Why the R&D Tax Credit Requires Expert Analysis
How often have you been in a situation where you need something fixed that either you don’t know how or don’t have the time to fix? If there’s a plumbing issue, you’ll probably call a plumber. If there’s an electrical issue, you’ll call an electrician. If you are experiencing health issues, you’re going to see a doctor. In all those situations, you’re probably going to have a professional with years of experience diagnose the problem and fix it.
Those situations are clear cut, but when it comes to tax – specifically the research tax credit – the general thought is, ‘it is a tax issue: I should let my accountant handle it.’ However, in reality, the R&D credit is an engineering function and hiring a research tax credit specialist will maximize your ROI and bolster your defense against potential audits.
Maximizing the Credit
The misconception that the research tax credit is a tax function often results in companies defaulting to having their trusted CPA firm handle the credit for them. For the same reasons you use a patent attorney for your intellectual property needs, you need an engineer with specialized tax law knowledge to maximize your research tax credit.
Remember that the credit is an engineering function, not an accounting function, and generally accountants are not trained to answer engineering questions. An accountant likely has a cursory knowledge of the credit but does not have the engineering expertise to maximize a claim. Therefore, CPAs typically focus on the simple, low-hanging fruit of research and development, generating a credit amount that is far below what you are eligible for.
To maximize the credit, a company needs to have a study performed that is grounded in science and the surrounding case law. The qualification of expenditures should be focused on ALL your efforts in technological advancement, not simply the dollar amounts you’ve already tracked internally as R&D expenses.
When a company’s research tax credit is audited, the IRS often sends in degreed engineers or trained specialists to audit the credit. Given this standard by the IRS, the first question you should ask is: “do I have degreed engineers or specialists overseeing my calculation to ensure it meets the necessary requirements?”
These requirements and standards drive the substantiation documentation. Companies that find themselves in the position of having their documentation reviewed at the Federal or State level are vulnerable to reduction or denial if their claims are not supported by engineering-based studies.
Denial was exactly what happened to Siemer Milling’s credit claim after the company’s accounting firm failed to show evidence of qualified research activity. By the way, Siemer’s activities clearly qualified, but the accounting firm lacked the expertise to substantiate the tax credit claim.
The research tax credit is a powerful tool that can help companies reinvest into new research and product development, hire talent, or even funnel back into marketing or sales activities. If you’re currently taking advantage of the credit, you’ve felt the impact, but ask yourself the following questions:
- Am I aware of what the maximum is that we could be claiming?
- Does my current provider use degreed engineers like the IRS?
- What compliance support do I have in the event of an audit?
- When was the last time my provider updated me about changes in legislation?
- Am I sure my company is including everything in our credit calculations?
About: John, Business Development Specialist, has a finance degree from Miami University. He lives in Indianapolis with his wife and three kids. When not spending time with his family, you can usually find him on a golf course.