Your Research & Development tax credit is dependent on identifying ALL your Qualified Research Expenses (QREs).
If your R&D credit provider does not know ALL the rules (and very few do), they will miss QREs.
What is included?
The concept of QREs helps businesses determine which of their R&D activities qualify for tax incentives. R&D tax credits are intended to encourage and reward companies that invest in innovation and technological advancement. These tax credits can significantly offset the costs associated with research and development activities.
Qualified Research Expenses typically include:
- Wages: Wages paid to employees directly involved in the research process, including scientists, engineers, and technicians.
- Supplies: Costs for materials, supplies, and equipment used during the research and development process.
- Contract Research: Payments made to third-party contractors or research institutions to conduct qualified research on behalf of the company.
- Overhead: A portion of the company's related overhead expenses, such as utilities, rent, and depreciation.
It is important to note that not all research and development expenses qualify as Qualified Research Expenses. The activities must meet specific criteria set forth by the Internal Revenue Service (IRS) to be eligible for the R&D tax credit.
For example, research must be undertaken to discover new information, eliminate uncertainty, and improve a product, process, computer software, technique, or formula.
Why are QREs so easy to miss?
The R&D credit rules are subjective. Additionally, the definitions of qualified costs have changed over the years. This means, it takes a level of expertise to know all the rules and be able to identify all the qualified costs.
Tax Court judge, Judge Vasquez, stated in a case opinion during the Suder v Commissioner (2014) case that the R&D credit rules were the most complex and difficult to apply in all the tax code.
Status Quo
There are too many tax rules for one person to know them all. This is why tax professionals specialize.
Mastering the R&D credit rules requires that a tax professional analyze multiple versions of tax regulations, over 50 court cases, and hundreds of IRS and state revenue agency pronouncements, instructions, and notices. Some rules apply to all taxpayers in all industries and other rules apply to selected taxpayers in selected industries. It takes tax professionals years to gain a basic proficiency of the rules.
In addition to the complexity, the tax industry has always looked down on the R&D credit specialty. The best tax minds have avoided this specialty. This has caused firms to hire non-tax people (in fact even non-accountants) to perform R&D credits. We have seen school teachers, medical school dropouts, IT administrators, and others pretending to be R&D credit experts.
Who is computing your credit? What is their professional background? Do they know the R&D credit rules?
These are valid questions. If your R&D credit specialist does not know the rules, how will they ever begin to identify ALL your QREs?
Examples.
How can you know if your R&D credit CPA is missing costs? They say things like this… (the statements below are from R&D credit professionals that do not know the rules)
- “That’s not a real uncertainty.” The rule is you must have uncertainty. There is no rule explaining what a “real” uncertainty is. This project was not included in the credits when it could have been.
- “That project does not have as much uncertainty as the others.” The rule is you must have uncertainty. There is no rule saying how much uncertainty you need. This project was not included in the credits when it could have been.
- “You don’t need the exact time.” The rule is you do need the exact time. In the end we all estimate the time a person spends on research…but to tell someone they do not need the exact time shows the person does not know the rules. Also, if they were to say this during an IRS exam, they would lose the point and possibly the entire credit.
- “We don’t have business components.” A person did say this to an IRS agent and did lose the entire credit. The rule is you apply the rules to each business component. I was on the phone with an R&D credit partner, and they said this in response to the IRS’s request for a list of business components.
The list could go on and on, but this gives you a taste. The cost of missed costs is simple. If you do not include all the qualified costs, your credit is smaller than it could be.
The AI Alternative
AI models are trained by the smartest people in the industry. They are trained in all the tax rules, all the court cases, all the IRS guidelines. This makes the AI models smarter than any one R&D credit professional. The AI models can find costs that others will miss.
