What is the R&D Tax Credit?
A tax incentive to incentivize companies that invest in innovation domestically.
It applies to costs incurred in the innovation of products, services and processes
The credit mechanically operates like an enhanced deduction against your tax bill
Thirty-seven states adopt and apply variations of the federal provisions
What activities qualify?
Eliminating uncertainties within business processes and manufacturing
Process re-design and re-engineering of existing processes across all business functions (sales, accounting, operations, product development & more)
Enhancing and re-gearing tools and components already used in the business
Technological advances and breakthroughs – even if failures
Business activities that rise to the level of “experimentation” and the creation of “alternatives”
What are the steps?
Cost-Benefit Analysis- prior to engaging, we would perform a cost-benefit analysis to quantify a reasonable range of potential tax benefits that may be realized
Formal Proposal- If it makes sense, we will prepare a formal engagement letter for your consideration and execution
Initial Interview & Walkthrough- We would then conduct and plan a site visit designed to a) walk through your plant b) identify those key activities that would qualify, c) identify key stakeholders in charge of those activities and d) develop a co-plan with you on how to capture and quantify the associated expenses with respect to those activities.
Cost Center & Data Collection- Working with your finance team, and the above stakeholders, we will refine the data collection process, iteratively, in order to create a cogent analysis that evaluates any missed opportunities. In addition, we review (on every assignment) the applicable provisions, case law changes and developments in order to ensure that we have captured as much of the qualified expenses as reasonable and practical.
Report- We will then craft a report designed to address those audit risk areas and procedures that would be employed by the IRS under the service’s Audit Technique Guide: Credit for Increasing Researching Activities
Renew- Each year thereafter we will renew, update and recalculate those credits to be calculated taking into consideration changes in case law and authoritative pronouncements or developments.
What is the History of the R&D Credit?
The federal R&D Tax Credit was made permanent with the Protecting Americans from the Tax Hikes (“PATH”) Act of 2015. PATH also allowed businesses with less than $50MM in gross receipts to offset the R&D Credit against AMT.
The Tax Cuts and Jobs Act of 2017, P.L. 115-97 modified the tax code which increased the benefits of the R&D Tax Credit by increasing the effective reduced rate (from 65% to 79%), among other increased benefits.
Taxpayers with under $5MM of gross receipts can use the R&D Tax Credit to offset payroll taxes.
Western states which have an R&D Credit program include California, Arizona and Colorado, among many other states.
Other Considerations
We are not a prepackaged provider. Each study we perform is completely unique to your situation. You will have a knowledgeable professional working with you throughout the process.
Many times, taxpayers are reticent to conduct such exercises for fear that R&D studies increase their respective audit risk. Our first goal is to evaluate the cost benefits of such study before even beginning the exercise. Our second goal will be to prepare a defensible calculation based upon sound principles. It is those taxpayers that unilaterally claim credits that are unfounded, poorly documented and not calculated correctly that should be concerned; not those taxpayers that undertake the legitimate efforts to properly document the scope of their work.
Next Steps
Contact us and ask for an initial assessment. We look forward to working with you!