Transforming Your Business Via Tax Credits and Digital Transformation with Jonathan Cardella of Strike
Are you a fintech company looking to maximize your tax savings and boost your innovation efforts? In this episode of PayPod, host Jacob Hollabaugh sits down with Jonathan Cardella of Strike to discuss how your technical and product staff can qualify for valuable tax credits. Strike enables all businesses to take advantage of the R&D tax credit, the Employee Retention Credit. Watch this episode for a fun and interesting dive into this latest development in payments and fintech.
Payments & Fintech Insights In This Episode
- Jonathan discusses the activities that qualify for R&D tax credits in technical fields that involve sciences, such as fintech.
- Many CPAs are not trained to identify opportunities for R&D tax credits, and partnering with companies like Strike can help.
- Strike is a software R&D firm that spun out of Ventive and has partnerships with them for technology development and business operations.
- Jonathan notes that LLMS like ChatGPT can create unique opportunities for companies to innovate and make tech more accessible.
- Integrating services like ChatGPT can help development teams accomplish more with smaller teams.
- And SO much more!
Jonathan Cardella : Strike
Strike Advisory is uniquely positioned to optimize your company’s R&D tax credits to fuel innovation. The IRS provides billions in tax incentives to ensure that companies ranging from small startups to large enterprises continue to innovate new and existing products and concepts. At Strike Advisory, their extensive background in software development, entrepreneurship, innovation, and the legal industry gives them greater insights into the world of R&D tax law and position your company to refuel your innovation.
Featured on the Show
PayPod is the leading voice in the payments and fintech industry, covering payments, risk management and new technology. Host Jacob Hollabaugh interviews leaders who are shaping the payments and fintech world, as they discuss the latest developments in the payments and fintech industry.
Jacob: Welcome to PayPod, the Payments Industry podcast. Each week, we’ll bring you in-depth conversations with leaders who are shaping the payments and fintech world from payment processing to risk management and from new technology to entirely new payment types. If you want to know what’s happening in the world of fintech and payments, you’re in the right place. Hello, everyone. Welcome to PayPod. I’m your host, Jacob Hollabaugh. And today on the show, we’re diving into how you could transform your business. First via tax credits and savings and earnings you might currently be ignoring. And then through digital transformation and making sure you’re on the right side of the technological waves we are currently riding. Joining me to discuss these topics is Jonathan Cardella, co-founder and CEO of Strike R&D Tax Advisory, as well as founder and chairman of Ventive, an award winning custom software development agency. Jonathan, welcome to the show. Thanks for taking the time to join me today.
Jonathan: Thanks, Jacob. Thanks for having me.
Jacob: Absolutely. Pleasure is all mine. I do want to talk about both these companies that you founded. But first, let’s start with Strike Tax Advisory and all things tax credits, because it’s a topic that doesn’t come up a lot on this podcast, but one I think has a ton of value to, especially to all the business owners listening in. So starting off high level overview. Who is Strike Tax Advisory and what do you do?
Jonathan: Sure. Well, Strike Tax Advisory is an employee owned and operated S corporation based in Boise, Idaho. Strike is a specialized tax credit firm that specializes specifically in the research and development tax credit. Also more recently has done the IRC or the employee retention credit for some of our clients.
Jacob: Are you yourself based in Boise? This is just a random personal question.
Jonathan: I am.
Jacob: Wonderful. So you mentioned the two major tax credits that you’re really focused on working with. Can you first explain what the R&D tax credit is and to whom that might be available?
Jonathan: Yeah, I would say the R&D tax credits really are it’s our focus. It’s why our company was founded.
Jacob: Right in the name. Yeah.
Jonathan: The R&D tax credit is available to any taxpayer that engages in the IRS or the Internal Revenue Code has defined as research and development or research and experimentation. There’s a lot of confusion over what that means. But I think in simple terms it means that if you’re using the hard sciences or any engineering disciplines and that doesn’t mean we need folks with PhDs or credentialed engineers, but if you’re doing technical work that is typically done involving the sciences and engineering disciplines in order to commercialize a product or service, then you likely qualify.
Jacob: That makes sense. When you say R&D, I think a lot of people would have visions of some folks in lab coats or whatever in some static place that may have more or less been a lot of it before the digital age. But now in the digital age, it’s I feel like it’s really expanded. And I could almost make an argument anyone is doing R&D. So if we looked at the fintech world specifically, which is a lot of the listenership of this show and the usual focus of this show, are there any examples of, you know, potentially I always want to say potentially, I’m sure you have some legal spiel you’re supposed to say or I’m supposed to say for you, but examples of qualifying activities that most fintechs may be doing.
Jonathan: Yeah, that’s a great question. I have those examples that I’ll provide. They’re pretty simple, but before I go there, I’d actually prefer to use a classic example just to get across what the credit is. Yeah, that isn’t necessarily directly applicable to fintech, but it I think it will expand your audience’s understanding. Yeah, and you’re right. I think there is a lot of misconception around, hey, you need to be in a lab coat and moreover you need a PhD or you need to be publishing findings to contribute to the body of knowledge, which is traditionally what research is like in a university setting. But no, it’s not that way at all. Under the tax code, the best example I have is if you’re creating a craft beer and bringing it to market, you’re experimenting with different processes or formulas and fermentation down to packaging, but you’re definitely messing with the taste of your beer until you get something that you can commercialize that people like. So you might be trying different ingredients and testing it on folks and recording results and repeating until you find out that you have a product that you believe can go to market or not for that matter, maybe it totally fails. But the bottom line is that there was uncertainty. You were using trial and error and you were using the hard sciences because fermentation is evolved, biology, you’re mixing ingredients. And so those activities do qualify in fintech. The corollary or the metaphor might go to fintech requires a number of qualified activities in order to produce software and what we call the product for market.
Jonathan: But specifically writing code. Writing code is usually a trial and error sort of endeavor in that when you write code, not all of the code is going to go to production or into the product. You might write a function or some lines of code. You might test them and find that you need to go back to the drawing board and tweak that code and do it again. And eventually some of the code you write ends up going to the prod branch and into the product, and much of it doesn’t. And by documenting that process, we can show that that a process of trial and error was done, the computer science was involved and that these efforts were around commercialization of this technology. And that’s sort of what checks the boxes around qualified activities. But really there had to be uncertainty in how. Write that code or design that product or develop that product, which is almost always the case when you’re bringing a new product or a new version of a product to market. But there had to be uncertainty as to like what needs to happen or what needs to be produced. And then this process of trial and error involving the sciences or engineering disciplines or both in order to drive that result, the outcome doesn’t matter, although it is helpful to be able to show that there are a number of failures along the way because that’s evidence of the uncertainty that is required in order to qualify.
Jacob: Yeah, that’s fascinating.
Jonathan: Technical in nature, right, involving the sciences. We have uncertainty. We have a process of trial and error to eliminate the uncertainty. And we have an effort to commercialize where actual commercialization of a product. Those are the sorts of things we’re looking for. And then those are the activities aren’t just the writing of code, but some of the research around writing that code, the testing of that code, the folks who manage, the folks that write that code, the folks that support, the folks that write that code. So you might have project managers, you might have front end developers and back end developers, and you might have product owners and you might have UX designers, you might have UI designers, you might have user researchers, and they’re engaged in all those activities. And normally we can pick up most or all of those activities. And so what we’re really doing is starting to qualify the technical staff, the product staff for that particular company, qualifying their activities and tying them to those projects. And the projects are the new builds of software and software modules, typically at a fintech company.
Jacob: That makes total sense. And as I understand it, it’s not just like if someone listening is like, Well, I don’t actually have any. All those job titles you just gave, I don’t have any of those people working for me. All of that stuff is done by like a third party contractor. That’s still under my understanding and correct me if I’m wrong, falls in line. If you’re contracting out all of that type of work, you’re still paying for that to be done on your behalf.
Jonathan: Yeah, generally, yes. But we miss one thing that that brings up the expenses, how to have a nexus or the location of the folks who did the work needs to be in the US is whether they’re employees or contractors. There’s a law that’s really designed to encourage US research and development and US jobs. And so if the contractors are in the US, then yes, those activities can qualify. However, when it’s an employee in the US and they’re engaged in those activities, we can capture that expense. Typically when it’s a contractor, not only do they have to be in the US, but we have to look to the contract itself with the contractor and examine the terms. Specifically in this contract, does the fintech company take the financial risk associated with the endeavors in the contract or in the work? So if they’re building a module, if the contractors are building a module, if they fail, who eats that cost? Or basically, is it a success based contract or a time materials contract might be one way to look at it. And then the IP and the knowhow from the actual R&D being done, who owns it? So the taxpayer that gets the credits is typically the taxpayer that takes the financial risk and owns the results of the R&D.
Jacob: Got it. That could be the contractor. That could be you depending where those things.
Jonathan: So the fintech company is paying time and materials if they’re paying hourly and there’s no promise of a certain outcome that the payment is tied to, then likely the fintech is going to own the IP and they’re going to capture the expense. Where it gets a little more complicated is if we give a fixed bid arrangement where you don’t get paid unless there’s success. But the work is done by the fintech company. It becomes more of a gray area where we really need to do an analysis of the contract. Makes sense. Yeah, there’s a lot of technicality there and we have folks that read the contracts and look at case law and make an analysis contract by contract.
Jacob: Figure that all out. It sounds like that this wouldn’t be something every single business out there could be taking advantage of. But a lot of them and certainly almost every business should be considering if they could. What percent of companies do you think are are currently, like aware of this using this? Right now.
Jonathan: There’s roughly 20,000 companies per year taking advantage of the research and development tax credit, I would estimate as current year. And that’s out of millions of companies in the US that potentially are performing R&D. But I would definitely say that awareness is less than 50% and taking of advantage of it is less than 20%.
Jacob: Is what’s holding people back. Just access to this info and companies like yourself, is it time? Is it prioritizing it? Is it this is new. And so just, you know, they’re not up to speed. What do you think is holding it back, if this is such an advantageous thing?
Jonathan: So I think, first of all, the misunderstanding, like the confusion in this space, sort of like you were saying, hey, you need to wear a lab coat to qualify. I think that’s one misconception. The founders taking compensation and they’re leading the product development and there are 1 or 2 people they can still qualify. Right. Somebody is leading that product development effort. The product doesn’t just develop itself again, if it’s developed offshore. Still, there’s somebody in the US typically guiding that offshore effort, pulling compensation. And so, you know, it’s hard to imagine a fintech company that doesn’t qualify on some level. The question becomes, is it worth it or not to them And. And I think the answer is yes. The question might becomes around timing. I do think, though, that it’s not just confusion or a lack of awareness, but there is some general awareness by founders and owners and executives. However, there might be misconception over Yeah, is it worth it? Is the juice worth the squeeze, so to speak. And then where do I find there’s risk involved? Perhaps I’m going to be distracted. Where do I find the services? And the issue around acquiring the services is that it really is a Wild West in terms of a lot of firms out there and some interesting billing models. A lot of the times you’ll hear that it’s a success based fee, but then you have to pay. When you get the credits, the question becomes, can I actually utilize these credits to create an economic benefit that offsets the fee? And if the fee comes first, your cash strapped startup company, it may not be worth the risk, right? If you’re going to have to pay $25,000 and I don’t know if I’m going to get $100,000 of benefit potentially over the next four years, it just becomes a little bit too much for them to bite off.
Jonathan: You hear about how folks like Elon Musk and all these giant multinational companies and billionaires and large enterprises are paying like 0 to 5% tax, even though they’re pretty profitable. And I think it comes down to basically financial engineering. But a big part of it is R&D tax credits for those folks as well as how they depreciate real estate and offshore potentially some their income. But I think the R&D tax credit is a big piece of that. And I think it’s traditionally been reserved to the billionaires. And part of what Strike is doing is creating an offer for the market and a service and terms that kind of democratize the credit and make it available to the smallest of businesses. The difference here being that, yeah, there are no upfront fees and we’re not asking we’re not requiring payment upon delivery of credit, but actually saying, Hey, we’re going to partner with you as the business, we’re going to get you the refund from the government or reduce your taxes. And not until you actually realize the economic benefit in a financial sense will you owe a fee to the firm for the work. And I think that is a very big key differentiator because it removes the risk for the small business, which I think is one of the biggest obstacles, is like, why would I risk my capital to get a potential tax benefit?
Jacob: Certainly. And that’s why, you know, with the big massive enterprises, they can afford that risk very easily to say even if this doesn’t work out and we paid a whole team to put it all together. Well, we’re at tens of billions of dollar market cap company. We can absorb that. But the smaller mom and pop shop, that’s like I can’t $25,000 is one month of my business run away. I can’t put that out there up front. If it’s not guaranteed to come back or even if it is guaranteed to come back. So that is.
Jonathan: Another phenomenon, is that the like the really big companies that you’re mentioning, they have big four accounting firms and those big four accounting firms have specialized tax consulting units that do research, development, tax credits, and they’re trained to come in and identify that. But the rest of the market, the small businesses, medium sized businesses or middle market, whatever you want to call it, we usually go to CPAs as our tax preparers.
Jacob: More generalists.
Jonathan: Yeah, yeah. Or generalists. And those folks, they are not specialized in R&D tax credits. It’s not part of the CPA curriculum. They don’t necessarily aren’t trained necessarily in identifying the opportunities and that’s they’re great at what they do. We partner with those folks to do the specialized tax work and hand them the credits and say, CPA, you use the credits to the best of the advantage of the client because you do their tax prep. You know it. And that is a natural partnership that then brings the credit to all those smaller businesses. But I think that’s a big part of it, is that you’ve got institutional money, you’re public or you’re you have institutional owners, private equity. They are definitely bringing in the big four and they’re bringing in the R&D tax credits. And that’s just part of the difference in the market where the enterprises are paying less per dollar in taxes because of that.
Jacob: Well, it’s very cool too. We’ve had a few like you trying to bring some of these services that have traditionally been kind of exclusive to the massive enterprises down to anyone and everyone that should be able to take advantage of it. So love hearing that. Let’s transition then to the other company. You co-founded, Ventive, which as I believe is the company behind the tech that supports Strike Tax Advisory. Do I have that correct?
Jonathan: Ventive is what we call a sister company, and that has some common ownership with strike and then strike actually spun out of Ventive So it’s a software R&D firm that’s been around since 2014. We’ve been grateful for being recognized by the Inc 5000 for the last five consecutive years as one of the fastest growing companies.
Jacob: That’s awesome.
Jonathan: Thank you. And we’re building software, we’re doing R&D, and we wanted to get the credits for ourselves and our clients. We try to go to the market to buy the services and found out how difficult it was for a small business and that gave us the idea for strike. So we spun strike out of Ventive and after it spun out, it maintained a partnership with Vantiv to produce technology and to support the general business operations of Strike as part of its strategy, where we do have quite a number of employees in house to do the core work, the consulting as well as business development and operations. But when it comes to our technology development, we really rely on. Ventive got over 100 developers and resources and it’s got proven teams that are. Fully managed. So I don’t need a CTO necessarily on staff full time. I don’t have to hire all those folks. I’m able to chunk the work into a vision or into modules, hand it to ventev and have it executed, which is what it does for other other other companies.
Jacob: Yeah. What other verticals and industries is Ventive working with?
Jonathan: Mainly fintech has been a big focus for us. Fintech too, in terms of SaaS development, defi and financial services. You know, more traditional financial services as well as care. Believe it or not, education and a number of other industries. We even support a company that does self beer taps where they self pour.
Jacob: You already made me thirsty earlier in this conversation. And now we’re going to beer thankfully recording in the afternoon so it’s not too dangerous if I get too thirsty by the end of this.
Jonathan: But but we’ve worked in mobile payments quite a bit and just a number of areas and really doing everything from designing and developing the product to launching it, managing it, helping our fintech clients to form strategic partnerships and get distribution for the products. A lot of times you can embed your product in a combined product with a bigger market incumbent to kind of like speed up the go to market. And so we do all that sort of stuff. I mean, from research and design to engineering. Yeah.
Jacob: So I know you’re working with all the different leading tech cloud services. AI BI Web3 Big data, I think a few others are mentioned on your site when it comes to fintech and payments world specifically. Obviously all of those new technologies and growing technologies are relevant. But if you had to say 1 or 2 of those was kind of the most relevant to the fintech space or had the most building and growth going on, would any of those stand out?
Jonathan: You know, we’re all looking at obviously right now the effect of AI and integrating AI and these new LLMS and looking at the ChatGPT like technologies or the technologies and APIs from OpenAI and figuring out how best to leverage that across all products and all verticals. But in particular fintech. I would say obviously for a while we’ve been looking at defi and blockchain and distributed ledgers and all the implications there and now the shift is definitely looking at AI and both together.
Jacob: Yeah, I didn’t do I’ve kind of worn out my tire joke already that because it’s 2023, I’m required to actually ask about AI. It just seems like it’s just like a legal thing for every podcast host in this year. But I will still ask the question and I did I guess just do the tired outdated joke already, but with AI specifically in this space and generative learning and machine learning and everything else, what do you see as its kind of biggest short term implications for the fintech space?
Jonathan: Short term, I think that LLMS like ChatGPT, create a very unique opportunity for companies to free the data, and traditionally you had to create a lot of UI and user experience and it’s somewhat rigid and expensive with LLMS. If you have a great data set and if you can kind of teach it certain known functions that are expected, I think you create a really powerful exchange between your users and your tech and your data and that we can move faster, innovate and make all the tech more accessible via that interface in a way that I don’t think anybody was thinking about a year ago. So I think that has pretty big implications as well as all the different other sort of opportunities are to add value within products using similar technology and machine learning in general.
Jacob: Are you seeing speed to market be kind of one of the new things that all these tools are also can help new products, new services be solved a lot faster and with smaller engineering teams. So I’d imagine with everything vendors doing that, that possibly speed to market becomes it’s always been an advantage but is even more so on the forefront of what’s going to win out.
Jonathan: Yeah, I think the services themselves are designed to be very easily integrated in an impactful way. So we’re seeing, you know, we’re seeing a lot of products out there, obviously integrating ChatGPT or competitors. And I definitely think it’s increasing the power of the developer and the development team. Absolutely. From technologies like copilot ChatGPT, where we’re more and more assisting our developers and writing code all the way to interfacing with your API stack or your application stack. All of this though, means, yeah, you can have a smaller team and get more done. I think it for the development teams and developers that are really embracing the technology and know how to work with it. I think it definitely makes them more valuable and more powerful. So yeah, the cycle is hastening with respect to the time it takes to get an innovation to market. There’s no doubt about that.
Jacob: And on the similar topic, the last question here I’ll get you out on is I believe it was on the Strike’s website that it said this, but I wrote down it was on one of the two, I think it was Strike and wrote down on the website. It said something should be automated, but some really shouldn’t. And it goes on to explain a mix of automated machine processes with actual human experts looking things over and making the decisions. Can you explain the philosophy behind having that balance maybe specific to strike and the work you’re doing? But this also, broadly speaking, talking about all this tech and working in the tech world, but thinking about philosophically that balance of, yes, we need to automate, Yes, this tech is amazing, but we still need humans involved in this as well. So can you kind of explain that balance and why it’s so important to what you do?
Jonathan: There’s a lot of great use cases for machine learning, for for LLMS in particular, an organization has a universe of data. Of course, most companies don’t have control of that universe and they need to really filter it and collate it sort of and curate it before they should probably unleash to the public and say, you know, just query my data. But on the one hand, what I’m getting at is that there are really good use cases. A chat bot is a great use case because chat bots bots have been around for a while, but they weren’t very good up until recently. Now you’ve got you can actually engage in a dialogue with the user and sort of qualify their question and give them an answer and say, Well, if you give me a little more information like this and this, I’ll give you a better answer. Actually, that’s pretty unique and new. And so my point is like writing sales emails and supporting customers and answering questions are actually a pretty good use of the technology. But what we’re saying is that if you’re a company and you’ve got 1 million or 2 on the line and tax credits or more, you know your small business, this is a very significant amount of money. We don’t think you want to just run some experimental LLM or AI on say, you know, we talked about a contract analysis earlier.
Jonathan: Is this contractor agreement? Where are the rights to the IP, Where’s the financial risk? And then analyzing that compared to case law. Now, that’s something that probably LLMS can be trained to do pretty well here now or in the near future. The technology is kind of here, but if somebody if I have a few million dollars riding on the line, do I really want to be the guinea pig for a company that’s going to save a few bucks by giving me a cheaper opinion on those contracts? I don’t think so. So I think that’s one example. I think the other example is just when we engage in a dialogue as humans, even though these chat bots have gotten so much better and smarter, they can understand the deficiencies in your questions and ask you to clarify and qualify your questions better and give you better answers. Even though that’s the case we’re talking about like fundamental misunderstanding of like we talked about earlier, what is R&D? Look, you can engage in a chat bot, but the truth is, if I get on the phone with an executive of a company and I know that they have a catalog of products that they’ve developed and they own the IP, I can pretty quickly let them know that they have been engaged in R&D and why without asking them about how they’re engaged in R&D and then telling me they’re not.
Jonathan: There’s a lot of room for confusion in that conversation that we talked about earlier that I do think you can address them all with this new technology, but it’s just not worth it to do, I think, from the customer’s perspective necessarily. I think that the cost savings are mainly for the companies deploying the technology. And as a customer, I don’t need to be an early adopter. Like, give me your best expert, give me your best expert opinion, have an attorney or a CPA look through these contracts and give me an opinion and let them have the benefit of using AI or LLMS to check their work. It’s just too much money on the line to completely automate those decisions at this time. Additionally, more and more of the work will be automated. Don’t get me wrong, I think that’s part of the efficiency gains we’re going to see in all these industries. But there’s still no substitute for the human element and having actual face time. So one of the things we do is we do technical interviews with CTOs and engineers and really dig into the nature of the work that they’re performing and where the uncertainty really existed and sort of the trials and tribulations they went through.
Jonathan: And to me, that that’s a very human conversation and I plan to keep it that way for a while. But when you talk about expense classification, if you’re going off a general ledger, flagging expenses likely as qualifying is probably a job for AI to be checked by humans. So I think it’s more of like making people bionic, so to speak, and increasing their efficiency rather than fully automating these high touch financial services and these different processes that the human element matters because ultimately somebody’s signing a tax return and there needs to be trust. And it’s more than that right before they sign a tax return, accepting these tax credits and using them and taking the risk involved and trusting the work, there’s even exposing your confidential information. All of it, right? Your financials, your R&D plans. This is really sensitive stuff. And as somebody who engages in R&D, I really want to interface with a human and a company and know that I can ask those questions. And there’s a lot of trust before I go forward. And I think that’s another area where machines aren’t quite there yet.
Jacob: Yeah, certainly. And I love everything about that answer and totally agree with the balance. It’s not meant to replace, it’s not meant to do everything. It’s meant to aid and help. And it might change what you need to be good at in across any industry. But we’re going to be needed. It’s going to be needed. And I especially love hearing someone who’s working with. Tack and leading tack based company. Talk about that balance and how important that is. So that’s awesome. Jonathan This has been an absolute blast. For those listening who may want to follow you. Learn more about Strike or Ventive or any of your companies and keep up with what all you got going on. Where would be the best place for them to go to do so?
Jonathan: StrikeTax.com is a great place to go there. We do publish our blog pretty regularly. Getventive.com is where you can learn more about ventive and we do have an active blog there. And then yeah, you can you can also find me and us on LinkedIn Jonathan Cardella And yeah, this has been a lot of fun. Thanks for asking such great questions.
Jacob: Yeah, we will link to those and more in the show notes and especially for the business owners listening. Definitely head over to Strike Tax. If you’ve never thought of this before, you know, like we talked about in the beginning, Jonathan’s bringing this and the company is bringing this not to just the big massive enterprises, but to everyone. So definitely go look into that for business owners and use all the other links we’ve got below in the show notes. So, Jonathan, thank you so much for your time and knowledge. It’s greatly I’ve greatly enjoyed it and hope to speak to you again soon.
Jonathan: Thanks so much, Jacob.
Jacob: If you enjoyed this episode and want to hear more, head on over to SoarPay.com/podcast to subscribe on your podcast listening platform of choice. That’s s o a r p a y.com/podcast.