At a high level, the R&D Tax Credit is calculated by first determining which activities your organization is engaged in meet the eligibility criteria – and then determining what the eligible expenses associated with those activities, with the resulting credit amount being based on a percentage of those expenses.

1. The purpose of the activity must be to improve the function, performance, reliability, or quality of a product, process, formula, invention, software, or technique.
2. There must be some aspect of technical uncertainty at the outset of engaging in the activity,
3. A systematic process of experimentation (i.e. an evaluation of alternatives) is undertaken with the intent to reduce or eliminate one or more of these uncertainties, and
4. The activity must be technological in nature (i.e. utilize the principles of the ‘hard sciences’).

It is important to note that a complete eligibility assessment involves the application of numerous additional technical, contractual, and financial criteria and should not be made without guidance from a trained professional.

1. Employee wages for the portion of their time spent engaged in the eligible activity (either directly, in a direct support, or in a direct supervisory capacity).
2. Supplies used or consumed in the process carrying out the development process (i.e. the process of experimentation).
3. Expenses associated with any 3rd parties used while carrying out the development process (e.g. laboratory testing, technical consultants, other).

Determinations about whether or not a specific expense can or should be included in the R&D Tax Credit calculation rely on the application of numerous additional criteria as well. Please contact us if you would like to learn more about expense eligibility criteria.

Most R&D Tax Credit service providers will offer one of the following two fee structures: (1) billable hour basis (many will cap their total fees at a negotiated percentage of the total credits identified); or (2) a fixed fee calculated as a negotiated percentage of the credit amount they identify for your organization.

Capping total fees as a percentage of usable credits identified protects, or ‘locks in’ the value proposition of undertaking the R&D Tax Credit study process.

The various rules, regulations, and standards that govern the R&D Tax Credit methodology are collectively so complex and evolving that many CPA firms opt instead to either refer their clients to a qualified third-party R&D Tax Credit provider (like us!) or will themselves partner with a qualified third-party provider to deliver this service to you.

While some accounting and tax firms do maintain a bona fide in-house R&D Tax Credit service capability, it is a relatively uncommon practice.

Our R&D Tax Credit studies generally take 6-8 weeks to complete as measured from the start date to the time that final credit calculations and reporting documents are delivered to you for filing.  This timeframe may vary based on a number of factors such as organizational complexity, access to relevant data and personnel, and your company’s project volumes.

We generally recommend that prospective clients reach out to us as soon as possible to discuss any potential filing deadlines or other issues that may impact when we should begin their Study process.

While all claimed credits must be substantiated via documentation, generally there are no specific documentation requirements (i.e. that a specific document/s be utilized for a given aspect of the analysis). Examples of documents or data that are typically utilized include prior year corporate tax returns, payroll data, accounting logs or ledgers, timekeeping system data, project management system reports, reporting from any technical development data management systems that may be in place, testing or lab reports, drawings or pictures.

Assisting with the identification and collection of relevant documentation is one of the more tangible ways that StageGate Partners helps make the R&D Tax Credit Study process as easy as possible for our clients. Whether we need to configure a virtual data room compliant with a specific security protocol or physically visit your location and sift through decades of archived physical files, we do that.

Yes. 38 states currently offer state-level R&D tax credits. However, the amount of the credit, eligibility criteria, and various other rules governing the process of calculating and claiming the credit can and do vary by state.

Please feel free to reach out to us with any specific questions about state credits.

No.  Claiming the federal R&D Tax Credit on a timely filed return, even if on extension, does not increase the risk of audit.  Published IRS statistics indicate that only ~0.5% of S-Corp and Partnership, and ~1.0% of Corporate, tax returns are audited annually.  Reasons for audit selection vary and include random selection.

However, it is important to understand that because the R&D Tax Credit is such an effective tool for lowering a taxpayer’s effective tax rate, it will frequently be included within the scope of an audit if one is to occur.  This underscores the importance of working with a qualified provider that can ensure both the integrity of the analysis conducted as well as that all proper documentation is prepared consistent with applicable standards.