Start-up Companies and R&D Tax Credits

Just the other day a client sent me some information regarding a company he started with some other people within the last year. The company is small but revenue is quickly growing in this first year. And while they were are not profitable, yet, he understands the Federal R&D Tax Credit can be carried forward 20 years.

His question was, is the cost benefit there for me to perform a R&D Tax Credit study? After looking at the numbers, my recommendation was no. Start-up companies have too many other issues to deal with without me asking them for a bunch of information that will not benefit them for a year or two. Especially when the tax returns are open for amendment for 3 more years. But, that did not mean they should not take action now.

Since the IRS Tier 1 directive in April 2007, IRS Field agents are looking for more contemporaneous engineering and accounting documentation to substantiate claims. This means they want to see engineering notes, sketches, calculations, testing data, drawings, ... And they want to see some method of tying employee time to the qualified research activities associated with these documents. This means contemporaneous time tracking data. Ahhhhhhhhh!

The ideal method of tracking time for the credit would be to have each person's time tracked by project by task. But this is not realistic for most companies because it does not match their corporate culture. The IRS and the tax courts understand this.

After explaining this to my client's start-up, we have begun the process of incorporating Employee Time Allocation Questionnaires to be completed every month. This meets the IRS requirements and minimizes the intrusion on the company's time. In addition to tracking time, the company now understands the importance of keeping all of their engineering documentation no matter how dirty and sloppy it may be.

As a result of taking a few simple steps, this company now has the tools to substantiate a significant R&D Tax Credit in the future and they are reducing the money and man hour expense of performing the eventual R&D Tax Credit Study within the next year or two.

So this is a call out to all accounting firms, companies, employees, ... If you are associated with a start-up company that is performing R&D take action and call someone that can give you some help to do the same things that my client has done. Anybody that you consult should not charge you any money for this help because it will not take long and they should look at it as trying to grow a relationship with you. And you can use this opportunity to see if the person you are consulting is looking out for you. I hope this helps someone.