Should I use my CPA for R&D Tax Credits?
While many CPA firms are aware of the tax-savings potential offered by R&D tax credits, not every firm or accountant has the time, resources, or expertise to take on the R&D tax credit application and documentation production process for its clients. CPA firms and their R&D tax credit eligible clients require the expertise of a well-qualified and experienced R&D tax credit professional to assist in claiming the biggest tax incentive available to businesses. Since its introduction in 1981, the R&D tax credit has expanded so that more and more businesses across many industries are able to claim the credits. In order for your business to be eligible to claim R&D tax credits, it must engage in certain qualified research activities. Schedule a free consultation with Clarus R+D to learn more about R&D tax credits or to discuss whether your business activities are eligible. Its technology-driven solution empowers companies to fuel their growth with America’s largest tax incentive. Clarus R+D has successful partnerships with its clients and their CPA firms throughout the country.
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R&D tax credits: What CPAs and their clients need to know
The Research and Development tax credit is a government-sponsored tax incentive available to companies who conduct research and development within the United States. The credit was implemented as a Congressional response to the decline in research spending which negatively impacted the Country’s economic growth, productivity gains, and overall global competitiveness. The R&D tax credit was initially implemented in 1981 and has since been reauthorized several times. In 2015, when the Protecting Americans from Tax Hikes (PATH) Act was adopted, the Research and Development (R&D) credit became a permanent part of the tax code.
I encourage any entrepreneur or company with significant dev expenses to pursue the R&D tax credit. The ROI compared to the amount of time spent is worth it.Jeff Wilkins / FMX
Many taxpayers assume the R&D tax credit is available only to major corporations conducting tests in research laboratories. This, of course, is not the case. Businesses of all sizes across many industries are eligible for the incentive as long as they are engaged in qualified research activities. Under the current tax code, any company that develops or improves products or processes may be eligible for the credit. The number of businesses who engage in eligible activities is ever-increasing as are the eligible activities that qualify a business for the credit. More and more businesses are engaged in qualified research activities making them eligible for the R&D tax credit. Clarus R+D is your tax credit consultant of choice to help your business take advantage of the research and development tax incentive.
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R&D tax credits and CPA partnerships
At Clarus R+D, we believe companies that are investing annually in R&D have a fiduciary duty to take advantage of the R&D tax credit every year. As a financial partner to these companies, CPA firms have an opportunity to add value. The value-added benefit can be a partnership with the R&D tax credit professionals at Clarus R+D.
Clarus R+D has experience with a variety of partnerships, a few of which are outlined below.
Your clients trust you and look to you for advice. By referring clients to Clarus R+D for R&D tax credits, you add to their bottom line and help drive innovation. The referral option is an easy way to get started with R&D tax credits. If you think you have a client that qualifies for the R&D tax credit, refer them to Clarus R+D, and we’ll keep you up-to-date on their progress. In the end, you’ll receive qualification reports to document eligibility and form 6765 to include in their return.
The outsource partnership works well if you are familiar with the R&D tax credit and have a number of clients that qualify. You offer the credit as a service under your firm’s brand but without the risk and overhead. A white-label version of our software helps you drive efficiency and compliance. We do the backend study review. At the end of the day, you add value for your clients and your firm, but without the expense of a new R&D practice.
Already offering R&D tax credits services to your clients? Need ways to increase compliance and efficiency? With our software partnership, all R&D studies are completed between you and your client using a white-label version of our platform. If you need any technical assistance with the software, Clarus R+D is available.
Many growing businesses continue to fail to take advantage of R&D tax credits. Some perceive it to be too complex or costly. Others mistakenly believe they don’t qualify. Many businesses perform activities that qualify for the R&D tax credit without realizing it. Co-market with Clarus R+D to educate and inform your audience about the value of R&D tax credits. Our partnership options make it easy for you and your clients to take advantage of the R&D tax credit.
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What CPAs and their clients look for in an R&D tax credits advisor
Selecting the right R&D tax credit advisor is an important first step. Whether the taxpayer is selecting the R&D tax credit professional, or if that task was entrusted to the taxpayer’s CPA firm, it is necessary to select an R&D tax credit consultant you can trust. Here are some points to consider in making your R&D consultant selection.
To capture the maximum number of federal and state R&D tax credits for your clients, you want to make sure you are working with R&D experts who have comprehensive expertise in the field. In addition to a long record of successful R&D credit results, Clarus R+D has experience working with clients across many different industries – especially those taxpayers engaged in the business of manufacturing and technology development.
Make certain your R&D tax credit experts can represent your clients wherever they conduct business. The team at Clarus R+D has experience working with clients across the country.
Our pricing is built to fit your business and designed to reflect the efficiencies of our process. Companies pay a small base fee plus a percentage of their credit. For startups, we offer a special pricing option.
High audit success rate
No one wants to think about an IRS audit, but it is always a good idea to be prepared. If an audit is initiated, it is necessary that a business is able to provide documentation supporting its R&D activity and eligibility. This is just another among the many reasons why taxpayers and their CPA firms make the decision to work with an R&D
tax credit professional to avoid any unnecessary worry during audit time. Clarus R+D delivers audit-defensible R&D tax credit study reports.
Clients own the work
In a Clarus R&D tax credit study, the client owns all the work. The Clarus team is committed to transparency, and the client retains ownership of all the work and data. It is important for Clarus that is its clients see both the finished product, and the work involved to get there.
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Using your CPA to help select your R&D tax credit advisor
Your tax clients expect the CPAs at your firm to provide guidance and advice that lead them to the most advantageous tax outcomes – that includes presenting opportunities for the taxpayer to take advantage of tax incentives when available. Here are some tips for CPA firms when choosing to work with an R&D tax credit professional.
1. Familiarity with taxpayer business
Being familiar with the client’s business should be a priority for your CPA team as you’ll be better able to identify opportunities to put more money back into the client’s business. Many businesses that could qualify for the R&D tax credit are not aware that it even exists, or they are aware that it exists but don’t think they qualify. The reality is that a number of companies in a variety of industries typically perform qualifying activities. Have your CPA team ask about projects that the client is working on, new processes they are creating to improve efficiency, and any new developments within the business that they may be excited about. An evaluation of the types of employees they have on their payroll can also help your team discover potential R&D tax credit opportunities.
2. Qualified Research Activities (QRAs) determination
The IRS uses a 4-part test to determine if a business activity qualifies as research. Make sure your team is familiar with the 4-part test when they evaluate the client’s eligibility for the credit. In general, for an activity to be eligible, it has to (in most cases) relate to a new or improved product, process, formula, computer software, program, technique, or invention. Although the 4-part test may seem fairly straightforward, there are complexities with which CPAs who are not experts in R&D tax credits will have no familiarity.
3. Excluded activities
More often than not, CPAs and business owners are misled by the name “R&D tax credit”; there is an assumption that their typical business activities would not qualify for the lucrative tax incentive. While many business activities are among those considered qualified research, there are certain exclusions with which your firm should be familiar.
- R&D activities performed outside the U.S.
- Funded research Research in non-scientific areas i.e. social sciences, arts or humanities
- Market/consumer research
- Ordinary quality control testing
- Routine data collection and analysis
- Internal business process development
- Management studies and surveys
- Adaptation or duplication of existing business components (products, inventions, formulas, software, processes, or techniques)
- R&D activities conducted solely to improve product aesthetics
- Research conducted after the start of commercial production or implementation of the new innovative component (some exceptions apply)
- Locating and evaluating mineral deposits, including oil and gas
These exclusions are not as straightforward as they may seem. Contact Clarus R+D for more information on these exclusions before concluding your client is not eligible.
4. R&D tax credits in a nutshell
After learning about the client’s business activities and determining that they could potentially qualify for the tax credit, your CPAs will need to explain what the credit is and why they believe the business might qualify. The R&D tax credit is a dollar-for-dollar federal tax credit that incentivizes the development of new or improved products or processes. Companies like yours can qualify for significant federal and state tax savings to allow them to hire new employees, invest in new products and service lines, and grow your business. Potentially any company that performs qualified research activities on U.S. soil can take advantage of the credit.
5. Supporting the claim
There are a number of factors that contribute to qualifying for this tax credit and you must be able to support, document, and validate the case for your client to receive an R&D tax credit. This is why working with an R&D tax credit professional is the best way for your client to maximize its R&D tax credit claim.
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CPA’s and R&D tax credit eligibility
Working with a professional R&D tax credit consultant, like Clarus R+D, is the best way for your CPA firm to determine its client’s tax credit eligibility. In order to be eligible for the research and development tax credit, the taxpayer must engage in qualified research. Qualified research generally is private sector or commercially driven development intended to yield innovation within a scientific or technological field. The following four-part test determines whether an activity is considered qualified research and, thus, eligible for the R&D tax credit.
The purpose of the activity or project must be to create new (or improve existing) functionality, performance, reliability, or quality of a business component. A business component is defined as any product, process, technique, invention, formula, or computer software that the taxpayer intends to hold for sale, lease, license, or actual use in the taxpayer’s trade or business.
Elimination of Uncertainty
The taxpayer must intend to discover information that would eliminate uncertainty concerning the development or improvement of the business component. Uncertainty exists if the information available to the taxpayer does not establish the capability of development or improvement, method of development or improvement, or the appropriateness of the business component’s design.
Process of Experimentation
The taxpayer must undergo a systematic process designed to evaluate one or more alternatives to achieve a result where the capability or the method of achieving that result, or the appropriate design of that result, is uncertain as of the beginning of the taxpayer’s research activities. Treasury Regulations define this as broadly as conventional implementation of the scientific method to something as informal as systematic trial and error process.
Technological in Nature
The process of experimentation used to discover information must fundamentally rely on principles of the physical or biological sciences, engineering, or computer science. A taxpayer may employ existing technologies and may rely on existing principles of the physical or biological sciences, engineering, or computer science to satisfy this requirement. Research activities that qualify for R&D tax credits must be conducted in the U.S. If your business does any of the following, it likely qualifies for the R&D tax credit:
- Develops or designs new products or processes
- Enhances existing products or processes
- Develops or improves upon existing prototypes and software
Even if your work passes the four-part test, there are a few exclusions to the R&D tax credit. Expenses incurred under the exclusions will not qualify for the incentive. Some of these already appear in the four-part test, including the need to rely on hard sciences. The activity must take place in the U.S. and cannot include routine data collection or market research. Also, activities cannot receive funding from an unrelated third party because your company might not retain ownership of the resulting intellectual property. Clarus R+D will work with you to help you understand what is considered qualified research for purposes of determining R&D tax credit eligibility.
Common misconceptions about R&D tax credit eligibility
Every year, eligible businesses don’t avail themselves of the benefits of the R&D tax credit. IRS statistics show that R&D tax credits worth over $12 billion were claimed in 2014, the latest year for which data is available. While this sounds significant, a large number of eligible entities neglect to claim the R&D credit. One of the biggest drivers for the underutilization is likely a lack of knowledge by both taxpayers and their advisers. Many are unaware of the R&D credit or otherwise believe their business activities are not eligible. Other reasons taxpayers miss out in claiming the credit include:
- Lack of understanding
- Can’t monetize the credit
- Complexity of the calculation
- Audit fear
Clarus R+D can help provide clarification on the applicability of the research and development credit, walk you and your team through a study and calculation, and can be there to support you in times of an audit.
Small businesses and startups
Despite its well-established and successful history, countless eligible companies fail to claim the research and development tax credit every year. This is especially true for owners of small businesses and startups. Small businesses and startups may be eligible to apply up to $1.25 million—or $250,000 each year for up to five years—of the federal R&D credit to offset the Federal Insurance Contributions Act (FICA) portion of their payroll taxes each year. To be eligible, a company must meet two requirements:
- Have less than $5 million in gross receipts for the credit year
- Have no more than five years of gross receipts
Those taxpayers, however, might fail to consider their eligibility for the R&D tax credit program for any number of reasons. Still, many startups don’t understand they’re eligible to claim the R&D credit and continue to miss out on money they’ve already earned. At Clarus R+D, we talk to entrepreneurs every day and we’ve heard it all. Here are some of the reasons startups miss this non-dilutive funding opportunity.
Some entrepreneurs assume the program sounds too good to be true and, therefore, complicated. At Clarus R+D, we work with small- to mid-sized business owners to discuss the eligibility requirements, explain the benefits of the tax credit program, and offer solutions to maximize the credit.
The business has not produced any revenue
Once again, companies don’t have to demonstrate income (or pay income taxes) to qualify for the credit. Qualifying smaller companies and startups can take the benefit as a payroll tax offset, claiming up to $250,000 every year. This applies to small businesses showing less than $5 million in the credit year, with no gross receipts in the previous five years.
The business does not have any employees
Sure, using the credit to offset payroll taxes does make it seem as if you’d have to have employees to pay. While wages generally contribute most heavily to the final credit calculation, other costs, like supply expenses and contractor payments, are also eligible. Most importantly, if you do take the research and development credit as a payroll tax offset without actual payroll, you can carry the credit forward for up to 20 years.
The business doesn’t do research
This is, perhaps, the greatest misconception about R&D tax credit eligibility. You needn’t be in the business of operating a research laboratory to be eligible for the research and development credit. You don’t have to employ a team of scientists running around in lab coats either. At Clarus R+D, we partner with entrepreneurs across all industries.
The business is not successful
A business does not have to be successful to qualify for the benefit. Riskier initiatives often fail with no return on investment. Recognizing that, the federal government provides incentives like the R&D credit to lessen the burden. Consequently, you will be rewarded for facing technical challenges and pushing forward on innovative solutions. These technological breakthroughs are all part of the research and development terrain. Even if the work isn’t successful, the effort itself (and the costs associated with it) may make your business eligible to receive the credit.
Business does research but not developing anything new
The R&D tax credit is for taxpayers that design, develop, or improve products, processes, techniques, formulas, or software. It’s calculated on the basis of increases in research activities and expenditures—and as a result, it’s intended to reward companies that pursue innovation with increasing investment. R&D doesn’t have to be new to the industry. It simply needs to be new to the company, which must have activities that meet the four-part IRS test below. Read more to learn why small businesses and startups miss out on the R&D tax credit. Clarus R+D will work with you to help you understand what is considered qualified research for purposes of determining R&D tax credit eligibility.
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R&D tax credit consultants: What to expect
Working with a professional R&D tax credit advisor is the best way to determine eligibility and maximize your benefit. Here is what you can expect by selecting Clarus R+D as your R&D tax credit consultants:
- Clarus R+D provides a team of professionals with expert credentials able to answer all your R&D tax credit questions.
- Our proprietary software streamlines R&D studies which maximizes your ROI.
- Clarus has expert knowledge of the IRS regulations relating to the research and development tax credit, IRC Section 41, as well as the regulations pertaining to state-specific research and development credits.
- Clarus has extensive experience in recognizing qualified research activities and expenditures.
- Our time-proven methodology has yielded maximum benefits to our clients.
- The Clarus team has helped hundreds of clients claim millions in R&D tax credits.
- We place emphasis on helping growth businesses take advantage of the tax incentive.
- Clarus does the work for you; our web-based app allows you to enter information at your own pace.
- We have extensive IRS and state audit experience and provide our clients with audit support.
- We have maintained an exceptional success rate in applying for the R&D tax credit.
- We work directly with our clients and their respective accounting firm and payroll processor.
- Our process saves valuable time and resources within the engineering and finance departments.
- Our fees are very competitive.
- Our performance, success rate, and unparalleled quality of service result in high client loyalty.
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ABOUT CLARUS R+DWith custom software backed by a team of tax experts, Clarus R+D specializes in tax credits for growth businesses. Our technology-driven solution simplifies the process, maximizes benefit, and ensures compliance. We partner with accounting firms, financial advisors, investors, payroll providers, and more.