R&D Tax Incentives - Advanta Tax Advisors, LLC

R&D Tax Incentives

Federal and state R&D tax credits are a valuable benefit to businesses developing new or improved products, improving manufacturing processes, engineering designs or developing software. Legislative changes have expanded monetization of the credits by allowing research credits to offset payroll taxes and generate state refunds even if there is no tax liability due to net operating losses. Companies should pursue research credits to help fund innovation and growth. Companies receive thousands and large companies receive millions of dollars from maximizing this tax credit.

“You will not find a more knowledgeable, thorough and efficient group in the R&D Tax Credit environment than Advanta.”

Birket Engineering, Inc.

The R&D Tax Credit is frequently understated or misunderstood. The definition of research applies more broadly than many businesses understand. The subjective nature of qualifying and documenting activities leads many businesses to not claim the credit or include an amount in the tax return without a thorough analysis.

The qualifying R&D activities and related costs must be presented by project or business component. The contract terms for R&D performed on behalf of a customer must be analyzed to determine qualification.

For example, a company asked us to analyze the R&D tax credits completed by their tax preparer as part of the tax return preparation. The Georgia based company currently claimed a federal credit of $120,000 and 0 Georgia credit. The only support for the credit was one spreadsheet. Our analysis generated credits of $505,046 with a full support package to sustain the credits if audited. Our fee was $30,000.

Advanta’s technical experts include CPAs, engineers, software developers and attorneys. Our clients tell us that utilizing highly experienced professionals minimizes the investment of time their technical personnel invest in documenting the research activities. We discuss the technical details, review your engineering drawings and calculations, photos, user stories and sprint reviews and create an integrated report. Our clients tell us this method takes less time on their part and provides more details in the final package than having their people complete questionnaires.

We apply our expertise to your business in order to understand the facts, apply the tax law, and deliver high-quality documentation that provides the support necessary to sustain the maximum available federal and state tax benefits. Our record in representing taxpayers in IRS examination and appeals cases is unsurpassed. Our audit-ready documentation and examination strategy supports quick settlements with the taxing authorities.

Steps to Analyze Research and Development Tax Credits

Phase 1: Initial Scoping and Credit Estimate

In Phase 1, Advanta’s team will conduct preliminary interviews and perform a high level analysis of selected financial information in order to provide an estimate of your potential tax credit at both the Federal and applicable state levels. Phase 1 results in a report presenting the estimate, a detailed workplan for implementing a full study, and a fee proposal.

A typical Phase 1 feasibility and cost / benefit analysis consists of the following tasks:

  • Conducting meetings with financial staff members to ascertain the scope of activities and expenditures dedicated to research and development activities - this analysis requires looking past the trial balance and general ledger as the credit tests are based on the nature of activities and the accounting rules that support general ledger account classifications typically are not.
    • During this step tangible property used or consumed during qualifying activity will be identified.
    • Also, we will identify outside parties paid to conduct qualifying activity on your behalf and ascertain the potential for their fees to qualify for the R&D credit.
    • Wage data and any project tracking systems are also analyzed during this step to identify potential staff members conducting qualifying research activity.
  • Conducting brief interviews with engineering and operational staff to identify projects, departments, processes and technologies which involve potentially qualifying research expenditures, determine which staff members are engaged in qualifying activity and the degree of their involvement.
  • Calculating potential federal and state credits for all tax years open under the applicable statutes of limitation.
    • We can also assist with calculating the potential benefit to shareholders of flow-through entities. (Including multi-level ownership schemes.) There are complex limitation rules at the federal and state levels as to the timing and ability to realize cash benefits by individuals and fiduciaries and our expertise can be utilized in managing the expected benefits to these parties.
  • We will prepare and deliver a high-level report that will detail the estimated federal and state benefits, outline a detailed work plan, and establish a fee structure.

Our Phase I approach is sufficiently thorough to minimize scope changes and efficient enough to minimize the disruption of staff to their everyday responsibilities. Our goal is to provide you with the information to make a decision on whether to move forward with a full analysis and the tax years to include in that analysis.

Phase 2: Implementation

The goals of Phase 2 are to ensure that all qualifying research activity has been identified, to ensure that all qualifying research expenditures are captured and linked to the qualifying activities, to calculate the federal and state R&D credits and to generate sufficient documentation to sustain the credit.

A typical Phase 2 implementation will include the following steps:

  • Conducting detailed interviews, in-person or via teleconference, with key development personnel to determine the nature of projects and activities. The first goal of these interviews is to gather sufficient technical facts to explain the qualifying elements of the activity. The second is to discuss the roles of specific employees, vendors and contracts in research activities and understand the timeline of development.
  • The facts gathered during these interviews are then summarized in memoranda explaining how the activity meets the R&D credit rules for each development initiative.
  • Contemporaneous documentation such as sprint reviews, design documents and status reports, are reviewed and incorporated in the memoranda by reference.
  • Wages, supplies and contract research expenditures are then compiled and the federal and applicable state credits are calculated and presented in detail.
  • A detailed report is then prepared and delivered. This report is intended to contain all of the information typically requested by federal and state examiners based upon our experience and publicly available guidelines including:
    • A company overview to provide high level evidence that your research activities qualify for the R&D credit,
    • the calculation of your credits,
    • qualifying costs by project: details for qualifying wages, supplies, and contract research,
    • detailed qualifying project reports referencing technical documentation.
  • Your report is available as both a hard copy and/or electronic deliverable and is prepared in a format designed to provide the IRS or state taxing authority with a clear audit trail. The IRS has accepted our report and given the client a no change result on the audit of the R&D credit in many cases.
  • Advanta maintains a solid reputation in the industry and with taxing authorities that relies on our commitment to assisting taxpayers in identifying and documenting the maximum sustainable tax benefits allowed by law and working efficiently with taxing authorities to defend our client's tax positions. The IRS has accepted our report and given the client a no change result on the audit of the R&D credit in many cases.

R&D Case Studies

Each example highlights one year of R&D credits identified and the company’s gross revenue for that year. Often, taxpayers can amend tax returns to claim multiple years' tax benefits for all tax years open under the statute of limitations, generally three-years. For an expanded list of case studies, please visit Case Studies.

Industry Company Description Annual Revenue Combined Federal and State Credits
(one year)
Aerospace Commercial satellite service provider developing next generation satellite platforms and new and improved communication networks. $2,472,400,000 $1,805,033
Architecture / Engineering Provider of building and bridge design services and structural evaluations. $112,294,318 $1,375,796
Manufacturing/ Engineering Designer and manufacturer of towers and steel structures for energy transmission and distribution. $369,183,200 $369,500
Plastic Injection Molding Manufacturer of complex, custom-designed injection molded products, manufacturing processes and tool and die components. $13,196,151 $44,206

The R&D credit is highly facts and circumstances dependent. Each taxpayer's ability to claim R&D credits depends on a myriad of complex factors. As can be seen by the limited illustrations above, it is difficult to base general estimates of credit availability for individual taxpayers based on one or two factors such as industry, gross revenues or even by analyzing development budgets. The accounting categorizations for development costs and budgetary classifications vary significantly from the rules for inclusion as qualified research expenditures. Our R&D credit experts have expertise with numerous industries, organization structures and business sizes.

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