Grappling with the Most Difficult Research and Development Tax Credit Issues (Part 1)
Attending the 2017 Research and Development Tax Credit Symposium in Washington D.C. gave some of Indago’s Tax Credit Practitioners the chance to discuss unique issues with other experts in the field. Some of the new or unsettled issues in the field include prototype claims, funded research in vertical industries, proper estimating techniques, and Acknowledgement of Facts in IRS audits. These types of issues can present difficult tax problems for companies, fortunately Indago’s technical staff is here to help you navigate these challenging issues.
Prototype/Pilot Model Claims: Recently, changes to the regulations around the research credit expanded the definition of prototypes and pilot models. Previously, a company could only claim the cost of a single prototype if the company developed the prototype for another company and then sold the equipment to another company or otherwise did not claim the depreciation expense. Now, the cost (labor and supplies) to build a fully functional prototype can qualify as research costs for the company that developed the equipment equipment or prototype. This change further encourages innovation and risk taking on the part of companies on the cutting edge of their field.
Funded Research in Vertical Industries: Many small to medium sized companies enter into contracts with much larger businesses to perform services or to develop custom products or equipment. Oftentimes, larger companies utilize standard form contracts that contain very favorable language for the larger company. This process can have negative effects from a research and development tax credit standpoint because the larger company prevents the smaller company from claiming the expenses related to the project. Indago can help you navigate these tricky contract questions so let us know if your research activities pertain to work done under contract for larger companies.