Is This a True Credit or a Deduction?
As the name suggests the R&D credit is a credit. It is designed to put money directly in your pocket. The credit directly reduces your tax liability dollar for dollar. If this were a deduction, it would only reduce your taxable income (and not be nearly as lucrative).
How much can the credit be worth to my company?
Strictly speaking, the credit will be worth on average 4.5% of your R&D expenditures plus any state credits that may be available. All-in-all we have clients that see close to 10% or their R&D spending coming back to them every year. Keep in mind that though the IRS definition of R&D may be quite particular; it probably encompasses more expenditures than you think.
Is This a Legitimate Credit?
The government reinvests nearly $8 billion via this credit every year. It has been put in place to keep high-tech, high-paying companies and jobs here in the United States. Think of it as one way our government is battling cheap overseas labor and attempting to grow our economy.
Will the R&D credit increase my chances of getting audited?
No, the credit will not spur a general audit. We do find that approximately one in seven of our R&E amended claims is audited; however, just as we use engineers to determine what is qualified, the IRS uses engineers as well. Therefore, any R&E audit usually stays within the scope of just the R&E credit.
What happens if the R&D credit is audited?
Hull and Knarr provides comprehensive audit protection to its clients. If the IRS has any questions we will answer them for you. Our approach is to perform the work necessary to win an audit BEFORE the credit is filed.
How is the Credit Calculated?
There are three calculation methods available. Which we use will depend on your situation and the engineering and financial information available. As we begin our process we will provide a detailed explanation of the route we will take. You might get bored with this part.
For more information on our process, please review the Credit Process Page.
My accountant handles this. Why do I need you?
Simply put: Accountants are not very good at answering engineering questions. Your accountant likely has a cursory knowledge of the R&D credit, but does not have the engineering expertise to support and maximize a claim.
For the same reasons you go to a specialized patent attorney for your intellectual property needs, you need an engineer with specialized tax law knowledge to maximize and defend your R&D tax credit.
Why does Hull & Knarr use Engineers to qualify companies for the credit?
Much of the confusion about the credit stems from the assumption that because its related to tax… it MUST be a function of accounting. While the final credit amount does end up going on a tax form, the correct methodology for getting to that number is a discipline of engineering.
Will Hull & Knarr work with our accounting firm?
Yes. Hull & Knarr is not an accounting firm; and we are not in competition with your accounting firm. In fact, we work with Big Four accounting firms on a regular basis with regard to the R&D credit.
Most of our research is government funded, can I still qualify?
We manufacture all or our products outside the United States, is there still opportunity for the R&D credit?
Yes, this credit is only concerned with where the R&D process occurs. You can move your production to the moon for all we care. Of course any R&D that occurs on the moon (or anywhere outside the US or US territories) will not be eligible.
What types of past accounting information and supporting documents are required?
To complete a retroactive R&D study, required accounting documents will vary. In a perfect world we would have all tax returns, W2s, and time tracking information back to 1984 or when the company started (whichever came second). Obviously, this is a bit of a pipe dream, and the IRS agrees. There are several ways to work around missing accounting records, though we will go to great lengths to recover historical records. However, sometimes we have to forgo retroactive credits and concentrate on claiming the credit going forward.
Our product development information is very sensitive, do you really need specifics?
We always sign non-disclosure agreements, in fact many of our clients are Department of Defense contractors; and we will be glad to sign any other confidentiality documents that will make you more comfortable. In order to maximize the credit opportunity we will need access to all parts of your R&D process, but of course we always work on a case-by-case basis.