How to Identify R&D Expenses in My Company?

The speed at which the market evolves has placed significant pressure on Portuguese companies. Innovation, Digitalisation, Automation, and Cost Reduction are the key challenges to overcome to ensure the competitiveness and sustainable growth of businesses and the Portuguese economy.

Research and Development (R&D) emerges as the strategic response to overcoming these challenges. More than an investment, R&D is a strategic imperative for companies aiming to build a sustainable future, enabling them not only to innovate in products, processes, and services but also to anticipate market transformations.

Thus, the ability to identify and optimise expenses associated with these activities proves to be a competitive advantage and a catalyst for medium- and long-term success.

// 1. What is R&D?

R&D refers to a set of activities systematically carried out to increase human knowledge and find practical applications for that knowledge.

According to the Frascati Manual, widely used to classify R&D activities, these can be divided into three main domains:

1. Basic Research: Experimental or theoretical work aimed at gaining new knowledge without immediate practical applications.
2. Applied Research: Studies aimed at solving specific problems, with a clear focus on practical applications.
3. Experimental Development: Applying existing knowledge to create or improve products and processes.

In the business context, R&D activities are mostly categorised under Experimental Development. In Section 4, we will detail the sectors that have reported R&D expenses.

// 2. How to Identify R&D Expenses?

Identifying R&D expenses might seem challenging, but with a structured method, the process becomes easier and more accessible for all entrepreneurs. But why is identifying R&D expenses so important? Identifying R&D activities is not only fundamental to assessing a company’s level of innovation against market trends but also a strategic advantage for Portuguese entrepreneurs. Based on the identified expenses, companies can use them to deduct a portion of their investment from their corporate income tax (IRC) through the Research and Development Tax Incentive – SIFIDE.

Recommended Article: SIFIDE – Everything You Need to Know

/ Step 1 - Map Projects and Involved Employees

Identify the projects carried out in the business areas and the employees involved. Analyse the objectives of each project and the percentage of team allocation.

/ Step 2 - Determine Project Eligibility

Once the projects are mapped, identify which ones may indeed include R&D expenses. Below are some questions to help determine whether your ongoing project contains R&D expenses:

For the projects under development:

• Does any involve developing a new product or service?
• Does any focus on introducing improvements to existing products or services?
• Is any being developed in partnership with scientific system institutions (ENESII)?
• Did you develop any prototypes and purchase materials for their development?
• Does any aim to develop technology not available in the market?
• Have any been patented in the last two years?
• Do any aim to develop a new method or methodology to optimise the company’s productivity or a specific process?

If you answered “Yes” to at least three of the questions above, then your projects may include R&D expenses. Let’s move to the third and final step.

/ Step 3 - Record the Expenses

Having mapped the projects and evaluated their eligibility, the next step is to determine the R&D expenses. Below are some common categories of expenses. We recommend organising them in an Excel sheet, listing each category along with its respective investment. This will provide a clear overview of your R&D investment. The main expenses include:

• Personnel Costs;
• Equipment and Infrastructure;
• External Services;
• Raw Materials;
• Studies and Demonstrations;
• Intellectual Property.

After calculating the total R&D investment, your company may qualify for a reduction in the corporate income tax payable. Based on the number of employees and the average time allocated to the project, you can estimate the tax credit your company may receive.

Free Support Tool: SIFIDE SIMULATOR - See How Much You Can Benefit

It is important to note that if the expenses were predominantly carried out by an external entity that does not have the ID Seal: Recognition of Competence for R&D Activities, these cannot be considered for tax credit calculations.

// 3. What to Ensure When Developing an R&D Project?

Developing an R&D project requires time and a well-defined and structured plan. Typically, companies looking to develop such projects seek specialised consultancy teams for project management. Below, we outline the necessary steps to develop a successful R&D project:

1. Set project objectives and expected results;
2. Define the research and investigation model;
3. Determine how the project will be carried out:
   
   • Individually: Using internal resources or additional resources that may be contracted;
   • In Collaboration: Using internal resources and partnering with scientific system entities.
4. Identify associated costs;
5. Conduct a Feasibility Study to ensure the project does not compromise the business’s sustainability;
6. Identify available funding sources and study which one best applies.

These six steps will help structure and plan an R&D project successfully. However, R&D projects inherently carry uncertainty and are characterised by higher risk levels compared to traditional projects. Hence, funding sources are an opportunity to reduce risks but require careful consideration when analysing the available alternatives. In Section 5, we discuss the types of funding available for R&D projects.

// 4. Which Companies Can Develop R&D Activities?

The answer is simple: All Companies Can Do R&D. However, it should be noted that some industries are more inclined to develop R&D activities than others. Industry and Services are sectors where R&D intensity is higher, but any sector can invest in research and development.

Below, we list some proven sectors that have reported R&D expenses:

• Agriculture and Fisheries
• Accommodation and Catering
• Financial Activities and Insurance
• Rubber and Plastics
• Commerce
• Technical, Scientific, and Support Services
• Energy and Water
• IT Equipment, Electrical, Electronic, and Optical
• Leather Industry
• Tobacco Industry
• Food and Beverage Industries
• Extractive Industries
• Information and Communication
• Wood and Cork
• Machinery and Equipment
• Transport Equipment
• Metallurgical and Metal Products
• Non-metallic Minerals
• Other Manufacturing Industries
• Other Services
• Pulp and Paper; Printing
• Petroleum and Chemical Industry
• Pharmaceutical Products and Preparations
• Textiles and Clothing
• Transport and Storage

// 5. Funding for R&D Operations

Funding is one of the major challenges for Portuguese companies, especially for projects with significantly higher associated risks. However, since innovation is critical to ensuring the competitiveness of any economy, companies have several instruments available to help significantly reduce the risks associated with developing R&D projects.

• SIFIDE (Research and Development Tax Incentive System): Allows companies engaged in R&D activities to deduct up to 82.5% of associated expenses from their corporate income tax (IRC). By benefiting from SIFIDE, companies can reuse part of their tax (IRC) and reinvest it in new R&D initiatives!
• Portugal 2030 – IDT (Research & Technological Development): Provides access to non-repayable funding of up to 80% for all companies proposing to develop R&D projects (e.g., Total investment: €1,000,000 | Non-repayable support with an 80% funding rate: €800,000 | Total investment from own capital at the end of the project: €200,000).
• SIFIDE + Portugal 2030: These allow companies to simultaneously deduct up to 82.5% of investments made in ongoing projects from their IRC and benefit from up to 80% non-repayable funding through the Portugal 2030 R&D incentive system for future investments (both instruments are complementary).
• Bank Financing: While the most well-known funding source for entrepreneurs, it can also serve as a strategic leverage tool and complement the above-mentioned instruments. It is also a viable solution for companies not meeting Portugal 2030’s eligibility requirements.

Recommended: Find the best funding source for your project! Click here for a free diagnosis.

// 6. Conclusion

Identifying and recording R&D expenses are crucial steps for companies aiming to face current market challenges and position themselves as leaders in innovation and competitiveness. Investing in R&D is not just about reducing costs or enjoying tax benefits but about building a sustainable future grounded in innovation and the ability to adapt to market transformations.

With tools like SIFIDE and Portugal 2030 Incentive Systems, companies have access to solutions that not only mitigate the risks associated with R&D projects but also promote the reinvention of products, services, and processes.

Furthermore, sectors traditionally less associated with R&D are beginning to explore available opportunities, reinforcing that any company, regardless of its sector, can benefit from these incentives.

Ultimately, innovation is not a privilege reserved for large companies. With the right support and a well-designed strategy, Portuguese SMEs can turn challenges into opportunities, ensuring sustainable growth aligned with the demands of a constantly evolving market. If you have not yet explored your company’s R&D potential, now is the perfect time to start. After all, innovating is not just a goal – it’s a necessity to ensure future success and relevance.

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Last updated: 19 June 2024