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.

State R&D Tax Credits

I don't have a way to make this topic an interesting read so I will be dry and bland when I write this (not that I am Dave Barry-esque in my other postings). I just want people to know that Hull & Knarr's website now has updated information on every State's R&D tax credit. You can get credit calculation methods, expiration dates, credit carry forward/back periods, limitation, and resource information. Please take a look for the information. I hope this becomes a good resource for you.

See I told you I am not Dave Barry.

State R&D Tax Credits

While most of the literature you read on the R&D tax credit focuses on the federal credit, there are tax incentives given by most states for R&D activities. Many of these state credits are not as lucrative as the federal credit but they lack tax nuances such as AMT limitations, NOL carry forwards, ... Therefore, some companies that cannot use a federal credit may still have tax to offset on the state level. ANd these credits can be substantial. My home state of Indiana, for example, has a credit that is more lucrative than the federal credit.

The question becomes, how do you know if the states you conduct R&D in have state R&D tax credits? State tax websites are hard to navigate and some college tax departments have summaries of credits but they do not provide the whole picture (forget knowing if the information is reliable). Well, hopefully you use Hull & Knarr to get this information. We have been collecting information from the states and we are posting it on our website, www.hullandknarr.com, within the next week. You will be able to get information on how the credit is calculated, carry forward and back years, credit expiration dates, and any special instructions for pre-filing applications. With the sourcing links you should be able to get yourself in the right direction for filing a state credit to either further supplement your federal R&D claims or benefit from a credit that is previously been unavailable.

I will keep you posted for when the interactive map with the information goes live. If you have questions now feel free to send them my way. Cheers.

Patrick