What are R&D Tax Credits? The Research and Development Tax Credit (R&D Tax Credit) was created by Congress as part of the Economic Recovery Tax Act of 1981. The requirements were redefined in 2001 when the IRS realized they were too complex for most companies to take advantage of the credits. Required documentation was relaxed to allow for projects completed in the past three years to be addressed by a technical interview process attesting to the projects worked on rather than documenting the project while doing the research. This has made R&D tax credits available to a larger segment of businesses.
Many companies including Software Development Companies as well as Manufacturers can classify many of their day-to-day activities as R&D. By IRS definition, any taxpayer engaged in the “design or development of new or improved products or processes, techniques, formulas, inventions or software is engaged in R&D. This can include products that are unique to the company or their clients, not necessarily to the entire industry. Activities that qualify for R&D Tax Credits include all “Qualified Research Expenses” (QREs) which include: figuring out methods or processes to accomplish new goals; developing or improving products, processes or formulas; designing or improving manufacturing processes; quality assurance activities; creating prototypes and models; first article runs and more. Most companies are engaged in efforts to improve products and processes as part of their day-to -day operations and the IRS defines these activities as R&D.
Some of the day to day activities the IRS classifies as R&D follow:
Developing new, improved, or more reliable products / processes / formulas
Developing prototypes or models (including computer generated models)
Designing tools, jigs, molds, and dies
Developing or applying for patents
Applying for patents
Testing new concepts
Development of new technology
Trying new materials
Adding new equipment
Developing or improving production / manufacturing processes
Developing, implementing or upgrading systems and / or software
Developing production control software
Improving or building new manufacturing facilities
Automating internal processes
Paying outside consultants / contractors to do any of the above activities
Activities performed by software companies that qualify as R&D include:
Designing software itself (Defining scope: what features to incorporate and leave out)
Considering what to hard code and what to make configurable
Considering life cycle
Designing database backend
Determining what should be coded and stored in the database versus what should be implemented as a program
Designing programs to work with different databases
Rapid prototyping (only have key features with limited abilities)
Testing (logic, data integrity, performance, compatibility)
Tracking difficult bugs during development (such as bugs that make systems crash)
Black box testing (looking at input and output)
Adding new features
Upgrading to new operating systems
Upgrading to new platforms (such as .NET)
Integrating/Working with other software (Word and Excel as examples)
Performance issues (like running too slow or bottleneck)
How does the process work?
Our Engineers, Tax and IP Attorneys have extensive experience in performing R&D studies of various industries. We utilize the Project by Project approach recommended by the IRS. We identify every qualifying activity and tie it to each employee’s time and wages and the corresponding sections of the code that substantiate the credit. Deductions can be taken not only for wages paid to employees directly involved in the activity but also managers, support personnel, supplies consumed in the research and a portion of expenses for outside contractors.The result is that we can maximize the credits and most importantly provide the documentation to support the credits. Since the IRS Agents reviewing the R&D Credit are engineers, it is critical that the documentation is prepared by experienced engineers. We work with your accountant to prepare amended tax returns for prior years and prepare documentation for all future years as needed.
How much can I save? The credit is not a deduction but an actual dollar-for-dollar credit against taxes owed or previously paid Tax Credits can provide an immediate source of cash by taking the credit for all prior open tax years - generally the last three, or four years plus the current year. The tax credit can also carry forward up to 20 years. Depending on taxes paid and the number of years studied, the cash benefit averages 5% of total payroll.
How much does it cost?
We charge a fixed fee depending upon size and scope of project. First we perform a free consultation and prepare a feasibility report to determine the cash benefit before you make the decision about moving forward. We work to limit the investment of time for you and your employees. For each $100,000 in benefit, only 6 to 10 hours of your employees time should be needed.
Why haven’t my tax advisers recommended this strategy?
Due to the technical knowledge needed to understand your business and to determine what qualifies and what does not, your CPA probably doesn’t have the engineers or IP attorneys on staff to properly document R&D activities. We partner with hundreds of accountants around the country to provide the documentation they need to claim R&D Tax credits. Your CPA will be part of the discussion regarding your ability to utilize the benefits we document and will be responsible for filing any amended tax returns.
How do I get started?
Get in touch and we will review your activities to determine eligibility and perform a free feasibility analysis to quantify the benefits. We then consult with your CPA to evaluate your current tax status and future business plans to verify the benefit for your situation.
Who you hire can make all the difference.
We combine both the tax and engineering expertise necessary to identify and document R&D Tax Credits We have performed thousands of studies with zero disallowances by the IRS. Our fee includes free, unlimited audit defense should the IRS question the results of our study. One of the IRS’s biggest concerns is to determine that reports are prepared by individuals with engineering and scientific backgrounds.
To Request Information, Contact Us or call Cherelyn Riesmeyer at 800-598-5587.
"We were first introduced to CORE and R&D Tax Credits through our CPA Firm. CORE gave us an initial feasibility report that outlined our potential cash benefit, based on our business activities and annual payroll. We were amazed at the size of the credit. Being a fast growing prototype firm we needed all of the tax incentives we could get. We engaged CORE to conduct the study. We were extremely impressed with their knowledge, attention to detail and quality of work. I was even more pleased when we received a six figure check from the IRS. I'm very confident in recommending CORE to other firms out there looking to improve cash flow".