R&D Tax Credit FAQs
R&D Tax Credit FAQs
As the name suggests the R&D credit is a credit. It is designed to put money directly in your pocket. The credit directly reduces your tax liability dollar for dollar. If this were a deduction, it would only reduce your taxable income (and not be nearly as lucrative).
Strictly speaking, the credit will be worth on average 4.5% of your R&D expenditures plus any state credits that may be available. All-in-all we have clients that see close to 10% or their R&D spending coming back to them every year. Keep in mind that though the IRS definition of R&D may be quite particular; it probably encompasses more expenditures than you think.
The government reinvests nearly $8 billion via this credit every year. It has been put in place to keep high-tech, high-paying companies and jobs here in the United States. Think of it as one way our government is battling cheap overseas labor and attempting to grow our economy.
No, the credit will not spur a general audit. We do find that approximately one in seven of our R&E amended claims is audited; however, just as we use engineers to determine what is qualified, the IRS uses engineers as well. Therefore, any R&E audit usually stays within the scope of just the R&E credit.
Hull and Knarr provides comprehensive audit protection to its clients. If the IRS has any questions we will answer them for you. Our approach is to perform the work necessary to win an audit BEFORE the credit is filed.
There are three calculation methods available. Which we use will depend on your situation and the engineering and financial information available. As we begin our process we will provide a detailed explanation of the route we will take. You might get bored with this part.
For more information on our process, please review the Credit Process Page.
Simply put: Accountants are not very good at answering engineering questions. Your accountant likely has a cursory knowledge of the R&D credit, but does not have the engineering expertise to support and maximize a claim.
For the same reasons you go to a specialized patent attorney for your intellectual property needs, you need an engineer with specialized tax law knowledge to maximize and defend your R&D tax credit.
Much of the confusion about the credit stems from the assumption that because its related to tax… it MUST be a function of accounting. While the final credit amount does end up going on a tax form, the correct methodology for getting to that number is a discipline of engineering.
Yes. Hull & Knarr is not an accounting firm; and we are not in competition with your accounting firm. In fact, we work with Big Four accounting firms on a regular basis with regard to the R&D credit.
Contrary to popular belief there are several ways for government contracts to qualify for the R&D tax credit. We will need to have a look at each contract, but these funded projects can often be used to generate a credit.
Yes, this credit is only concerned with where the R&D process occurs. You can move your production to the moon for all we care. Of course any R&D that occurs on the moon (or anywhere outside the US or US territories) will not be eligible.
To complete a retroactive R&D study, required accounting documents will vary. In a perfect world we would have all tax returns, W2s, and time tracking information back to 1984 or when the company started (whichever came second). Obviously, this is a bit of a pipe dream, and the IRS agrees. There are several ways to work around missing accounting records, though we will go to great lengths to recover historical records. However, sometimes we have to forgo retroactive credits and concentrate on claiming the credit going forward.
We always sign non-disclosure agreements, in fact many of our clients are Department of Defense contractors; and we will be glad to sign any other confidentiality documents that will make you more comfortable. In order to maximize the credit opportunity we will need access to all parts of your R&D process, but of course we always work on a case-by-case basis.