{"id":29534,"date":"2025-01-15T20:51:08","date_gmt":"2025-01-15T20:51:08","guid":{"rendered":"https:\/\/peraltafinancing.com\/accounting\/navigating-rd-tax-credits-maximizing-benefits-for-companies\/"},"modified":"2025-01-15T20:51:08","modified_gmt":"2025-01-15T20:51:08","slug":"navigating-rd-tax-credits-maximizing-benefits-for-companies","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=29534","title":{"rendered":"Navigating R&D Tax Credits: Maximizing Benefits for Companies"},"content":{"rendered":"


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As the year comes to a close, you might be thinking about ways to minimize your 2024 tax bill. At any tech company, that means exploring how to maximize your R&D tax credit. Technically called the \u201c<\/span>Credit for Increasing Research Activities<\/span><\/a>,\u201d this tax savings opportunity can help companies get as much as $500,000 back.\u00a0<\/span><\/p>\n

This is an area you don\u2019t want to miss out on. But recent news has underscored the importance of taking the requirements for claiming this tax credit seriously.<\/span><\/p>\n

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What we learned in 2024: takeaways from the Kyocera case<\/span><\/h3>\n

Like any tax savings opportunity, the IRS wants to see proof that your company qualifies for this tax credit. That means proving the money you\u2019ve spent on qualifying research activities.\u00a0<\/span><\/p>\n

In some cases, this is fairly easy. If you buy a piece of equipment for research purposes and you save the receipt, you\u2019ve got the documentation you need.\u00a0<\/span><\/p>\n

But because salaries count as a qualifying expense when that individual is specifically undertaking qualifying research, the water can get muddy. You then need to prove the amount of that individual\u2019s time that was focused on your qualifying research activities. And a recent court case proved that the IRS can get pretty granular here.\u00a0<\/span><\/p>\n

Specifically, the U.S. government <\/span>is arguing<\/span><\/a> that the multinational firm Kyocera can\u2019t claim this credit and the resulting refund because \u201cit failed to create or retain the documents required to substantiate its entitlement to the credit.\u201d\u00a0<\/span><\/p>\n

Kyocera wasn\u2019t loose in how they attempted to substantiate their claim to the credit. Court documents show that the company initiated a study with a Big Four accounting firm to determine the size of their credit. The accounting firm then conducted staff interviews as part of that study. In short, the team involved had extensive experience in this tax credit and made a concerted effort to substantiate Kyocera\u2019s claim. Still, the IRS wasn\u2019t satisfied.\u00a0<\/span><\/p>\n

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Big takeaways from this situation<\/span><\/h4>\n

For any company interested in claiming the R&D tax credit, the most notable thing to learn here is that the IRS requires substantiating documentation. Word of mouth \u2014 even in a formal setting like an interview conducted by an accounting firm \u2014\u00a0isn\u2019t enough. The paperwork is critical.\u00a0<\/span><\/p>\n

That\u2019s where Kyocera and its accounting partner got into trouble. The electronics company didn\u2019t retain (and potentially didn\u2019t ever create) substantiating documentation. Then, its accounting partner didn\u2019t keep records from the study it conducted to determine the size of Kyocera\u2019s tax credit.\u00a0<\/span><\/p>\n

As a result, when the IRS looked into the claimed credit, it found little to back it up. This was particularly problematic because a big part of the credit claim was predicated on employee salaries. Without proof that those employees were actually working on the qualifying research activities for the duration the company said, the IRS has grounds to refuse the credit.\u00a0<\/span><\/p>\n

That\u2019s likely going to hurt Kyocera to the tune of $398,985 (the size of the credit it attempted to claim).<\/span><\/p>\n

Documenting qualifying research activities is the big takeaway here. But there\u2019s another lesson to learn from these court proceedings. The U.S. government is arguing that Kyocera can\u2019t satisfy the credit\u2019s four-part test requirement. Specifically, the court case argues that the tech company fails part four of the test, which requires that \u201csubstantially all\u201d of its expenditures on the projects for which it\u2019s claiming the credit involve a process of experimentation.\u00a0<\/span><\/p>\n

So, what does this mean for other tech companies hoping to claim the R&D credit in 2024? Two things. First, documentation is paramount. Secondly, you need to understand the four-part test to ensure your company\u2019s passing it. Let\u2019s look at both.\u00a0<\/span><\/p>\n

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Solving the documentation issue\u00a0<\/span><\/h3>\n

In order to successfully claim this tax credit, your company needs to be prepared to prove that any expenses you apply toward the credit were, in fact, research-focused. As we mentioned earlier, that\u2019s often the most challenging when it comes to applying salaries and wages toward your claimed total.\u00a0<\/span><\/p>\n

Here, contemporaneous documentation goes a long way. Any project plans you have stored in your project management tool (e.g., Jira, Asana) can provide proof to the IRS that your team was, in fact, engaged in research activities.<\/span><\/p>\n

From there, it can be a big help to have people track their time dedicated to the research activity in real-time. This is true even for salaried employees. Having them log the hours they apply specifically toward the research activity gives you a solid foundation on which to claim the credit.\u00a0<\/span><\/p>\n

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Satisfying the four-part test<\/span><\/h3>\n

Per the part of the Internal Revenue Code that talks about this tax credit, to qualify as research, the activity needs to:<\/span><\/p>\n