The potential benefits of claiming the R&D Tax Credit are significant, with many manufacturers saving hundreds of thousands of dollars a year or more. Yet, some companies may be worried and wondering:
• Is a complicated IRS audit in my future?
• How can audit risk be reduced?
• Does an amended return increase audit risk?
• Will the IRS look a little harder this year?
Here’s the truth: claiming the R&D Tax Credit may increase the risk of an audit, and amending prior returns could bump that a bit more.
But, there’s a lot of good news! Reputable, well-established firms with high integrity know the credit and the industries they serve. They won’t claim a nickel on their customer’s behalf unless they have 100% confidence it will be sustained, in the rare event of an audit.
What does that mean as far as risk? More on this later, but specialized firms regularly expect percentages of between 1% and 2%. Even if you’re one of the unlucky few, there’s nothing to fear as long as the R&D firm you have partnered with is properly prepared.
What activities qualify for the R&D tax credit?
Manufacturing activities that develop or improve an existing product or process may qualify for the tax credit. For example, the following activities that manufacturers do every day typically qualify for the credit:
1. Sales Time (determining requirements, quoting, etc.)
2. Design Meetings (collaboration among staff, etc.)
3. Flat Blank Layouts (design modifications, etc.)
4. Tool Making (design, build, tryout, etc.)
5. Engineering Process (new equipment, shop redesign, etc.)
6. Proof of Concept (process documentation, etc.)
7. Trial Production Run (first run of a product, etc.)
8. Quality Approval (PPAP, ISIR, etc.)
9. Shipping (package design, etc.)
How to succeed in claiming the R&D tax credit and avoiding an audit
To avoid an audit, be aware that these factors can increase the likelihood that your R&D Tax Credit claim will be audited:
- The overall size of your credit
- The credit you claim versus the industry average
- Claiming the R&D Tax Credit when you file an amended return — all amended returns receive additional scrutiny by the IRS
- Whether the IRS deems it customary for your industry to incur R&D expenses
Enlisting the help of a R&D Tax Credit expert helps ensure that your credit is maximized and will be sustained in the event of an audit. A specialty tax credit service provider also helps you navigate your existing record-keeping methods and standards and recommends the best methodology to optimize the process of claiming your credit.
Only 1.3% of Black Line Group customers get audited by the IRS.
In the event you are audited, you should count on your R&D Tax Credit partner to proactively take the lead in your audit defense and back up every dollar claimed so that you can go about the business of running your business.
If you want to read a fascinating tale of being audited, check out this interesting case study. Going against their CPA’s advice, this manufacturer claimed R&D Tax Credits that resulted in an ROI of 1,216% of the fee paid. They passed their audit with flying colors. Get your copy now by clicking below.