As of 2021, The U.S. video game industry is now valued at an astounding $65 billion with revenues estimated to top out over $300 billion annually by 2025. From the humble beginnings of Pong’s release in 1972, the industry has moved into the realm of unparalleled realism, rich and novel user experiences, and dozens of genres for everyone from casual mobile gamers to hardcore Twitch streamers. With the explosive growth over the last decade, the landscape for developers and studios has vastly changed. More than ever there are small studios battling large household names like Activision and Electronic Arts for market share resulting in an endless array of choices and platforms to play on.
With the high cost and risk of development, companies, especially small-to-midsize development studios, appreciate any additional cash flow to keep their doors open. This is where the R&D tax credit really shines. Game development is rife with technical and financial risk which means that the work being done, qualifies for the credit. In most companies, the highest expense is the cost of talent both internal and external, all of which are considered QREs (qualified research expenses). If you are already spending the money, you are entitled to receive the benefit.
Qualified Research Activities for Game Development Companies
- Planning and conceptual development
- Wireframing, storyboarding, and prototyping
- Game engine development and testing
- Audio engine development and testing
- Game asset design
- Improvement and optimization to reduce latency
- Development of Virtual Reality (VR) experiences
- Development of Augmented Reality (AR) experiences
- Development for alternate platforms (PC vs Console vs VR vs Mobile)
- Development of scripts for automated testing and validation
- Development of databases
- Cloud infrastructure development
R&D Tax Credit Case Study: Game Development
A game studio based in the US began an extensive research and development effort to make the leap into Virtual Reality (VR) over the course of several years.
R&D Tax Credit Qualification for Software Development
This company had a history of developing games for both the PC and console market. Several years ago, they began researching and developing for VR platforms in the market. These efforts started as experiences designed to be much shorter than a full-fledged game, but still offer an immersive experience that would engage users on a level they had not experienced before. The development of these experiences started in conceptualization which included art, design, testing, and development of technical requirements.
Once the concept was developed, the team created prototypes while conducting further research on the constraints of the new VR environment and experience. For instance, one of the biggest challenges of a VR experience is the human component. In studies, developers were seeing that if experiences were too long, the lack of correlation between movement and vision would cause nausea and sickness in users. Testing was done to optimize the length of the features and greater focus was put on development of a more immersive experience.
Building on the success of the prototypes, the company began focusing on development of the actual VR experience which included development of the assets, physics, and visual elements. One of their main focuses of was the development of an audio engine that would allow them to create immersive sound stages which would provide a much more immersive environment. Like most development in the current landscape, this process was highly iterative. Because this was virgin territory, the team was constantly refining numerous parts of the experience including interaction between the player and the virtual environment, graphics optimization for improved latency and performance, development of acoustics, and testing and validation.
Qualifying activity was present throughout the course of these development projects and through an agile development process that included multiple full development cycles (planning, design, requirements analysis, coding, and testing) the team was able to bring numerous experiences to the market and to end users.
The Results Speak for Themselves
Over a 4 year period, this company was able to generate roughly $2MM in total Federal credits and $800K in state credits. This additional working capital has allowed them to expand their organization every year and add significant headcount to their team.