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Many eligible companies already taking advantage of the Research and Development (R&D) tax credit rarely maximize the credit they claim.

Using our experience and the expertise of our team, we have been able to help CPA firms and their clients optimize R&D tax credits and therefore significantly reduce their tax liability. In order to substantiate R&D credit claims for our clients, we typically follow the steps below, which are described in greater detail thereafter:

  • Investigate all relevant buckets of R&D expenses;
  • Evaluate both base methodologies for each year;
  • Determine eligible state credits in addition to the federal credit; and
  • Conduct statistical sample to consider all eligible projects and expenses.

Investigate all relevant buckets of R&D expenses

If a company is already claiming the R&D credit, it is usually including wages and contractors in the calculation; however, some companies can include supply costs, which can substantially increase the credit.  We typically see that supplies are understated if included at all.

In addition to supply costs, we frequently see companies leaving out relevant wage expenditures related to direct support and direct supervision of the research and development activities.  This includes managers of someone performing R&D, a secretary supporting someone performing R&D, and a variety of other roles and activities.  These direct support and direct supervision activities are specifically permitted in optimization-for-rd-tax-creditthe Internal Revenue Code and can increase the qualified research expenses quite significantly.

Evaluate both base methodologies for each year

Unbeknownst to most people, there are actually two base methodologies that can be used when calculating the R&D Credit:  the Alternative Simplified Credit (ASC) and the Regular Credit.  The ASC method is usually easier to calculate, so that is oftentimes the method used.  However, in our experience, the regular base methodology can increase the credit if the information required is available.

Determine eligible state credits in addition to the Federal R&D Tax Credit

The majority of states offer a state R&D Tax credit.  The calculation and requirements vary dramatically state by state, but if calculated correctly, the credit can greatly benefit companies and can usually be claimed in addition to the Federal R&D Tax Credit.  Even if a company operates in several states, or has employees across the country, state credits are usually based on the location of the activities and a company may be eligible for multiple state credits.

Conduct statistical sample to consider all eligible projects and expenses

Instead of individually reviewing the sometimes hundreds of projects companies undertake each year, Revenue Procedure 2011-42 allows companies to conduct a statistical sample of all eligible projects to individually review a smaller subset of projects.  Once the sample is complete, the company can then follow the Revenue Procedure to capture all eligible expenses instead of just a subset of expenses.

Below is an example of one of the results from an optimization study we conducted where we were able to utilize all of the items listed above to maximize the credit for our client:

For an Equipment Manufacturer with more than 100 employees, $20 million in revenue and $183,000 of R&D Tax Credit already claimed, we were able to increase its R&D Tax Credit by $430,000, for a total of $538,000 in R&D credits. stats-rd-tax-credit

These are just a few of the ways we have been able to maximize the R&D Tax credit for some of our clients.  As R&D Consultants, we’ve worked with countless businesses and their CPAs to calculate an R&D Tax Credit.  We partner with CPAs and businesses just like yourself to provide this valuable benefit. Discover our methodology to find out more on how we work.