Jeff Haskett, CEO of Clarus R+D, and Kevin Dehner, CPA at Clark Schaefer Hackett, authored this article for Accounting Today.

Remember strolling through the aisles of Blockbuster Video to find just the right movie on Friday night? At its peak, Blockbuster owned over 9,000 video-rental stores throughout the United States and had 65 million customers. Today, aside from the lone Blockbuster storefront in Bend, Oregon, Blockbuster has essentially disappeared. Why?

With Netflix nipping at its heels, Blockbuster was well aware of the future trend of streaming video. However, it underestimated how quickly the future would come. Once it decided to prioritize the change, it was too late. As people have begun to talk about “Accounting 4.0,” the change in our industry is now.

Accounting 4.0

As a result of increasing technology and automation, accounting firms are finding themselves at a crossroads where they will need to shift their primary focus from compliance to a more balanced approach including value-based consulting services.

Compliance work will always be needed, but the question is who will provide it? As this work gets more commoditized and automated with technology, firms are already feeling competitive pressure from new tech-forward services offered online. To use the Blockbuster reference, people didn’t stop watching movies; they just shifted to a new delivery model when they struggled to see the value in the old one.

Accounting 4.0 offers a more comprehensive and holistic approach to accounting. It connects physical with digital and allows for better collaboration and access between CPAs and their clients. Accounting 4.0 empowers firms to better control and understand clients, leverage data to boost productivity, improve processes and drive growth. Let’s embrace it as the opportunity that it is.

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For companies submitting claims for the R&D tax credit, the IRS is clearly defining requirements to prove the validity of the refund. The memo underscores the approach we have always taken in supporting our clients’ R&D claims. Not all practitioners or R&D software follow these guidelines. But we always have. Our R&D platform backed by tax experts strictly adheres to IRS guidelines.

To support an R&D claim, the IRS states that for each business component, companies need to:

• Identify all research activities
• Name the individuals who performed the research activity, and
• Describe the information each individual seeks to discover

R&D documentation also needs to detail:

• Total qualified employee wage expenses
• Total qualified supply expenses, and
• Total contract research expenses for the year.

These requirements define what information companies should provide with their claims, what format they should use, and how the statute of limitations applies.

Claims for the R&D credit take up significant time and resources for both the IRS and taxpayers. Enforcing requirements for claiming the R&D tax credit is part of the IRS’s efforts to manage issues with the credit and IRS resources. The requirements allow the IRS to determine upfront if an R&D claim should be paid immediately or needs additional review.

The IRS is offering a grace period until January 10, 2022. Once the grace period expires, there will be a one-year transition period. During that time, taxpayers will have 30 days to correct an R&D claim before the IRS makes a final determination on the claim.

For companies already claiming the R&D tax credit and those that are just beginning to determine their eligibility, it is critical to be thorough when documenting qualified research activities and expenses. To reduce your tax burden with the R&D tax credit, you have a responsibility to make sure it’s defensible by adhering to IRS guidelines and properly tracking expenses. Clarus R+D can help you claim R&D tax credits without stress or confusion.

Your clients trust you to help them minimize their tax obligations. Recent enhancements to the R&D credit make it a viable and lucrative incentive for early-stage as well as established innovative businesses.

More SMBs qualify for R&D tax credits than ever before and need help claiming them. We partner with accounting firms, financial advisors, investors, payroll providers, and more to increase access to this meaningful tax incentive. Our mission aligns with yours, put hard-earned money back into the hands of the innovative companies that are fueling the growth of our economy. Partnering with Clarus R+D is a win for you and your clients.

We partner with accounting firms, financial advisors, investors, payroll providers, and more.

The R&D tax credit

The R&D tax credit is the most lucrative tax credit in the U.S. The PATH Act of 2015 greatly expanded the credit’s usefulness to startups and SMBs by making three significant changes:

• Early-stage companies that are not yet paying income tax can now utilize the credit as an offset to payroll taxes.
• Many companies can now use the credit to offset their AMT liability.
• The R&D tax credit is now written into permanent law.

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, you have an opportunity to add value. And this is where we come in. Clarus R+D offers partnership options that best fit your needs and those of your clients.

Types of partnerships

• Referral: A good way to start. Clarus R+D is your trusted partner that performs R&D tax studies for your clients.
• Outsource: Power your own R&D practice. Clarus R+D provides white-label software and all the backend heavy lifting, but you present R&D as one of your service offerings.
• Software: High tech autonomy. Use only our software to help you ensure compliance, drive efficiency, and increase profitability.
• Co-Marketing: Partner with Clarus R+D to educate and inform your audience about the value of R&D tax credits.

Referral partner

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 over to us 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.

Outsource

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.

Software

Already offering R&D tax credits 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 help with the software, Clarus R+D is available.

Co-Marketing

Many growing businesses continue to miss the R&D credit. 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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More than half of our customers have never claimed the R&D tax credit before working with us. Why do so many companies miss out? For a majority, we believe a thorough R&D tax study is outside the scope of their CPA’s service offerings.

Start by asking your CPA the following five questions. Then bring us into the conversation to talk about how Clarus R+D can work as an extension of their business and your accounting department. The end result: a streamlined process, IRS compliance, and the maximum financial benefit for you.

1. Do I qualify for the federal R&D tax credit?

At Clarus R+D, we talk to eligible companies every day that miss this credit. Some don’t know the rules have changed. Others think (incorrectly) they don’t qualify either because they don’t pay income tax, don’t have enough employees, or don’t spend enough money.

2. Have I ever claimed it in the past? Why not?

Many companies have been told it’s too expensive or cumbersome. With Clarus R+D, it’s not! Our tech-enabled solution and creative pricing model are designed to lower your cost and maximize your reward.

3. How can I maximize my benefit?

Many credits are understated when calculated by non-specialists. Expenses that qualify get left out because innovation spending is more inclusive than what is typically booked as R&D.

4. How do I know I’m following the rules?

Coming in at #7 on this year’s Dirty Dozen list, the IRS continues to see significant misuse of the research credit. Clarus R+D specializes in helping companies do it right, generating all the documentation required by the IRS, including qualification and calculation reports.

5. How can I make sure my benefit is monetized?

The R&D tax credit can be used to offset:

• Income taxes if you are in a taxable position.
• Alternative Minimum Tax (AMT) if you have less than $50 million in average revenue for the 3 preceding years from the tax year, and you owe AMT in the current year.
• Employer portion of Social Security taxes up to $250,000 each year, allowing qualified small businesses to receive the benefit regardless of profitability. Startups need to ensure their payroll providers process it correctly. Many do not! Clarus R+D integrates with payroll providers for easy and accurate monetization of your benefit.

At Clarus R+D, we’re on a mission to make this significant financial incentive accessible to all qualified companies. Connect with our team of tax credit experts for a free consultation to learn more.

If you have only just learned about the R&D tax credit and don’t have time to complete your study by the filing deadline, no need to worry. You can still claim it by filing an extension or by amending.

To use the R&D tax credit against payroll taxes, you must claim it with your original return — which is why extending is so important for startups. On the other hand, companies that take the R&D tax credit against income taxes have the option of amending their return – and can even consider performing a ‘look back’ to capture up to three years of unclaimed tax credits.

When to file a tax extension

Your tax extension needs to be filed by the original tax due date. Depending on your type of business entity, your tax filing date is either mid-March or mid-April.

If the deadline has not yet passed when you discover the missing credit, instead of extending you can file what’s called a superseding return. This essentially undoes the filing of your original return, allowing you to include the necessary documentation for the R&D tax credit.

If the deadline has already passed, filing an amended return is your only option. When amending, the R&D credit can only be used against income taxes.

Filing a tax extension

Some businesses are hesitant to file a tax extension. But, it is very common. Talk with your CPA to ensure it’s the best decision for your business. Once you decide to file an extension, it’s simple for your CPA to complete the paperwork.

For most businesses, your CPA would file IRS Form 7004 to extend the return. For flow-through businesses extending their tax returns, shareholders or partners may also need to extend their individual tax returns.

Is the R&D tax credit worth it?

If you’re nearing the deadline and unsure what the R&D tax credit could be worth to your business, consider extending so you don’t miss it entirely. Then schedule a free consultation with Clarus R+D to discuss your eligibility and get a customized estimate of your tax benefit.

If 2020 taught us all one thing, it’s that businesses need to be prepared because things can change quickly. This year, in particular, companies across all industries were challenged as COVID-19 undermined even the most well-developed plans.

But there is good news amongst the 2020 chaos: R&D tax credits.

It’s more important now than ever to look into R&D tax credits to help your business.

The CARES Act made R&D tax credits even more impactful. Businesses can now carry back 2020 losses up to five years and receive tax refunds for previously paid taxes. In addition, your 2020 R&D tax credit can be carried back to 2019 as well as forward 20 years. It’s more important now than ever to look into R&D tax credits to help your business.

Claiming the R&D tax credit has always given companies the opportunity to reinvest back into their businesses. This year may be different, with companies rethinking how to reach goals while facing tough, new challenges. Simply put, the R&D tax credit is one way to get there.

Done the right way, claiming the R&D tax credit can be a simple process that won’t consume much time, is low risk, and definitely worth the effort.

We understand that, on the surface, the R&D tax credit seems risky. However, with the process, documentation, and filing done properly, you can greatly reduce the chance of an IRS audit. In rare instances when an audit has occurred, our team at Clarus R+D has helped customers every step of the way.

At a time when companies are looking for liquidity to either maintain their growth or keep their doors open, help your company take control of this opportunity to generate needed capital and reduce tax liabilities for this year, as well as past and future years.

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