Learn why R&D tax credit studies are needed and what’s involved in the process
For U.S. businesses developing new or improved products or processes, the Research & Development tax credit can be a great tax savings tool. Many taxpayers are aware of the credit. However, few are familiar with the intricacies involved in actually claiming it; and, even those who are often find themselves intimidated by its complexity and ambiguity.
That’s why so many taxpayers looking to claim this credit undergo a formalized R&D tax credit study from a third-party provider– especially the first time around.
What is an R&D Tax Credit Study?
An R&D tax credit study is essentially a thorough analysis of a taxpayers research and development efforts. Often, the culmination of the study findings, and more specifically the methodology used to determine qualifying vs. non-qualifying activity and costs are presented in a formalized study report.
Why is a Formal Study Needed?
Claiming the R&D tax credit goes well beyond calculating a number – or at least it should. There is extensive qualification and quantification analysis that should be performed anytime a taxpayer is making a claim. Showing that an analysis took place, how it took place, and how the activities and costs meet the necessary requirements to make the credit claim is especially critical should it ever come under audit. — Keep in mind that this is a tax item which means the burden of proof falls on the taxpayer.
What’s Involved in the Study Process?
Often R&D tax credit studies are performed by IRC Sec. 41 research and development experts. These studies aim to examine a taxpayers R&D efforts, determine which efforts qualify for the credit and which costs associated with those efforts can be included.
At Tax Credits Group, our R&D tax credit study services include the following:
Qualification:
Based on the rules and requirements necessary to claim the research credit, the first step in our study process it to determine the full scope of a client’s qualifying activity. In order to determine this, we conduct discussions with appropriate company personnel to learn about the business operations.
Once we understand the full scope of the R&D efforts, (including specific projects and departments and personnel involved) the next step is to document the activity. This is done by conducting interviews with key subject matter experts, documenting these efforts through project qualification questionnaires, and working with our client to secure the necessary contemporaneous documentation needed to support the claim.
Quantification:
Once the full scope of qualifying research activities has been determined, the next step in our study process is to quantify the allowable Qualified Research Expenditures “QREs” which include wages, supplies and contract research costs. This too requires our experts to work hand-in-hand with our clients to secure the necessary financial detail to support the claim. And, based on statutory requirements, this quantification process must be done for current and prior “base period” years.
Study Report:
Once the R&D tax credit study is complete, the last step in our process is to combine the qualifying and quantification findings into a well-organized, detailed study report. This report includes the summary of the study, qualifying project documentation and all needed detail behind the credit calculation.
Audit Defense:
Of course, we don’t stop there. At Tax Credits Group, we stand by our work. Should your claim come under federal or state audit, our services go beyond our report. We’ll provide you with hands on representation through the appellate level, including negotiation with auditors.
The above detail is just a quick outline of what’s typically involved in a research tax credit study. In reality, there is much additional consideration that must be given. For instance, there is more than one credit calculation methodology available to choose from, and there are often further factors that need to be taken into account such as entity acquisition or disposition analysis, analysis of prior years for amended returns, and analysis for applicable state credit opportunities. –With these many variables at play, you can begin to see why so my companies opt to bring in experts to conduct this service.
That said, while R&D tax credit studies can be complex, it’s our job to do the heavy lifting. We know the activities that qualify for the credit and will help you gather the required documentation without overly burdening your busy employees.
