There has been a lot of discussion recently about the R&D credit and the types of companies and activities that are eligible. The R&D credit, enacted in 1981 and made permanent in 2015, was originally passed to help keep jobs in the United States, and that original purpose still rings true today. There are several exclusions, but there is not a single industry that has been singled out in the Internal Revenue Code as not qualified. This does not mean that all industries qualify, and it is important to work with a company who is experienced and well-versed in the R&D activity qualification requirements and exclusions to ensure you are not including expenses for non-qualified projects.
1. Understanding the funding exclusion is key to claim correctly the R&D Credit
For example, it is important to understand the funding exclusion and the requirements to include a project for which a taxpayer is paid for the work it performs. Oftentimes, our clients think that because they are paid for the work, they are not able to claim the R&D credit for those activities; however, that is not true! The case law concerning the funding exclusion states that the taxpayer needs to evaluate whether it meets two criteria:
1) Does the taxpayer bear the economic risk if the project fails, and
2) Does the taxpayer maintain substantial rights to the research?
If the answer to both questions is “yes,” then the projects activities can be evaluated and potentially included in the credit calculation. If the answer to either question is no, then the expenses associated with the project cannot be included.
2. Work with a qualified tax consultant to not overlook funding exclusion
Oftentimes when conducting optimization studies for our clients who were either doing it on their own or working with their CPA, we find that the funding exclusion was overlooked and not considered in the credit calculation. Either the company was excluding expenses associated with work it was being paid for entirely, or the contracts were never evaluated using the criteria discussed above.
The funding exclusion can be complicated and is a big reason we believe it is important to work with a tax consultant you can trust who is also well versed in the R&D credit.
Want to learn more about our process and how we stand behind the work we provide to our clients? Reach out to us today to request an assessment of your eligibility for the R&D credit and we’ll get back to you within a few hours!