4 things you need to know about the R&D Tax Credit 

The R&D Tax Credit has been around for over 40 years. It’s undergone some major changes throughout its lifetime and now people have different ideas as to how it can be applied. The IRS has eliminated the “discovery test”, they’ve introduced the idea of process improvements, and they’ve expanded the definition of qualifying employees.

These changes have allowed more businesses to benefit, but it also requires more expertise from the tax credit specialists who are conducting these studies. We’ve seen inexperienced studies result in over $1.7 million in unclaimed tax credits for just one of our clients alone. Nobody is perfect, but we can share our experience with you so that you know what to watch out for to ensure your clients are receiving their full benefits and retaining their benefits when they encounter an audit. 

Below are four important nuances of the R&D Tax Credit:

  1. The R&D Tax Credit is better understood as the “business improvement credit” because projects don’t have to be new to the world or a novel invention, but rather the projects need to be new to you and your company.
  2. This nuanced understanding of the tax credit is what allows nearly every company in the agriculture or food & beverage industries to qualify for this tax credit. These businesses are often trying out new methods and techniques that other companies in their industry have tried. Think: drip irrigation, new fermentation techniques, or test crops.
  3. That being said, one must be reserved with this definition as it can quickly become too broad and some tax incentive consultants will look to qualify anything and everything. One must look to IRS court cases and first-hand audit experiences in order to determine where the line for qualified activities is drawn. For instance, one of the most important distinctions the IRS will look at is where development ends and production begins.
  4. The IRS recently emphasized this point on retroactive R&D credit studies. Firms must now provide all documentation and substantiation at the time of submission, whereas previously a firm could have the documentation on-hand if an audit came in the future.

These points and more are what have enabled us to maintain a 98% post-audit credit retention rate, and we hope it benefits you and your clients.