
In one case, a technology solutions company with annual revenue of $30 million was able to claim $299,500 in federal and state tax credits. In another, an application development company with annual revenue of $3 million was able to claim $375,000 in federal and state credits for their work.
The R&D Credit has been successful enough to enjoy bipartisan support, with many in Congress today suggesting that it should be doubled in order to become a more useful tool for sustainable economic growth.
Innovation is the Key to our Future
Our country is currently experiencing a digital revolution, with companies turning toward automation, cloud-based technologies, and the Internet of Things to create better and more efficient products.
This is the future for our economy, and it requires innovation now more than ever. The U.S. faces some challenges, including a disastrously low number of STEM graduates coming into the workforce compared to countries like China and India.
But we do understand the value and importance of creative failure. And the R&D Credit helps businesses pay for creative failure, so they can offer more competitive salaries, invest in workforce training programs, and bolster innovation efforts to draw in new talent. We have work to do, but as long as we can “continue to fail” the future of innovation in the U.S. is bright.
ABOUT THE AUTHOR: Rick White is a former U.S. Congressman. He represented Washington State’s First Congressional District, including Microsoft, Amazon, and other tech companies. He was a founder of the Congressional Internet Caucus and CEO of TechNet, a leading trade association for the technology industry. He now serves as an investor and advisor for startups, primarily in the Seattle area, and as a member of the Strategic Advisory Board for alliantgroup, a tax-consulting firm in Houston.