THE IRS DEFINITION OF R&D-QUALIFIED RESEARCH EXPENDITURES
The IRS’ definition of R&D and
what constitutes qualified research expenditures (QRE) is
misunderstood. The traditional definition of R&D is that of
scientists in lab coats tinkering with chemicals, ultra high-tech
industries and Fortune 500-type companies. The IRS’ definition is
substantially broader.
For boiler
manufacturers, here are some activities that qualify for the
credit:
- Determine
parameters for reliable energy output depending on fuel
type;
- Design components to maximize
energy output through careful steam control;
- Determine
boiler system layout at project site to maximizespace and boiler
performance;
- Quality assurance testing of
component parts of boiler and subsequent assembled boiler;
- Determine the coating on boiler system
to prevent environ- mental factors that might breach structural
integrity.
Qualified
research expenses are those for qualified research performed in-house
or under contract. Such expenses include the
following:
- Wages
paid to employees engaged in the actual conduct of the research
effort or in the direct supervision or support of such
effort;
- Costs of supplies used in the
research;
- Payments made to third parties
for computer time used inthe research;
- 65%
of the contract fee paid to a third party for research conducted on
the taxpayer’s behalf.
And
finally, if you have not been taking the credit, you can go back as
far as three open tax years and claim the credits you missed!
R&D TAX CREDIT STUDY
Rentz continues, “I liked Paradigm’s
approach. I just signed off on the study and they did all the work.
My one concern was an IRS audit, but I found out that audit defense
was included in their fee so I didn’t need to worry.” Paradigm’s
production staff comprises engineers and intellectual property
attorneys with an engineering background.” Brian Cameron added, “We
use a technical interview process whereby we match our engineers with
the company’s activities and interview the engineers and principals
of the company to uncover all the projects that may qualify for the
tax incentive. Our tax controversy attorneys get involved when an R&D
audit does occur, and at no cost to the client.”
The
IRS recommends the “Comprehensive Project by Project Approach with
Established Nexus” methodology when conducting a study. In layman’s
terms, it means they want to know:
What
was the project (nothing confidential or
proprietary)?
- What were you trying to
accomplish?
- What were the activities that
were involved in accomplishing that project?
- What
were the hurdles encountered?
- How were
they overcome?
They
expect to see a nexus between the activity and the capture of
time.
So in short: who worked on a particular
project, performed a qualifying activity, how much time was involved,
and in which year did it occur? They are looking for that level of
detail.
Rentz suggests, “After I went
through the interview process, I quickly realized that a CPA firm
would not have the appropriate staff, engineers in particular, to
grasp what is required to conduct a proper study. My suggestion to
anyone wanting to conduct a study and maximize their benefit is that
they use an engineering firm that specializes in this niche.”
