R&D Tax Credit Fundamentals



By and


        For over thirty years the Federal R&D tax credit has helped American firms recoup the costs of their innovation. The vast majority of these firms are not engaged in white lab-coat activity, as one might associate with the term 'R&D.' By contrast, the credit is available to any company that meets the criteria described herein. Since 1981, the credit has existed in all but two years; in the likely event it is again extended, firms seeking growth through innovation should familiarize themselves with the basic principles of R&D tax law.


Qualifying for the Credit

        Employee wages drive the credit. Eligible employees must work within the hard sciences, engineering, or software development. Ideally, those employees either have formal training in a relevant technical discipline and/or a lengthy professional background in their trade.

        Eligible wages must then be allocated to particular projects, termed "Business Components" in the law. The most common business components are specific products and processes. In addition, business components can include techniques, formulas, inventions and software. It is not enough to report qualified wages on a general level, without segregating them into components. Bayer, the leading pharmaceutical, remains in ongoing litigation centered on this very issue.

        Further, it is not enough to show that a technical employee has contributed on a general level to a given project or business component. Eligible activity must relate to specific "permitted purposes" that the law regards as especially contributory toward innovation. These include making a given business component more reliable, functional, higher quality, better performing or more cost effective.
       
        The kinds of activities which frequently achieve these ends include prototype development and testing, product design and redesign, process development (pre-production), technical feasibility analysis and patent application work. Frequently, these activities help resolve instances of technical uncertainty, and involve the examination of alternatives. Both technical uncertainty and the examination of alternatives are specifically cited in the law as key determinants of eligible activity. The challenge for a taxpayer is to uncover and demonstrate the extent to which these principles of scientific discovery underlie their own firm activity.


Documenting the Credit from the Bottom Up

        Ultimately, each employee has a percentage applied to his wage reflecting the portion of his time spent on R&D. Substantiating this percentage is a list of eligible business components showing which employees contributed R&D to which component.

        Firms using project-based accounting are in a better position to tie their employee's R&D activities to specific business components. By contrast, firms using cost-based must supplement their documentation more thoroughly to arrive at appropriate estimates. Supplementary items include contemporaneous documentation - meaning documents generated at the time of R&D which corroborate the credit claim - and oral testimony from employees. The most relevant examples of contemporaneous documentation should be procured into a binder, and a list of other potential resources, such as emails, logs, notes, travelers, models, outside contractor reports, etc., should be developed.

        Firms are not disqualified simply because they may be required to estimate certain figures due to their accounting methodology. In Cohan vs. Commissioner, a taxpayer without exact records of past business expenses was allowed to estimate them . The same principal was later applied specifically to R&D documentation in Fudim v. Commissioner . The key issue is today is not whether estimation has occurred, but how thoroughly those estimates are substantiated.

        Regardless of the taxpayer's accounting approach, every R&D study should also be supported by interviews with relevant personnel. These interviews provide insight into the appropriate division of each employee's time as well as to the challenges faced on each project. The validity of oral testimony in particular as an element of estimation was affirmed in United States v. McFerrin.


Documenting the Credit from the Top Down

        The credit is, ultimately, a tool for national growth and job creation. As such, good documentation will also make a compelling case along these broader lines. Manufacturing firms, for example, should detail the exceptional competitiveness of the industry and its specific impact on their companies; any manufacturer that has survived the recent wave of off-shoring is well-positioned for R&D credits by sheer virtue of the competitive pressures endured. Likewise, tech startups should emphasize the shift to an incubation model on behalf of US universities and the role this framework has played in job creation for the new economy.

Research has shown that for each dollar of foregone tax revenue, GDP has increased by at least an additional $1 High-level connections to growth and job creation therefore tie in to the bottom line of the legislation itself. Likewise, if a firm's activities substantially connect with any governmental initiative aimed at economic development, those connections should also be highlighted. For example, firms engaged in health care innovation, particularly those products which reduce costs and streamlines efficiency, relate directly to national efforts at fighting health care inflation. Excellent documentation identifies these relationships in much the same way the R&D law explicitly creates a patent safe harbor.


Conclusion

        Many firms which do not take the Federal R&D tax credit do so out of a mistaken belief that they are not eligible. Any firm employing professionals who are resolving technical uncertainties, testing alternatives, and contributing to their firms' own knowledge bank should take a close look at this incentive. The knowledge gleaned need not be new to the world; rather, it must be part of a firm's own intellectual progress and scientific know-how.

Article Citation List

   


Authors

Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Charles G Goulding is the Manager of R&D Tax Savers.


Similar Articles
The R&D Tax Credit Aspects of Blockchain for Supply Chains
The R&D Tax Credit Aspects of Physical Security Technology
The R&D Tax Credit Aspects of Mechatronics
The R&D Tax Credit Aspects of Driverless Cars
3D Printing - University Business Incubators and R&D Tax Credits
How 3D Printer Purchasers Earn Research and Development Tax Credits
Your First 3D Printer Purchase and R&D Tax Credits
New Tax Incentives for Lean 3D Printer Product Startups
The R&D Tax Credit Aspects of SaaS Start-Ups
The R&D Tax Credit Aspects of Emotion-Recognition Technology
The R&D Tax Credit Aspects of A&E Firms Repurposing Shopping Malls
The R&D Tax Credit Aspects of AI in the Insurance Industry
The R&D Tax Credit Aspects of School Building Designs
The R&D Tax Credit Aspects of Emerging AV Trends
Enhanced R&D Tax Credits for Specialized Co-Shared Spaces
Ethereum's Impact on Digital Contracting Creates R&D Tax Credit Opportunities
The R&D Tax Credit Aspects of Clean Food
The R&D Tax Credit Aspects of LED Horticultural Lighting
The R&D Tax Credit Aspects of Geofencing
The R&D Tax Credit Aspects of Video Enhanced Remote Airport Control Towers
The R&D Tax Credit Aspects of Helicopter Innovation
The R&D Tax Credit Aspects of Immunology
The R&D Tax Credit Aspects of Distribution Center Automation
The R&D Tax Credit Aspects of Artificial Intelligence in Fintech
The R&D Tax Credit Aspects of Law Firm Artificial Intelligence
The R&D Tax Credit Aspects of Avionics
The R&D Tax Credit Aspects of the Food Safety Modernization Act (FSMA)
The R&D Tax Credit Aspects of Building Management Control, Design & Integration
The R&D Tax Credit Aspects of Harbor Redevelopment
The R&D Tax Credit Aspects of Natural Gas System Engineering and Design
The R&D Tax Credit Aspects of Arthritis
The R&D Tax Credit Aspects of Boeing's Manufacturing Process and Supply Chain
The R&D Tax Credit Aspects of Grocery Delivery
The R&D Tax Credit Aspects of Asthma
The R&D Tax Credit Aspects of Chemical Engineering Post Dow-DuPont Merger
The R&D Tax Credit Aspects of Telemedicine
R&D Tax Credits Enhance Life Science Impact Investing
New Tax Case is Good News for Environmental Remediation Design Contractors
State & Local Tax Jurisdictions Address Media Streaming and Cloud Services
Federal Government Provides Faster Approvals and Tax Credits for Consumer FinTech Products
The R&D Tax Credit Aspects of High Performance Vehicles
The R&D Tax Credit Aspects of Energy Related Startups
The R&D Tax Credit Aspects of Pediatric Hypertension
The R&D Tax Credit Aspects of Commercial Baking
The R&D Tax Credit Aspects of Voice-Activated Software
The R&D Tax Credit Aspects of Traffic Management Technologies
Taking Flight: The R&D Tax Credit Aspects of Renovating U.S. Airports
The R&D Tax Credit Aspects of Parkinsons Disease Technology
The R&D Tax Credit Aspects of Artificially Intelligent Hedge Funds
The R&D Tax Credit Aspects of Legal Medical Marijuana
Reaching for the Moon: The R&D Tax Credit Aspects of Conquering Cancer
The R&D Tax Credit Aspects of LiDAR
The R&D Tax Credit Aspects of Educational Technology (EdTech)
The R&D Tax Credit Aspects of Zika
The R&D Tax Credit Aspects of the Commercialization of Space
The R&D Tax Aspects of CRISPR-CAS9
The R&D Tax Credit Aspects of Bioelectronic Medicine
The R&D Tax Credit Aspects of Liquid Biopsy Testing
The R&D Tax Credit Aspects of the Elevator Industry
The R&D Tax Credit Aspects of Hospital Design and Construction
Bicycle Designers & Manufacturers Obtain R&D Tax Credits for Innovation
The R&D Tax Credit Aspects of Cryogenics
The R&D Tax Credit Aspects of Digital Art and Blockchain Technology
Machine Shop Innovation and R&D Tax Credits
The R&D Tax Credit Aspects of Cyber Security Start-Ups
R&D Tax Credits for the Architecture & Engineering Industry
The R&D Tax Credit Aspects of Solar Technology
The R&D Tax Credit Aspects of Construction Industry IoT
R&D Tax Credits Provide New Opportunities for Artificial Intelligence Start-Ups
The R&D Tax Credit Aspects of Design Firm Start-Ups
The R&D Tax Credit Aspects of NYC Start-Ups
The R&D Tax Credit Aspects of Medical Foods
The R&D Tax Credit Aspects of Domestic Fast Fashion
The R&D Tax Credit Aspects of Virtual Reality Technology
The R&D Tax Credit Aspects of Urban Agriculture
The R&D Tax Aspects of Nutritional Science
The R&D Tax Aspects of Microbiome Research
The R&D Tax Credit Aspects of Water Analytics
Matching Drone Regulations and U.S. R&D Tax Credits
The R&D Tax Credit Aspects of Carbon Fiber
The R&D Tax Aspects of Artificial Intelligence Robo-Advisors
The R&D Tax Aspects of Chocolate Products and Processing Innovation
The R&D Tax Aspects of Mouse Models in Clinical Research
The R&D Tax Credit Aspects of Natural Language Processing (NLP) Innovation
The R&D Tax Aspects of Precision Medicine
The R&D Tax Aspects of Synthetic Biology
The R&D Tax Credit Aspects of Advanced Farming
The R&D Tax Aspects of Pharmaceutical Packaging
New Standards and Regulations Create R&D Tax Credit Opportunities for the Pharmaceutical Packaging Industry
The R&D Tax Credit Aspects of Fuel Cell Developments
The R&D Tax Aspects of Energy Storage
The R&D Tax Credit Aspects of 3D Printing End Users
The R&D Tax Credit Aspects of Orphan Drugs
Businesses Use Innovative Technology & Behavioral Policy to Conserve Water
The R&D Tax Credit Aspects of Blood
The R&D Tax Credit Aspects of Foodborne Illnesses
The R&D Tax Credit Aspects of Industrial Trans Fat Elimination
The R&D Tax Credit Aspects of Plant Protein Products
The R&D Tax Credit Aspects of Craft Beer
The R&D Tax Credit Aspects of Modern Wine Production
The R&D Tax Credit Aspects of Urban Recycling
The R&D Tax Credit Aspects of Modern Filtration
The R&D Tax Aspects of Architectural Signage
The R&D Tax Aspects of 3D Printing Infrastructure
Providing Advice for the Robot Purchase Decision
The R&D Tax Aspects of Regenerative Medicine
The R&D Tax Credit Aspects of 3D Printing for Textiles
Providing Business Tax & Accounting Advice for 3D Printer Purchase Decisions
The R&D Tax Credit Aspects of Video Compression Technology
The R&D Tax Credit Aspects of Environmental Remediation
The R&D Tax Credit Aspects of Precision Farming and Agricultural Robotics
The R&D Tax Credit Aspects of Automated Coding
The R&D Tax Credit Aspects of Gastro Technology
The R&D Tax Credit Aspects of Payment Technology
The R&D Tax Credit Aspects of Restaurant Technology
The R&D Tax Credit Aspects of Microgrids
R&D Tax Credits and the Second Wave of Cloud Adoption
The R&D Tax Aspects of Data Storage Startups
The R&D Tax Credit Aspects of Cyber Security
The R&D Tax Credit Aspects of Mobile Applications
R&D Tax Credits for the Modern Insurance Industry
The R&D Tax Credit Aspects of Truck Fuel Efficiency
The R&D Tax Credit Aspects of the Beverage Industry
The R&D Tax Credit Aspects of Smart Ship Design
The R&D Aspects of Modern Tunnel Design and Construction
The R&D Tax Credit Aspects of Airport Design
The R&D Tax Credit Aspects of Multiple Sclerosis
The R&D Tax Credit Aspects of Solid State Lighting
The+R%26D+Tax+Credit+Aspects+of+the+Internet+of+DNA
The R&D Tax Credit Aspects of Modern Dental Labs
The R&D Tax Credit Aspects of Concussion Technology
The R&D Tax Credit Aspects of Schizophrenia
The R&D Tax Credit Aspects of IoT Communication
The R&D Tax Credit Aspects of Bitcoin and Blockchain Technology
The R&D Tax Aspects of Cancer Treatment
The R&D Tax Aspects of Near Field Communication
The R&D Tax Credit Aspects of STEM Building Design
Kickstarting Federal and State R&D Tax Credits
R&D Tax Credits for Modern Food Processing
The+R%26D+Tax+Credit+Aspects+of+LED+Sensor+Networks
The R&D Tax Aspects of the New FDA Mobile Apps Requirements
The R&D Tax Credit Aspects of Kitchen Science
The R&D Tax Aspects of the Baxter Robot
The R&D Tax Credit Aspects of Nanotechnology
Tapping the Power of Big Data and R&D Tax Credits for Utility Companies
National Innovation Priorities - How the 2014 Federal R&D Budget and R&D Tax Credits Integrate
The R&D Tax Credit Aspects of the Medical Software Industry
The R&D Tax Aspects of Computer Enabled Human Identification
The R&D Tax Credit Aspects of the Packaging Industry
The R&D Tax Credit Aspects of Heart Disease
The R&D Tax Credit Aspects of Biological Drugs
The R&D Tax Credit Aspects of Ceramics
The R&D Tax Credit Aspects of Novel Uses for Genetically Engineered Organisms
R&D Tax Credits for Smart Farming Applications
The R&D Tax Credit Aspects of the Plastic Manufacturing Industry
The R&D Tax Credit Aspects of New York City's Engineering Education and Googlization
R&D Tax Credits for the High-Risk Battery Business
The R&D Tax Aspects of Respiratory Diseases
The R&D Tax Credit Aspects of Software Modeling Analytics
The R&D Tax Credit Aspects of Cognitive Computing
The R&D Tax Credit Aspects of Logistics Software and Process Innovation
The R&D Tax Aspects of Cameras of the 21st Century
The R&D Tax Credit Aspects of Network Security
R&D Tax Aspects of DNA Identification
R&D Tax Credit Aspects of Cyber Security and Homeland Protection
Financial Product Trading Platform Artificial Intelligence R&D Tax Credits
The R&D Tax Credit Aspects of Industrial Design
The R&D Tax Credit Aspects of Cosmetics
Gig City Startups and R&D Tax Credits
The R&D Tax Credit Aspects of Major Life Science Benefactors
The R&D Tax Credit Aspects of a Nondysfunctional Airline Industry
The R&D Tax Credit Aspects of the Health Cloud
The Internet of Things Creates R&D Tax Credit Opportunity
The R&D Tax Credit Aspects of Mobile Banking Applications
The R&D Tax Credit Aspects of Autism
The R&D Tax Credit Aspects of 3D Bioprinting
The R&D Tax Credit Aspects of Coffee
R&D Tax Credit Aspects of Drone Commercialization
The R&D Tax Credit Aspects of In-Image Advertising
R&D Tax Credits for Hybrid Call Centers - Airline, Hotel, and Car Rental Industries
Integrating a Changing Government R&D Model with Commercial R&D Tax Credits
The R&D Tax Aspects of Advertising Science
The R&D Tax Aspects of Data Science
R&D Tax Aspects of Radio Frequency Identification
The R&D Credit Aspects of Cell Therapy
The R&D Tax Aspects of the U.S. Textile and Apparel Renaissance
The R&D Tax Aspects of Advanced Driver Assist Systems
The R&D Tax Credit Aspects of Sugar Substitution and Reduction in Food Products
The R&D Tax Credit Aspects of Gluten-Free Foods
The R&D Tax Aspects of the Internet of Residential Things
The R&D Tax Aspects of Web Television
R&D Tax Credit Aspects of Sleep Innovation
R&D Tax Credit Aspects of Massachusetts Robotics Cluster
R&D Tax Credit Aspects of Medical Robotics
R&D Tax Credit Aspects of Industrial Robotics
R&D Tax Credit Aspects of Service Robotics
Yes Alice, Patents and R&D Tax Credits Remain Available for the Internet of Things!
The R&D Tax Aspects of Neuroscience
How Salesmen Can Use R&D Tax Credits to Sell Today's Software Products Engagements
The R&D Tax Credit Aspects of Infrastructure Innovation
The R&D Tax Aspects of Cloud Computing
The R&D Tax Credit Aspects of Hearing Technology
The R&D Tax Credit Aspects of Hybrid Call Centers for Health Insurers
The R&D Tax Credit Aspects of Eye Disease
The R&D Tax Credit Aspects of Dermatology Innovation
The R&D Tax Credit Aspects of Food Processing Robots
R&D Tax Credit Opportunities for the Utility and Auto Industry's Common Needs
Now Every Business is a Software Business
The Robot Revolution and Tax Policy
The R&D Tax Aspects of Collaborative Robots
The R&D Tax Credit Aspects of Bioinformatics
The R&D Tax Aspects of Lab Equipment and Instrumentation
The R&D Tax Aspects of Salt Reduction
R&D Tax Credit Aspects of Meat Science
The R&D Tax Aspects of Coastal Protection Infrastructure
The R&D Tax Aspects of Robot Software
The R&D Tax Aspects of Machine-to-Machine (M2M) Innovation
The R&D Tax Aspects of Solar Photovoltaic Development
The R&D Tax Aspects of Financial Technology Services
Beacons Create R&D Tax Credit Opportunity
R&D Tax Credits for Increased U.S. Electric Utility Industry Innovation
Fast Growth of Sharing Economy Impacts Tax Reporting
The R&D Tax Credit Aspects of Robotic Warehouse Automation
The R&D Tax Credit Aspects of Fish Farming
The R&D Tax Credit Aspects of Retail Technology
The R&D Tax Aspects of Generic Drugs
The R&D Tax Credit Aspects of Improving Virtual Reality Technology
The R&D Tax Credit Opportunities for Mobile Devices
The R&D Tax Credit Aspects of Clean Energy
The R&D Tax Credit Aspects of the Gun Manufacturing Industry
Process Improvement Research & Development Tax Credits
The R&D Tax Credit Aspects of Wearable Technology
The R&D Tax Aspects of Big Data
How Lean New Business Startups and R&D Tax Credits Integrate
R&D Credits for Companies Combating Superbugs
Los Angeles Tech Boom Creates Large R&D Tax Incentive Opportunities
The R&D Tax Credits and the U.S. 3D Printing Initiative
R&D Tax Credit Aspects of the U.S. Manufacturing Renaissance
The R&D Tax Credit Aspects of Alzheimers
The R&D Tax Aspects of Software Development
The R&D Tax Aspects of Diabetes
The R&D Tax Aspects of Brain Mapping
The New Shape of R&D Tax Credits
New Car Fuel Rules Drive Product Innovation and R&D Tax Credits
R&D Credit Opportunity for Smart Sensors
The New R&D Tax Credit Scenario
Rapid Robot Technology Advancements Supported by R&D Tax Credits
R&D Tax Credit Aspects of Human Body Weight