Research and Development Tax Credit: Telecommunications

Companies in the telecommunications industry make strong candidates to claim the Research and Development (R&D) Tax Credit. Businesses within this industry create prototypes and conduct process developments on a daily basis. The tax incentive eligibility broadens when companies acknowledge that not only do their development efforts qualify, but also their activities and operations can be claimed as part of the R&D Tax Credit. Employees spend a considerable amount of their time developing, designing and improving products. These activities fulfill the IRS Four-Part Test and are considered qualifying research activities (QRAs) for purposes of the tax incentive. Therefore, they can be claimed under the Research and Development Tax Credit.

Another indication which shows that they are strong contenders for the R&D Tax Credit is that they hire employees that have technical backgrounds like industrial, mechanical, electrical and process engineering. These academic achievements allow them to conduct highly technical activities, meeting one of the four requirements to fulfill the IRS Four-Part Test. The QRAs below are examples of eligible activities for the R&D Tax Credit:

  • Development of integration system for mobiles, media and networks.
  • Improving product safety, quality and durability.
  • Implementation of safety standards and quality assurance processes.
  • Testing materials to increase product performances.
  • Innovate existing products.
  • Develop processes and software to improve data management.

Does your company perform any of these telecommunication activities? Visit the Kuhler Tax Credits website www.kuhler.com or email us at info@kuhler.com to learn more about the Research and Development Tax Credit.

Research and Development Tax Credit: Automotive Industry

In 1981, President Reagan enacted the Research and Development (R&D) Tax Credit as a way to reboot the American automotive industry. Approximately 30% of the United States’ research and development is conducted by companies in the automotive industry and heavy-duty manufacturers who create parts and components for vehicles. The continuous designs, developments and improvements conducted by automotive companies make manufacturers within this industry strong contenders for the R&D Tax Credit.

For activities to be considered qualifying research activities (QRAs) they need to fulfill the IRS Four-Part Test. The IRS Four-Part Test requires a new or improved business component (product, process, technique, invention, formula or software), the business component to be technological in nature, some kind of elimination of uncertainty, and a process of experimentation. The activities stated below fulfill the IRS Four Part Test and thus are considered QRAs for purposes of claiming the R&D Tax Credit.

The following activities are examples of the QRAs conducted by companies within the automotive industry:

  • Improving efficiency in manufacturing operations.
  • Designing, developing and improving automotive parts.
  • Conducting tests to maintain quality assurance.
  • Testing to meet compliance regulations and safety requirements.
  • Developing environmental consideration for overall operations.

If your company designs, develops or improves parts or components for motor vehicles, there is a strong chance that you can benefit from the R&D Tax Credit. To learn more about the Research and Development Tax Credit visit the Kuhler Tax Credits website www.kuhler.com or email us at info@kuhler.com

 

 

 

Research and Development Tax Credit: Brewing Industry

Brewing companies perform daily research, not as a separate task, but as everyday improvement activity for their products. Thus, making this industry a strong contender for the Research and Development (R&D) Tax Credit.  Many companies are unware of this government incentive since there is a misconception that employees need to have a PhD or the research needs to be conducted in a state-of-the-art laboratory. Great news though, most of the products’ developments, improvements and testing are considered qualified research activities (QRAs) and thus fulfill the IRS Four-Part Test requirements which allows a company to claim the incentive.

The following activities conducted by brewing companies such as developing fermentation processes, filtration methodologies, bottling and canning processes, ingredient processing techniques, brewing and bottling equipment, and preservative chemicals are considered qualified research activities. Testing products to ensure consistency and shelf life are other brewery innovations that a company can claim for the R&D Tax Credit. Failures in the design, development or testing phase can also be considered QRAs, regardless of being catalogued as “failed projects”.  The IRS “failed project” provision is essential for companies in the brewery industry who constantly test products and some of them don’t meet the quality assurance threshold.

If your company conducts the activities explained above there is a strong likelihood that your company can take advantage of the R&D tax incentive. Visit the Kuhler Tax Credits website http://www.kuhler.com or email us at info@kuhler.com for more information on how we can increase your company’s market value and boost its bottom line through the Research and Development Tax Credit.

Research and Development Tax Credit: Agriculture & Farming

Many of the activities related to the agriculture and farming industry qualify for the Research and Development Tax Credit. Yet, business owners are unaware of this strategic financial planning tool given that, historically, the credit has been claimed mostly by manufacturing, pharmaceutical and software companies. Agricultural and farming companies continuously conduct qualified research activities (QRAs) and spend on qualified research expenses (QREs) such as identifying, testing and implementing new or improved agricultural and farming innovative solutions, which makes them a strong candidate for the Research and Development Tax Credit.

Given the nature of the agricultural and farming industry, businesses have the opportunity to constantly experiment with new products and processes. These opportunities present themselves on a daily basis, such as pest control, product development, cost efficient harvesting, water saving techniques, and specialty soil development. Other activities that can also qualify as QRAs are pesticide testing and evaluation, irrigation efficiency, and lighting improvement techniques.

Below you’ll find other farming and agricultural activities that will fulfill the IRS Four-Part Test and qualify for the Research and Development Tax Credit:

  • Packaging development
  • Reduce waste processes
  • Spoilage elimination processes
  • Increase in shelf life techniques
  • Feeding, breeding and crossbreeding techniques
  • Improved transportation methods

Does your company perform any of these activities? Drop us a line! To learn more about the Research and Development Tax Credit visit the Kuhler Tax Credits website www.kuhler.com or email us at info@kuhler.com

How Can Engineering Firms Benefit from the Research and Development Tax Credit?

Engineering firms are strong candidates for the Research and Development Tax Credit. Most of the activities they perform create new or improve existing business components (products, processes, techniques, inventions, formulas or software), the business components are technological in nature, they eliminate some kind of uncertainty, and they go through a process of experimentation. Engineering firm owners or their financial departments are unaware that expenses related to designing and testing may allow them to claim the valuable Research and Development (R&D) Tax Credit. These firms continue to underutilize this tax incentive due to the misconception that R&D can only be completed within a laboratory by an employee wearing a white coat.

In the civil engineering field, engineering and design activities related to road design, bridges, water and wastewater treatment facilities, foundation and earthwork, retaining walls and structures, site development and infrastructure often qualify for the Research and Development Tax Credit. These activities are strong contenders to claim the tax incentive since they are technological in nature and create new or improve existing processes and designs. Services relating to surveying, soil and material testing, traffic engineering, subsurface evaluation and landscape architecture typically will not qualify for the beneficial tax incentive. A simple change in the aesthetics of a landscape won’t fulfill the criterion of the IRS Four-Part test.

For example, in the environmental engineering realm, remediation design, solid waste system design, drainage system design and flare station design will qualify for the R&D tax credit given that they go through a process of experimentation and eliminate some kind of uncertainty. Furthermore, services relating to site assessment and investigation, permitting and regulatory compliance don’t qualify for the R&D tax incentive. The activities stated above do not identify and evaluate alternatives, perform trial and error experiments or test results, thus they aren’t considered as having a process of experimentation.

Does your company perform any of these activities? Drop us a line! To learn more about the Research and Development Tax Credit visit the Kuhler Tax Credits website www.kuhler.com or email us at info@kuhler.com

The Research and Development Tax Credit: Concept and Production

Several stages and activities are involved in the research and development of a product, process or service to create them. Some of these stages generally qualify as qualified research activities (QRAS), but others don’t meet the IRS Four-Part Test threshold.

As a recap, to meet the IRS Four-Part Test, an activity must meet all four items of the “Four-Part Test”. The IRS Four-Part Test requires a new or improved business component (product, process, technique, invention, formula or software), the business component to be technological in nature, some kind of elimination of uncertainty, and a process of experimentation.

As mentioned above, some activities within the research and development process are considered QRAs and qualify for the Research and Development Tax Credit and others don’t pass the threshold. The following production activities generally qualify as QRAs: concept development, applied research, design, prototype and first run tests. These activities can apply to a variety of industries such as: engineering, software and tech, environmental and life sciences, and manufacturing and design. The following production activities generally are considered non-qualifying: full production, life cycle management, sales and marketing.

The following industry examples will illustrate the QRA explanation made above. In the manufacturing industry, improvements to processes and quality and reduction of defects in a product are considered QRAs, whereas the management of these processes or products won’t surpass the IRS Four-Part Test threshold. Moreover, in the food industry, improvements to flavor emulations and testing ingredient replacements are considered a “process of experimentation”. On the other hand, the marketing and selling activities to promote this new product won’t be recognized as “technological in nature”.

Think your company’s expenses conducts qualified research activities? Send us an email at info@kuhler.com or visit the Kuhler Tax Credits website www.kuhler.com to learn more about the Research and Development Tax Credit.

Why Claim the Research and Development (R&D) Tax Credit?

Tax season is quickly coming to an end and here at Kuhler Tax Credits we are wrapping up all of our Research and Development Tax Credit studies that need to be filed before the April 15 deadline. That is why the Kuhler team wants to remind you the importance of claiming the R&D Tax Credit. The purpose of this incentive is to encourage U.S. businesses to develop new products, services and systems as well as to stimulate the economy and provide jobs. It is the government’s way of rewarding businesses with a federal and state (most of them) reduction in current and future company tax liabilities.

The R&D Tax Credit allows a company to recapture a percentage of the dollars spent on R&D. The recapturing of these dollars assist companies in reinvesting the money back into the core business operations and remain competitive in their market field. The R&D Tax Credit is one of the most valuable tax incentives available to companies performing qualified research activities (QRAs) and qualified research expenses (QREs) in the U.S.

The R&D Tax Credit isn’t an income tax deduction but an actual dollar-for-dollar reduction against the taxes currently owed and taxes previously paid by a company. Companies can claim the R&D Tax Credit for all open tax years. A company can potentially receive a refund check for taxes paid for QRA in previous years from the IRS and state tax authorities. More importantly, the federal R&D Tax Credit can be carried forward for 20 years.

President Obama signed the Tax Extender bill into law in December 2015 making the Research and Development Tax Credit permanent. Given the new set of regulations, we project that the R&D Tax Credit benefit will nearly double for our clients in 2016!

Research and Development Tax Credit: Chemicals and Plastics

The chemical and plastics industry is a strong contender for the Research and Development (R&D) tax incentive. However, many companies are unacquainted with the scope of the benefit and don’t take full advantage of it. In recent years, the IRS has broadened the spectrum as to what qualifies as research and development and thus companies should take a second look at this strategic financial opportunity. Companies in the chemical and plastic industry need to not only look into the R&D department, but every other department since not all qualifying R&D activities take place in traditional R&D laboratories. Many individuals involved in the R&D activities may not necessarily work at a laboratory or in a chemist group and consequently are overlooked for R&D tax credit purposes.

Most of the activities conducted in chemical or plastic companies involve extensive experimentation and testing to ensure product quality and process efficiency. The following are some common practices within the industry: formula, method and process development, scale-up processes, and analytical testing of experimental or improved products. These activities will definitely fulfill the IRS Four-Part test and thus are considered qualified research activities (QRAs).

The following are examples of plastic injection molding activities that are eligible for the R&D tax credit study:

  • Mold and tooling – design, prototyping, fabrication and testing.
  • Engineering and process development.
  • Material application, temperature, pack and hold, and gate seal study.

The following are examples of chemistry innovations eligible for the R&D tax credit study:

  • Development of new testing methods.
  • Designing new drugs and chemical compounds.
  • Conducting tests to satisfy regulatory requirements.
  • Developing devices for testing.
  • Developing new applications for existing chemicals.

If your company conducts activities within the chemical, oil and gas, polymer, and pharmaceutical industry there is a strong likelihood that your company can take advantage of the R&D tax incentive.

Qualified Research Expenses: Substantiation and Recordkeeping

IRS regulations state that “a taxpayer must retain records in sufficient usable form and detail to substantiate that the expenditures claimed are eligible for the credit.” The taxpayer has to fully comply with this regulation when collecting all the information needed for an audit. The IRS states that if a taxpayer fails to maintain the records, they can disallow the Research and Development Tax Credit.

The IRS doesn’t have to accept qualified research expenses (QREs) estimates if the necessary documentation to verify the expenses exist. They will accept estimates if there are no contemporaneous records and two conditions are satisfied:

  • The taxpayer established performance of qualified research activities (QRAs) as defined in section 41(d).
  • The failure to maintain a proper recordkeeping system cannot be an inexactitude of their making.

The taxpayer must have evidence that can support every assumption made to meet the IRS guideline’s burden of proof.

The IRS guidelines state that the initial audit document request should be files that are readily available to the taxpayer. The following are some examples of initial requested documents:

  • Taxpayer’s base amount and fixed base percentage calculations.
  • General information: Chart of accounts or organization charts.
  • Acquisitions and dispositions from 1984 through the tax year under audit.
  • Accounting method: Are costs accumulated by department or by project?
  • Activities: What are they and why are they eligible for the R&D credit?
  • Wages: Names, amounts, percentages of annual wages, departments, job titles and descriptions.
  • Supplies: Categories, how they tie into the general ledger, and amounts.
  • Contracts: With whom, amounts, and categories.

The IRS might also ask for information that will help understand the acquisition of company resources or details about research projects conducted within the examination year. The following are some examples:

  • Materials explaining research activities, i.e. brochures, pamphlets, press releases, etc.
  • Submissions to management, the board of directors, review committees, etc.
  • Documents prepared by or on behalf of the internal audit.
  • Minutes or notes from budget, board of directors or managerial meetings.
  • Project authorizations, budgets, or work orders that initiate a research project.
  • The internal authorization policies for approving a research project.
  • Project summaries and/or progress reports and project meeting minutes.
  • Field and lab verification/summary data.
  • Research credit studies conducted by outside consultants.
  • Paper, treatises, or other published documents regarding the taxpayer’s research.
  • Complete copies of contracts, letter agreements, memoranda of understanding, or similar documents for research performed by, or on behalf of, a third party.

Additionally, an oral testimony by an individual with personal knowledge about the research projects will supplement a taxpayer’s contemporaneous documentation.

To survive an IRS audit, taxpayers are required to keep records that substantiate any expenses reported or claimed. Thus, they have to clearly establish full compliance with all IRS regulatory requirements.

The Consistency Rule

In addition to the IRS requirements and guidelines for the R&D tax credit, the IRS also requires the “consistency rule” be used as a basis to request and collect financial and technical information for current and open tax years. The “consistency rule” states that the qualified research expenses (QREs) that are taken into account to compute the base amount should be determined consistently with the QREs used to calculate the credit. This rule avoids an overstatement or understatement of the R&D tax credit by not allowing manipulation of the base years’ QREs.

Under Section 41(c)(5)(A), the “consistency rule” states, that in order to “accurately calculate a credit, the taxpayer is required to define qualified research expenditures the same from year to year.” The IRS adds that the taxpayer must show consistency between the QREs in the credit year and the QREs in the base year. The gross receipts in the base years also have to agree with the prior four years’ average.

This rule is designed to ensure accuracy in the determination of the increase in QREs over the amount regularly spent by the taxpayer relative to its gross receipts. The Research and Development tax credit is an incremental credit, thus, the taxpayer has to prove there has been an increase in QREs relative to its base period. Taxpayers can’t rely on an estimate to support the calculation of the fixed-based percentage. Thus, base year records should be analyzed to determine the correct amount of expenses.

The IRS recommends asking the following questions to make sure, as a taxpayer, you abide by the consistency rule:

  • Is the fixed-base percentage in the base years substantially lower than the current research ratios? If so, why?
  • Do past annual reports or 10Ks support the reported base years’ QREs?
  • If the research credit was claimed in prior years, were the same base years’ attributes used? If not, why not?
  • Was there a prior research credit examination? Did it cover one or more of the base years?

If the IRS believes there isn’t sufficient evidence to prove the claimed qualified research activities (QRAs) and QREs, it will disallow that portion of the credit calculation. Therefore, it is important to properly map out responses to not only the consistency rule, but also substantiate and record keep your expenses with your tax credit providers. We will go into substantiation and recordkeeping next week.