The Credit
In the early 2000’s the regulations governing the qualifying, calculating and claiming of the R&D Tax Credit were heavily modified to provide a stimulus for the small and mid-sized business. No longer did one have to create something that was totally “New to the World” and no longer did they have to deal with very concise and detailed record keeping to even be considered for the credit. Now, all they had to do was meet a four (4) part test:
· Engage in designing and creating a totally new product (new to the company – even if others are producing that product it was okay), vastly improve an existing product (make it out of new material) and create and/or vastly improve the design of a production process.
· These efforts must engage the Hard Sciences – Physics, Chemistry, Engineering, etc.
· There must be risk associated with the efforts: Financial Risk as well as potential risk of failure to get product to a production state and….
· There must be a method of testing that determines the success or failure of such an effort.
If these conditions were met then the company is engaged in Qualified research Activity and could make a claim for a credit. All of the people (executive, staff and direct labor) that performed in some fashion in the planning, design, prototype development, testing and final approvals – to the degree they worked on R&D efforts – that percentage of their time could be applied to their w-2 wages (including year-end bonuses) to determine the wage expense associated with R&D. Also, expenses incurred for supplies used in the prototype development and testing as well as for outside contractors related to the R&D efforts (everything up unto the product reaches Article 1 stage – ready for production) can also be counted. It was known that most small and mid-sized firms did not have the record keeping abilities of the larger corporations and documentation support could fall back to such items as meeting notes, e-mails, testing plans, status reports and other related documents as well as, in some cases, owner testimony.
Companies operating in various types of manufacturing, metal work, software-development, food processing, chemicals and pharmaceuticals, energy, etc. all became open to this opportunity. There is no relationship between revenue size and size of credit as the credit is more related to the amount of R&D activity going on in a particular year. At any one time, the credit can be calculated for the current year and can also be calculated for three prior “open” years with amendments made to the tax returns. Credits are refunded to the extent that taxes were paid in and any overage can be carried forward (up to 20 years) and applied to reduce future tax liabilities. Most states also offer a credit that is fairly similar in approach and calculation to the federal plan making the credit potential larger. Important Note: Many firms/owners were inhibited from capturing the credit in the past because of AMT (Minimum Tax levels that could not be penetrated). Effective in 2010 the AMT limitation was removed opening up the tax credit to consideration to many smaller business operations (under $50 million in revenues).
About TRCG
TRCG is a made up of a group of CPA’s, Tax Attorneys from the Big-4 Accounting firms (Deloitte, Anderson, etc) and past business operating executives that have been familiar with the R&D credit from the inception of the revised regulations. The project team has collectively worked on over 1000 studies and has stayed current on all court rulings that have had an effect on this credit – either favorable to the tax payer or to the IRS. TRCG is working with clients in many different industries across the entire country assisting them in collecting this credit and providing full audit support if/when any audit arises. The past executives have gone thru studies as clients and understand the level of work required and the type of information that needs to be collected to support the effort. In many cases they provide assistance to clients helping them to develop internal processes to enable future calculation of the credit on their own.
For further information or to address any specific question one might have, feel free to contact me at any time:
Steve Ragow, Director
Cell: (310) 968 – 0708
Email: sragow@trcgadvisors.com
The writer's representation of qualified R&D activity is startlingly over-broad (e.g., he states that "All of the people (executive, staff and direct labor) that performed in some fashion in the planning, design, prototype development, testing and final approvals – to the degree they worked on R&D efforts – that percentage of their time could be applied to their w-2 wages" - this is is a gross over-simplification of these complex tax rules, and one wonders how the Internal Revenue Service interprets such liberal positioning.
ReplyDeleteBeing familiar with the Federal R&D credit program for some number of years - including increased scrutiny in recent years by the IRS - I must say in candor that I find Mr. Ragow's article overly simplistic. The discussion about what qualifies as R&D, and particularly the record-keeping requirements, strikes me as a a bit thin, to say the least. Sustaining these credits under audit is a fair bit more complicated than indicated, and the implication that a company can support a credit claim with "meeting notes" and such is alarming. I must wonder, of the "over 1,000 studies" by Mr. Ragow and his company, TRCG Advisors, how many have been audited, and how the IRS views their work?
ReplyDeleteHouston, TX
This seem to be an over-simplification of the this complex area of tax law (for example, the reference to no longer needing concise records to support and R&D tax credit claim).
ReplyDeleteI think Mr. Ragow was trying to cater to a broad, undefined audience (from tax directors to company owners) and wanted to spur interest rather than debate about the interpretation of various issues. That said and for clarification, the IRS view on the R&D Credit Rules can be found in its Audit Techniques Guide for the R&D Tax Credit, which is not law (but does provide a nice framework for navigating this issue). An auditor is instructed by the ATG that the taxpayer may use whatever documentation is available to substantiate qualification of activities as R&D and the associated costs therewith (emails, meeting notes, and so forth). I think the broader point of the article concerned two fundamental principles - removal of the discovery rule and elimination of the specific, statutory documentation requirements for the Credit - as promulgated in the Final Treasury Regulations in 2003. Other information re: estimates, wage expenditures, direct costs, etc. of which Mr. Ragow has provided a very general overview comes directly from Case Law (reference the taxpayer friendly McFerrin, UCC, and Trinity Cases). As with almost everything in tax, the R&D Credit is largely based on facts and circumstances as presented on a case by case basis. If you (or if you have a client) would like additional information about the R&D Tax Credit, Export Incentives, Negotiated Incentives, or other related tax issues, feel free to visit our website or contact us at 866-244-4170.
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