5 misconceptions about the R&D tax credit


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With Congress debating tax extenders, including the R&D tax credit, it's a good time to check your understanding of the credit and how you could use it more effectively. More at http://gt-us.co/1uDxLn6

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5 misconceptions about the R&D tax credit

  1. 1. 1. If I’m doing research, I can get a credit — You need to not only be doing qualified research, but also have the documentation that supports the credit. There isn’t a bright-line documentation test, so each taxpayer must analyze his or her documents to determine which ones support the credit. You’ll need documentation that: • Shows that you meet the four-part test • Shows that you don’t fall into one of the exceptions • Connects your costs to your activities A good example is the issue of technical uncertainty. It’s not enough to know that your scientists or engineers had an uncertainty. You’ll need to have documents as evidence that the uncertainty existed. 5 misconceptions about the R&D tax credit 2. I can compute a state credit from my federal credit with a few changes — Some taxpayers approach their state R&D credit as an afterthought. They use essentially the same calculation in their state credit as in their federal credit with just a few modifications. Be aware of some important differences between state and federal credits, and how they might affect your state application: • Some state credits have unique rules and deviate from the federal rules. • Some state credits are permanent, but the federal credit is temporary. • Some state credits are larger than the federal credit, depending on your business’s fact pattern. Some taxpayers in California, for example, could qualify for a state credit that exceeds the federal credit. It can be worthwhile to conduct or arrange for a review of the R&D credit in the states where your business operates. With Congress debating the future of the federal R&D tax credit, it’s a good time to check your understanding of the credit and how you could use it more effectively. Here are five common misconceptions about the credit. Mark Andrus, Regional Partner, Strategic Federal Tax Services
  2. 2. 2  5 misconceptions about the RD tax credit 3. Interviewing my subject matter professionals is the best source of information — Tax professionals may think they need to simply interview their engineers or scientists for a description of the project, the uncertainty and the amount of time spent. The accounting department then takes the percentage of time spent and multiplies it by the salaries of those involved. While employees are a good source of information, the interview process can be time-consuming and interrupt important RD activities. An analysis of available documentation can be an effective way to obtain information needed to compute and substantiate the RD credit. Combining both document analysis and interviews has proved to be an efficient method to gather information and reduce an organization’s cost of compliance. 4. My company isn’t in technology, so it won’t qualify — Approximately 80% of RD credits go to companies in the manufacturing industry, according to electronic regulatory filing data gathered by XBRL US Inc. Some other industries that might qualify for the credit are agriculture and livestock, and food and beverage. Companies in these industries don’t always develop base technology, but technology is embedded in what they do. Making incremental improvements to products or manufacturing processes is often eligible for the credit. 5. Managing documentation is more trouble than it’s worth — Managing the process of gathering and analyzing the documents may seem almost impossible. For many taxpayers, the challenge is how to substantiate RD credit issues using documents produced in the normal course of business. They don’t want to create RD-credit- specific documentation — and they don’t need to. Grant Thornton LLP’s RD Tax Credit team uses electronic tools and processes to help clients gather, analyze and index support documentation located throughout their companies while reducing any security risks. In one case, our team created secure protocols for a client and extracted more than 1 million documents that were analyzed to support the RD credit. In another case, our team worked within a client’s network, analyzing more than 1.5 million documents in a few days’ time without removing any documents from the network.
  3. 3. Documents can make or lose a case Documentation — or the lack thereof — affected decisions in two recent court cases: 1. Union Carbide Corporation and Subsidiaries v. Commissioner of Internal Revenue — To support qualified research activities, the taxpayer presented the employees’ testimony and documentation that corroborated the employees’ testimony. The court sided with the taxpayer and accepted the employees’ testimony because it was corroborated by documentary evidence. Contact Mark Andrus Partner, National Practice Leader RD Tax Credit Services Grant Thornton LLP T 503.276.5910 E mark.andrus@us.gt.com 2. Basim Shami and Rania Ardah, et al. v. Commissioner of Internal Revenue — The taxpayer presented employees’ firsthand testimony to support the employees’ own qualified research activities. Because the taxpayer didn’t present supporting documentation, however, the court didn’t side with the taxpayer. Tax professional standards statement This document supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document, we encourage you to contact us or an independent tax adviser to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this document is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended. “Grant Thornton” refers to the brand under which the Grant Thornton member firms provide audit, tax and advisory services to their clients and/or refers to one or more member firms as the context requires. Grant Thornton LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and its member firms are not a worldwide partnership. All member firms are individual legal entities separate from GTIL. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another’s acts or omissions. Please visit grantthornton.com for details. © 2014 Grant Thornton LLP | All rights reserved | U.S. member firm of Grant Thornton International Ltd Connect with us grantthornton.com @grantthorntonus linkd.in/grantthorntonus RD tax credit legislation Read how congressional activity could extend or make the federal RD tax credit permanent.