What is the R&D Tax Credit?
The Research and Development Tax Credit (R&D Tax Credit) was created by the Federal government as part of the Economic Recovery Tax Act of 1981 to encourage American industry to invest in research and development activities. The purpose of the credit was to encourage R&D activities among businesses located in the United States.
Benefits to Clients
- Millions of dollars in tax credits, resulting in cash back from the IRS for previous open tax years (generally 3 prior tax years)
- $1 for $1 reduction on current year’s tax liability
- Additional tax savings in future years
- Ability to Carry-forward up to twenty (20) years
Who can use it?
- Manufacturing
- Fabrication
- Engineering
- Software Developers
- Chemical Companies
- Tool and Die
- Machine Shops
- Plastics Manufacturers
- Pharmaceutical
- Biotechnology
- Food Sciences/Manufacturers
Why are companies missing out on this lucrative tax incentive?
Primarily due to a lack of awareness. Most companies have heard of R&D Tax Credits, but mistakenly assume that they don’t qualify. The term “Research & Development” conjures up images of scientists in a lab wearing white lab coats inventing something revolutionary. Firms that don’t have an official R&D department simply assume this benefit dos not apply to them. In reality, the IRS definition of “Qualified Research Expenditures” is quite broad. Wages are the typically the biggest expenditures that qualify for this credit, and wages of many “technical” personnel like Engineers, Programmers, CAD Designers, and many others who work on projects that are of a technical nature that the company may consider to be “routine” will surprisingly qualify in the eyes of the IRS. However, each company is unique in their mix of activities, and it takes a qualified team to properly evaluate the feasibility, and conduct a thorough study that will stand up to IRS standards.
Another common misconception that keeps firms from digging into R&D Tax Credits is the fact that they assume their CPA must already be claiming this credit on their behalf. While we have the highest respect for CPAs as important advisors to any business, it is important to understand that most CPAs handle a wide variety of tax related issues, for a large variety of clients. Just as you wouldn’t expect your general physician to be an expert on brain surgery, a CPA can’t be expected to be an expert on every specialized tax incentive. In fact, most CPA firms that pursue R&D Tax Credits for their clients, recommend they utilize an outside consulting firm that can provide the engineering and legal expertise required to conduct a thorough study, and back it up in case of an IRS audit.
R&D Tax Credit Engineering Study
Our team of experts work with clients, and CPA firms, nationwide, to understand their needs and maximize their benefit under the current tax laws.
Our turnkey package includes:
- Interviews
- Credit Calculations, Detailed Timesheets and Summaries
- Engineering Report
- Research & Development Audit Defense at no additional cost
- Support for CPA
Our unique value proposition:
- Our team comprises of engineers and IP attorneys with an engineering background as required by the IRS
- We use the Comprehensive Project by Project Approach methodology to conduct our studies as required by the IRS
- We provide free R&D audit defense
- We use a two phase approach to minimize the risk to our clients
Questions to ask when choosing a R&D Tax Credit Consulting Firm
In your due diligence in selecting a consulting firm to perform your R&D Study, consider asking the following 5 questions:
1. Does the firm employ engineers?
Ask for the qualifications of the individuals on their production staff and determine if each individual involved with your Study is either an intellectual property attorney with an engineering background, or an engineer.
2. Do they use the Comprehensive Project-by-Project Methodology?
Ask if the firm will utilize the comprehensive project-by-project methodology as well as establish a detailed “nexus” of Qualified Research Expenditures (QREs) to Qualified Research Activities. One of the IRS’s biggest concerns is that some companies’ “engineering” reports are in fact written by individuals with no engineering or scientific background and that “no nexus” is established between a company’s qualifying expenditures and qualifying activities. Their documentation should connect the project to the employee, and the estimated time spent on that project to each of the years under engagement. It is the most thorough methodology accepted by the IRS today, so accept nothing less!
3. Does the firm assume most of the risk?
To begin a project, most firms will ask to bill by the hour (sometimes with a cap) or sell on a lump fixed fee. This approach carries too much risk for the client because there are too many variables that simply cannot be foreseen at the beginning of the project. Choose a firm that is willing to assume most of that risk and for a nominal fee will answer all of those variables by determining the following:
- Your actual credits per year
- Your exact utilization of those credits
- Your base percentage and whether that affects your utilization
4. Does the firm include Audit Review as part of their fee?
It is imperative that the consulting firm you choose be willing to accept the risk of an IRS audit should it occur and include the audit review as part of their fee. They would do this if they felt confident enough that their numbers were correct and their Engineering Report could withstand the scrutiny of a potential IRS audit. Otherwise, you have an open ended situation where you will have to pay that firm or legal counsel on an hourly basis to defend you against the IRS.
5. Does the firm have references?
A history of success is important, since a detailed R&D study is a complex endeavor that requires a team of specialists.
Contact us today for a FREE evaluation!
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