Build the R&D Tax Credit Into Your Accounting System

The Opportunity

Several Years of R&D Tax Credits May Still Be Available

Companies discovering the R&D Tax Credit today may have more than the current year available. Depending on when prior returns were filed and taxes were paid, two or three previous tax years may still be open for amended Federal returns, along with opportunities under applicable State R&D Tax Credit programs.

For companies with meaningful qualifying R&D expenditures, combining several years of credits can create a substantial tax benefit. Depending on the company's tax position, those benefits may include refunds of taxes previously paid, reductions in tax liability, and credits available for future years.

When multiple years of qualifying activity are involved, the cumulative benefit can reach hundreds of thousands of dollars for some companies.

The Problem

Tax Time Is the Wrong Time to Reconstruct a Year of R&D Activity

Most accounting systems were not originally configured with the R&D Tax Credit in mind. As a result, potentially qualifying wages, supplies, contract research, project costs, and supporting information may be recorded without identifying their relationship to research activities.

When the credit is prepared months later, accounting personnel, management, technical employees, and tax professionals may have to reconstruct what happened, who worked on it, what was spent, and how the underlying activities relate to the credit.

The information may exist, but identifying and organizing it after the fact can require substantial time, additional analysis, employee interviews, spreadsheets, and manual reconciliation.

• Employee wages may not be readily connected to qualifying projects and research activities.
• Potentially qualifying supplies and outside research costs may be buried within broader general-ledger accounts.
• Project, payroll, accounting, and timekeeping information may not be connected.
• Employees may not know what activities and expenditures should be identified while the research activity is taking place.
• Supporting financial and technical information may have to be reconstructed long after the underlying work occurred.

What Good Looks Like

Capture R&D Costs as Part of Normal Accounting

A well-designed process begins with the people doing the work. Management, accounting personnel, and other appropriate employees should understand what activities and expenditures may qualify and what information should be captured.

The accounting and related systems can then be configured or customized so potentially qualifying costs are identified contemporaneously as part of normal business operations.

Payroll, project costs, supplies, outside research expenses, locations, time records, and other relevant information can be organized in a way that supports the preparation of Federal and applicable State R&D Tax Credits.

Reports can then be generated from the company's own systems, reducing the need to recreate the information later.

• Train employees on what activities and expenditures may qualify.
• Configure or customize accounting systems to identify R&D costs as they occur.
• Connect payroll, projects, expenses, time records, and other supporting information.
• Develop reports that organize the information needed to support the credit.
• Reduce year-end reconstruction, employee interviews, and manual spreadsheet work.
• Create a repeatable process that can be carried forward from year to year.

Make the System Serve the Business

The Tools May Already Be There

QuickBooks, your ERP system, payroll system, project-management software, timekeeping system, and other existing applications may already contain much of the information needed to support the R&D Tax Credit.

The objective is not necessarily to replace those systems or create another layer of technology and administration.

The objective is to configure the accounting, payroll, project, information, and reporting systems so they capture the right information as part of normal operations.

Once established, the process can be carried forward each year and updated as your business, research activities, accounting systems, and reporting requirements change.

Recover the Past. Build the Future.

Start With the Credits Available Today

The initial engagement can include a review of open prior tax years to identify qualifying activities and expenditures that may not have been previously claimed.

When appropriate, Criterion can perform the specialty tax work needed to calculate the Federal and State R&D Tax Credits and support the amendment of prior-year tax returns.

Going forward, the emphasis changes from reconstruction to contemporaneous capture. Your team understands the process, your systems capture the appropriate information, and reports can be generated directly from your accounting environment.