You Already Take the R&D Tax Credit

“It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.” ~ Mark Twain

I have been talking to a lot of companies lately that have heard of the Federal R&D Tax Credit and many of them are already taking advantage of it. This is good. We need the companies that are driving technological development to grow by increasing R&D spending. Unfortunately for many of them, they are unaware of deficiencies in the quantification and subsequent substantiation of their R&D credit claims.

Controllers and CFO s tell me, "My accounting firm does that for me." or "We have been doing this for years and we haven't had a problem." These quotes often indicate to me that these people know falsehoods as a fact and it's not their fault. In the past, the R&D tax credit claim could be substantiated by any accountant but it is different now.

My frustrations with these statements have grown lately. I recently did work for one client that had a large regional accounting firm perform an R&D tax credit study and it was crap. The R&D credit study report just regurgitated information provided an individual who did not even have cursory knowledge of the four-part-test. Wages of technical writers, technicians, and management people were erroneously included in the calculation at 100%. No due diligence was performed to validate the company's raw data. Until, I did my work they had no idea how deficient their previous accounting firm had been.

And that is not an extreme case. I have seen firms apply blanket percentages of 5% to all of production and arbitrary number for CEO s that merely listen to R&D meetings. Their mentality is let's go after it all and if we lose 20%, 30%, even >40% in audit the company is still better off. But that is not true. Cash strapped companies can not afford to pay back adjusted claims plus interest and penalties. Staffing and budgeting are adjusted according to estimated tax bills and any adjustment can substantially hurt a company.

But from what I have seen recently, the people that work this way are not looking out for the best interest of their client. They are only looking out for their own interests. Unfortunately the penalty from the IRS gets assigned to the company and not the misleading, narcissist.

To avoid any problems, educate yourself on the R&D tax credit. Use resources like IRS.gov, Wikipedia, and Hull & Knarr. Look for specific IRS directives like the Tier 1 directive, audit guidelines, court cases, and position papers on each service providers website. This is the only way you can be sure what you know for sure is so.