In December 2015, the United States R&D Tax Credit was made a permanent tax regulation. With the passage of this tax measure into law by the U.S. government, responsibility and opportunity now lie with the Taxpayer to set up and follow best practices on a permanent nature.
This pursuit should have companies asking themselves a series of questions to optimally utilize the credit. Taxpayers already claiming the credit should work with their in-house or external providers to set up accounting and reporting practices to ensure the method of generating the R&D tax credit is robust and complied with properly.
There are three main areas to consider in establishing the best return on investment for R&D Tax Credit Studies; Maximization, Risk Management, and Preparation Costs.
If companies have not taken the R&D credit before, then now is the perfect opportunity to begin pursuing this business venture as an investment, as it will continue to pay off in the future. If companies have pursued the credit before (either with the help of a third-party or without), then it is time to reevaluate if all costs that could be captured towards the credit are being fully maximized. By conducting this exercise, companies will be able to identify potential additional areas to invest in and explore long-term opportunities.
- Risk Management
When conducting an R&D Study, companies should ensure that they are managing their risk by noting the potential “flags” or exposure areas. Each company has a different threshold of how much risk is tolerable and by managing the “hot button” issues, should have a better idea of the support and documentation needed for their R&D claim. Additionally, this consideration will help to ensure that these procedures are properly implemented for this business line in the future.
When working with a third-party provider, companies should ask how they document and support all areas of the credit as the exposure areas could range from who is qualified for R&D to what materials are allowable expenses. This is especially important moving forward as the R&D credit has been included on the IRS’s “Dirty Dozen” list of potential tax scams.
- Preparation Cost
Whether conducting the study in-house or working with a third party, there is a certain amount of time and documentation required for the R&D study. The impact on daily business can be minimized by choosing a vendor wisely. In order to appropriately access this question, companies should consider issuing a Request for Proposal (RFP) to evaluate the best vendor for the type of activities that will be conducted.
Before issuing an RFP, companies should determine what the scope of the work should contain, including how many years they wish to pursue and the level of documentation they require. Additionally, companies should consider the credentials of the company, including what type of personnel they have on staff (technical, financial, etc.), their sustention rates, and the type of market areas that they work with. After these initial assessments, a detailed scope-out call should follow to further evaluate the type of study that would be conducted in order to receive different fee structures and options. The final step would then be determining the evaluation criteria of the vendors and what aspects will weigh higher and be most beneficial for streamlining the R&D process for years to come.
Now that the R&D Tax Credit has officially been made permanent, businesses have the opportunity to pursue long-term investments in research and development. R&D can become a serious business line that Taxpayers can continue to manage without the usual uncertainty that surrounds the matter. By using and managing the R&D Tax Credit properly, companies can ensure their long-term competitiveness in the marketplace.
By taking the time to evaluate all available options to prepare the R&D Tax Credit claim, companies ensure that their claim profile is maximized, the risk is managed, and the costs are within reason. The goal should be to integrate a solid process so the time commitment is limited and the information can be provided both quickly and accurately.
BGI has a proven track record with working with Taxpayers at all levels of consideration. Our expertise lies in the diverse, yet focused areas of technical and financial / taxation. By using Scientists / Engineers coupled with Financial and Taxation specialists, the full impact of the credit is analyzed from a number of perspectives.
BGI has the keen ability to identify and manage exposure areas or risk by maximizing the opportunity of qualified research activities while at the same time building a strong and auditable nexus between the activities and expenditures. All of this work is done within the cost considerations of the Taxpayer. Services can be diverse in their nature, ensuring that the scope of work is directly specifically to the needs of the Company.