TWO ITEMS TO CONSIDER WHEN BUYING R&D TAX CREDITS
The R&D Credit is one of the most impactful benefits for companies that are improving products, processes, and software in the U.S., and it still remains one of the most underutilized incentives. The traditional thought is that you must be doing work in a laboratory, or what is thought of in our heads as R&D, to benefit from the R&D Credit. The definition of R&D when it comes to the credit is rewarded at a much simpler level.
If you’re exploring whether you qualify for the R&D credit or maybe you’re already claiming the credit but have never compared what you’ve claimed to see if it is the maximum defensible credit you can claim, below are two things to consider when determining which provider is best for you.
Contingency Fees vs. Fixed Fees
The concept of contingency fees is important to understand because it not only affects your credit and net benefit, but it also affects your ability to be protected under audit. In certain instances, if a company is choosing between two providers for R&D Credit services and one offers a contingency fee and one does not, it may appear as if the company offering the contingency fee is the best option.
For example, a provider offering a contingency fee identifies that they will find $50,000 in R&D Credits for a company and they charge a contingency fee of 20%. Their fee ends up being $10,000, and the net benefit for the company is $40,000. Another provider also says they will find $50,000 in R&D Credits but they offer a fixed fee of $15,000 resulting in a net benefit of $35,000. Which option is better? Choosing solely from a cost standpoint, the contingency fee option appears to be the best option based on the fact that the fee is less, and the net benefit is more.
However, if you chose the provider that is paid on a contingency fee and they get into the project and identify $100,000 in R&D Credits you now owe $20,000 and have a net benefit of $80,000. On the flip side, with the fixed fee provider if they get in the project and identify $100,000 in R&D Credits, your fee would have remained $15,000 and your net benefit would have been $85,000.
The two issues with contingency fees are as follows. Providers that are paid off contingency fees are paid on a percentage of the credits identified meaning the possibility exists that non-qualified expenses that are not defensible can be included in your credit calculation inflating your credit. If that happens, the provider is paid more, and your credit is at more risk under audit. The second problem is …
It is important to note contingency fees aren’t illegal. They are, however, frowned upon. The IRS clearly states that providers representing companies in front of the IRS are precluded from charging a contingency fee. Section § 10.27 of Circular 230 says when describing fees that “
- In general. A practitioner may not charge an unconscionable fee in connection with any matter before the Internal Revenue Service.
- (b) Contingent fees — (1) Except as provided in paragraphs (b)(2), (3), and (4) of this section, a practitioner may not charge a contingent fee for services rendered in connection with any matter before the Internal Revenue Service. There are some exceptions, which are as follows:
- A practitioner may charge a contingent fee for services rendered in connection with the Service’s examination of, or challenge to — (i) An original tax return; or (ii) An amended return or claim for refund or credit where the amended return or claim for refund or credit was filed within 120 days of the taxpayer receiving a written notice of the examination of, or a written challenge to the original tax return.
- A practitioner may charge a contingent fee for services rendered in connection with a claim for credit or refund filed solely in connection with the determination of statutory interest or penalties assessed by the Internal Revenue Service.
With that explanation, a provider that charges a company a contingency fee for the R&D Credit is precluded from protecting you under audit as part of their R&D Credit Services. For them to defend their work, a company must pay that provider that was paid on a contingency fee an additional fee to defend them further eating into their net benefit.
The goal of the R&D Credit is to reward companies that are improving products, processes, and software in the U.S., so they continue to invest and create more opportunities here in the U.S. For companies that want the highest amount of credit that they can claim along with knowing that they are protected under audit, it is important to note what paying a provider a contingency fee means when it comes to audit defense. If you’re paying a R&D Credit provider a contingency fee yet you want protection for your credit, contact one of our experts here.