Research & Development Tax Credit Services
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TCC’s audit-ready approach and innovative technology are above the pack.”
– SVP, Global Tax, Fortune 500 technology company
Experts at Every Stage
Our team will present risk analyses and alternative credit scenarios to ensure that you can make an informed decision based on your company’s risk tolerance.
Quantitative and Qualitative Approach
Our team will speak with your subject matter experts to calculate the R&D credit, and support the credit by preparing technical reports demonstrating qualification.
Our Proprietary Process
Our 30-step process is vetted to stay current with IRS requirements. Developed by a former Big 4 IRS controversy leader specializing in R&D tax credits, the design incorporates input from an external consulting firm of ex-IRS engineering territory managers.
Discover the Difference
TCC’s service process includes unique technology elements, such as proprietary web-based project, activity and time allocation software.
TCC also provides a dashboard and reporting framework featuring audit and risk-scoring analytics that are unmatched in our industry.
TCC has experience in niche areas, including the ASC 730 R&D Safe Harbor and R&D credits for “retail transformation”, including distribution automation technology, e-commerce and omni-channel software projects.
R&D Tax Credit FAQs
The research tax credit, also known as the research and experimentation (R&E) tax credit, under I.R.C. section 41 provides an incentive to invest in R&D by allowing companies to claim credits for spending on qualified research expenditures (QREs). It provides a credit for QREs above a base amount as calculated under I.R.C. section 41.
Over 30 states have an R&D tax credit.
There are 3 major categories of eligible costs: First, the wages and salaries of employees who perform qualified research activities, or who directly supervise or directly support qualified research activities. Second, the cost of materials, supplies, and leased computer time used in the research. Third, 65% of eligible R&D costs for research performed by third-party contract researchers.
The credit is claimed on Form 6765. That form outlines 3 different calculation methods – the regular credit calculation, the start-up method, and the alternative simplified method. Taxpayers can select the most favorable method, based on their specific facts and circumstances.
This varies based on the calculation method used, whether there are state credits available, and the taxpayer’s specific facts and circumstances. A good estimate, however, is a combined federal and state benefit of 12% to 14% of the total QREs claimed.
Any company that develops new or improved products, processes, computer software, formulas, or techniques should evaluate credit eligibility. The R&D tax credit is not limited only to research in the academic or lab environment. It is a business credit focused on research and development in the commercial environment.
Whether costs qualify for the credit depends on the nature of the activity to which the expenditures relate, not to the nature of the product or improvement being developed or the level of technological advancement the product or improvement represents. It is an activity-based test, not an innovation-based test.
- There are 4 basic requirements under I.R.C. section 41 (collectively known as the four-part test) that every project regardless of industry must meet:
- The project must relate to the development of a new or improved business component, defined as new or improved products, processes, internal use computer software, techniques, formulas, or inventions to be sold or used in the taxpayer’s trade or business;
- The project activities are intended to resolve technical uncertainty that exists at the outset of the project, relating to the capability or methodology for developing or improving the business component or the appropriate design of the business component;
- The project activities must rely on a hard science (e.g., engineering, computer science, biological science, or physical science); and
- Substantially all of the activities undertaken to resolve the technical uncertainty constitute elements of a process of experimentation (i.e., systematic trial and error testing).
- If the project relates to internal use software, there are 3 additional tests that must be met:
- The software must be innovative. It should result in a reduction of cost or an improvement in speed that is substantial and economically significant.
- Developing the software involves significant economic risk, requiring the commitment of substantial resources and subject to substantial uncertainty of recovery in a reasonable time period.
- The software is not commercially available. The taxpayer cannot purchase, lease, or license and use the software for the intended purpose without having to make significant modifications that satisfy the first two requirements.
- Finally, even if a project otherwise meets the requirements for qualification, you must ensure that it doesn’t fall within one of the following exclusions to qualified research:
- Research conducted after commercial production or implementation of the business component (with some exceptions)
- Adaptation or duplication of existing business components
- Surveys, studies, or activities related to management functions or techniques
- Market research, testing, or development
- Routine data collection
- Routine or ordinary testing or inspection for quality control
- Any research conducted outside the U.S.
- Any research in social sciences
- Funded research
- Activities not directed at the functional aspects of a product including expenses relating to style, taste, cosmetic, or seasonal design factors.
While there are no specific record keeping requirements, substantiation is required. This usually requires a combination of business records ordinarily kept by the company, and employee testimony. The IRS has published guidance on the types of records it deems useful.
The ASC 730 Directive provides a safe harbor (audit protection) for larger companies that disclose book R&D expense in their certified financial statements. For companies that properly report their R&D credits under the Directive, the IRS has instructed examiners not to challenge any safe harbor QREs. Safe harbor QREs are limited to wages and supply QREs. Eligible research expenses that do not fall within the safe harbor (e.g., contract research, internal use software, etc.) can still be claimed but will still be subject to IRS audit review.
Before 2016, companies could only take the research credit against their income tax liability. The payroll tax offset provides a narrow exception for eligible “qualified small businesses” to apply part or all of the research credit against their payroll tax liability, instead of their income tax liability. The payroll tax credit provides a unique opportunity for start-up companies having little or no income tax liability to monetize their R&D credits.