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How to maximise your research credit
At this time of year the focus is on preparing tax returns and computing research tax credits, therefore claiming all qualifying research expenses is critical to reducing tax liability and gaining an effective tax rate. However corporate tax departments often overlook qualifying research activities by narrowly focusing "traditional" R&D departments. Taxand USA discusses how a corporate can maximise their research credit.
Since the IRS can be expected to closely scrutinise research credit support, it is important to properly document both the qualitative and quantitative aspects. This includes collecting contemporaneous documents that clearly explain how a company's research activities and business components qualify for credit and how the claimed expenses are linked to such activities and business components.
Just as many baseball players have trouble with the curve, many taxpayers have difficulty identifying and capturing non-traditional R&D expenditures. As a company documents their research credit and identifies qualifying activities, they should consider how non-traditional R&D departments support the research function and contemplate whether they should be included in their qualifying research expenses. Generally product and process development projects involve input from professionals in numerous departments. This is the case even in sophisticated corporations with large groups of design engineers who engage in cutting-edge research activities. These non-traditional R&D group efforts should be considered for qualification where they directly support qualified research departments and activities. Such non-traditional R&D groups can include:
- Manufacturing engineering and production support
- Sustaining engineering
- Continuous improvement
- Technical sales or bid and proposal
- High level personnel
- Contract research
Taxpayers must contemporaneously document qualifying research credit activities and expenses in order to avoid difficult audits with the IRS. Maximising qualifying expenses and properly documenting them will positively impact a company's tax position and should increase the chances of sustaining research credit under examination. It is recommended that corporates dig into the breadth of activities occurring throughout the company, with special attention focused on spotting non-traditional R&D groups within the organisation.