Project Methodology

Follow These Steps To Apply For The R&D Tax Credit

The Research & Development (R&D) Credit is a 20% federal credit under Internal Revenue Code (IRC) Section 41.  Enacted in 1981, the credit is designed to incentivize companies in the advancement of new technologies and to encourage hiring of employees to perform R&D activities in the United States.

Most states allow for a state-specific R&D Tax Credit for qualified expenses related to R&D activities conducted in the state.  The R&D credit can be claimed for all open tax years. Generally, there is a 3-year statute of limitations for federal purposes but some states have a statute of limitations up to 4 years.

In order to identify whether or not companies may be eligible for the R&D credit, it’s important to follow a formal project methodology to best capture all of the qualified activities and expenditures for the credit.  The following is the most accurate methodology and approach.

Pre-Phase 1

In this stage, companies and a third-party R&D specialist will perform a very high-level assessment to determine whether the taxpayer has performed any R&D activities and incurred any R&D expenditures.  A back of the envelope credit estimate may be performed in order for the taxpayer to determine if they have any kind of credit benefit and the level of effort it will take to document the R&D projects.

Phase 1

This phase is conducted to better understand the company’s operations and businesses by reviewing company data and interviewing key financial and technical personnel about their department’s R&D activities.  A more detailed, high-level credit estimate is drafted and some key assumptions and possible issues are identified.

Phase 2

Phase 2, also called the “R&D Study”, is performed which is a comprehensive and detailed analysis of the company’s R&D activities, quantifying Qualified Research Expenses (QRE), creating federal and state R&D credit calculations and the organization and documentation of supporting R&D work papers.  This should be an audit-ready substantiation package.

Phase 3

In Phase 3, the goal is to recommend changes to existing processes and introduce new (or changes to existing) technology to produce an improved study with equal or less effort in the future.

By utilizing this 4-step process, companies will fully maximize and document their R&D tax credits.

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