Ron Antal estimates that only about half of the companies eligible to receive a federal research and development tax credit actually take the time to fill out the form to request it.
That’s because many businesses don’t believe they are doing work that qualifies as R&D in the eyes of the Internal Revenue Service.
“It’s not what you’re thinking, where you have to have a lab coat and a lab and you’re doing this basic research testing,” says Antal, managing director of Research Credit Group Inc. “The definition used to be that whatever you were discovering, it had to be new to the world. In about 2003, the definition changed to it’s new to you as a company. That’s where a lot of people started getting in and companies started taking it.”
Despite the influx of new claims for this tax credit, many companies still don’t apply for it because they either think their business doesn’t qualify or they think the process is too cumbersome.
Antal’s financial advisory firm has helped companies gain more than $451 million in R&D tax credits throughout the past 10 years. And he says the key to getting it done is relatively simple: documentation.
“They want to know you recorded it as it was being done,” Antal says of the R&D projects your company undertakes. “It’s showing you had a system set up. They just want to know you thought about it and didn’t wait until the end of the year and looked back and said, ‘Oh yeah, what did I do in January?’ That’s the IRS’ big point. If you’re really doing this, why don’t you track it in some form instead of waiting until the end of the year?”
Before you start documenting, you need to know if what you are doing qualifies for the credit. Antal says it can be a new product your company is developing or introducing to the market or an improvement to an existing product. The gray area comes into play when someone outside your organization brings a project to you.
“Let’s say a person comes to you and says, ‘I’d like you to produce this widget for me,’” Antal says. “It kind of looks like this, and here’s what I want it to do. I don’t want to pay you any money upfront, but if you can produce it and it works for me, I’ll buy 10,000 of them from you.”
The IRS’ interest is in who is at risk should something go wrong with the project.
“Ultimately, it’s the company trying to produce it because if they weren’t successful, the other company wasn’t going to buy from them,” Antal says.
This is where documentation becomes key.
“What the IRS wants to know is, are these guys paying you for the final product or are they paying you for your time?” Antal says. “Only one company is supposed to take it. My advice would be to just define what the product is and specifically what you are doing. If you have a contract, look for key phrases like, ‘I specifically own the rights to it.’”
The payoff of researching the credit and documenting your research and development efforts is worth it, says Antal, especially in these tough economic times.
“If you took 6.5 percent of the expenses that qualify, that would give you an idea of where your credit would be,” Antal says. “If you had $1 million in qualified expenses, you’d end up with $65,000 in credits.”
How to reach: Research Credit Group Inc., (330) 689-1778 or www.rcg-inc.com
Documenting the hours spent on research and development projects is difficult because most engineers and entrepreneurs do not work on an hourly scale, says Ron Antal.
The easiest way to address that challenge is to put someone in charge of tracking the time spent on such a project.
“You don’t have to have every single person keeping track of their time,” says Antal, managing director of Research Credit Group Inc. “If they feed it to the person who takes a look at it and says, ‘OK, that looks reasonable that you spent 13 hours this week on that,’ they can just summarize it. It can be as simple as a handwritten journal. It’s a reminder to people. As time goes on, it’s the consistent maintenance, a little bit at a time.
“If the IRS does want to take a look at it, it’s really hard for them to refute that when you’ve been (tracking) it all along and documented why it qualifies.”
You’ll save yourself a lot of headaches by tracking your hours now, rather than trying to go back and reconstruct a schedule from the past.
“It’s a lot tougher if you’re going back and trying to claim the credit,” Antal says.