Congratulations! You’ve discovered that your business qualifies, and you’re going to claim, the R&D Tax Credit. Now, you need to determine who will be involved in accomplishing these important tasks (internal resources, assistance from your CPA, an outside R&D tax expert):
1)Identifying and calculating your qualified research expenses (QREs)
2)Completing Form 6765
When thinking through who will be involved, keep the following in mind:
“Am I documenting everything to properly defend the claim?”
“Am I sure I’m not leaving money on the table?”
“How do I know if the QREs are calculated correctly?”
“Is it smarter to rely on a firm that specializes in R&D Tax Credit studies?”
Finding Qualified Research Expenses (QREs)
Before you can even think about completing Form 6765, you need to consider how to determine what will be included, namely, your qualified research expenses (QREs). This is where the bulk of industry knowledge and expertise is actually put to use, mostly during an official R&D Tax Credit Study and making sure everything is properly documented so it can be defended (more on this later).
R&D expenses that qualify for tax credits can be broken down into three categories:
- Wages paid as part of R&D expenses can be included in the tax credit calculation only if they were paid for “qualified services” performed by the employee.
- Supplies involved in your R&D expenses, such as parts, molds, and other base materials
- Contract worker expenses paid for services performed to meet the specific R&D criteria are eligible if the wages claimed in the application were paid only for those services.
A Complex and Constantly Changing Form
Once QREs are determined and documented, it’s time to complete Form 6765. Internal Revenue Code (IRC) Section 41, which governs the Research Credit, is loaded with details. An advanced level of knowledge is beneficial to understanding the terms, qualifications, and caveats applying to the credit.
References to subsections of Section 41 appear throughout the instructions, making it more complicated. It also refers to another document, Credit For Increasing Research Activities, which is 14 pages on its own.
Form 6765 has changed almost yearly since 2002. That’s a lot of requirements to learn and then have to relearn year after year. With everything on your CPA’s plate, can you be sure they’ll keep tabs on all the changes? More importantly, are you sure you’ll be legally claiming the most credits you can get?
Experts Can Claim More and Document Better
The combination of your internal staff (CFO and others) along with your CPA is no doubt a powerful force. And they’re surely looking to claim whatever they can. No disrespect meant, but there are reasons why a specialist can find more qualified activities than your team can, providing you with higher ROI on your R&D Tax Credit:
- A specialist knows the law — As Form 6765 changes along with the requirements, it’s the specialist’s job to stay on the cutting edge of what can and cannot be claimed.
- A specialist knows your industry — A specialist knows how changes can impact your industry, properly identifying which of your company’s activities are eligible for the credit.
Having the required supporting documentation is crucial. In the event of an audit, you must prove that each expense meets tax credit requirements by showing how it fits into your overall R&D procedure. An R&D Tax Credit specialist determines the documentation necessary to support the claim, which involves more than Form 6765.
Answer These Questions
In order to complete Form 6765, you need to know and provide specific and qualified details. If you can’t answer these, perhaps a specialist can help.
- Did you know that your business type — eligible small business, qualified small business, member of a controlled group of corporations — dictates the information you need to provide?
- Do you know how to determine the base period for the research credit? For a recent start-up (operating less than 3 years), it’s trickier than a well-established company.
- In order to document properly, what subject matter expert (SME) interviews are planned to describe your qualified activities?
- Do you know which of the product development or improvement lifecycle specific to your industry include qualified expenses?
- Do you know all of your qualified supply expenses and qualified contractor expenses you need to capture?
As previously mentioned, an R&D tax specialist helps you collect and organize all necessary supporting documentation regarding the IRS’s Four-Part Test and every other step, too. There’s no more effective and reliable way to make sure you have complete and correct information to complete and properly file Form 6765 for the research credit.
You Make the Call
Can you confidently determine your qualified research expenses (QREs)? Maybe.
Can you complete the R&D Tax Credit Form 6765 by yourself? Sure.
Yet, it’s not easy, and you may never know if you’re maximizing the amount you can claim. That lost opportunity could make the difference between growth and falling behind, especially during a time when a global pandemic and labor shortages are the new normal.
With a partnership of a firm that specializes in the R&D Tax Credit, you’re getting thorough guidance. And remember, a key benefit of working with an R&D tax specialist is that they’ll document everything and stand behind the work performed in the event of an audit.
At Black Line Group, we’ve helped companies take their credit from $5,000/year to $150,000. The time spent by your staff working with us can translate to thousands of tax dollars saved for every hour the team invests. For a complimentary consultation, reach out to our team of experts.
Wondering if you’re receiving full value from the R&D Tax Credit? Review our guide: Manufacturing R&D Tax Credit Guidance.