Understanding the R&D Tax Credit – A Guide for Tax Practitioners & Advisors

hello and thank you for participating in today’s webinar understanding the R&D tax credit a guide for tax practitioners and advisers our presenter today is Ashley Thompson Ashley has 14 years of experience helping clients claim federal and state research tax credits and leads B Katie’s nationally recognized research and experimentation Tax Credit practice Ashley helps clients who do not claim credits identify document and calculate available credits and implement strategies to efficiently capture qualified research expenses on a go-forward basis he also helps clients who do not claim credits improve processes to better substantiate expenses and maintain documentation consistent with IRS expectations Ashley also has significant experience in defending research credit claims for both public and private companies before the IRS including representation at the appellate level he also worked with companies ranging in small closely held businesses to large multinational conglomerates he is a graduate of Wabash College Crawfordsville Indiana with a BA degree in economics thank you again for attending the webinar today at this time I would like to introduce Ashley thank you and thank you to everybody for joining us today to talk about research tax credits if you ask me there’s nothing more lovely to talk about on a on a Tuesday morning so here we go a little bit of what we want to cover today is certainly give you guys an idea of who qualified for the credit so I think what you’ll see here is that you know there are a lot of different types of companies they can they can claim credits and it really comes down to you know what are they doing and are they involved in developing things that are new approved the other things that we want to hit of course is you know what is the potential value of the credit what we want to arm you guys with there is just a rough rule of thumb so when you’re out meeting with clients and prospects and they bring up the research tax credit you’ve kind of got this this general rule that you can go by to give them a snapshot of what that potential value might be and then of course I think we have a lot of folks on the phone today who currently have clients that are claiming research tax credits and they may work with an outside service provider they may be doing it internally on their own and so what we want to cover there is just you know are there any risks that we should be aware of and so when it comes to the credit you know what are the key things that you know we as tax practitioners need to be on the lookout for and so what we’ll cover some of that and then finally we just want to spend a few minutes talking about you know what does the future look like and what does the future hold for research tax credits and so what do we anticipate you know going forward and so those are really that the primary topics again that we’ll hit today so applicable industries I’m certainly not going to read everything that’s on the slide view guys you can certainly glance down through that I think the purpose of this slide is really to highlight that it can be any number of types of companies any number of industries of course generally where you see the sweet spot would be with your manufacturers that are developing new or improved products as well as with software companies generally with software research and developments the lifeblood of their business so if they’re not currently involved in R&D so developing you know new versions of software chances are they may not be around a real long time and so again we see a lot of opportunity there and then of course opportunities in those other industries as well so some of the indicators that we look forward to say hey you know do we think that a company has research or qualified research taking place would it would just be some of those things that you see on there on the screen right now you know I think the big thing that often gets overlooked would be process development type activities and so generally you’re going to see this with manufacturers right so you know things that your manufacturing clients might be doing to you know improve efficiencies of their process so either you know improving the the production rates you know so can we take a process and instead of doing 25 parts per hour can we do 50 parts per hour so probably take some R&D to get there or it might be things that they’re doing to processes to reduce scrap so cut down on you know the waste and so that would be where we would see some opportunity there with process and the other thing I really want to highlight off this slide would be the bullets it’s a software development and technology development and the reason being there if if we were to flip back to that this slide immediately prior to this you would see on their insurance companies financial institutions and the National question there is well how do these companies really have research

activities it’s not really something where you at equate research with those those industries and chances are if they have qualified activity it’s coming back to software development technology development things like that so they’re developing these these platforms you know generally in-house they might have a pretty robust IT department in-house that’s figuring out you know how to program that how to code that you know how do we develop that functionality so you know we can interact with with customers interact with third parties and so again when you when you start to think about software that’s really where you have these these wide-ranging applications and so we don’t like to waste any time with giving into the polling question so we have polling question number one just simply says do you serve clients who claim the R&D tax credit so of course yes/no or unsure and again you’ll have a few seconds to to respond to that so as you can see we have a mix of results there that sounds like the majority of the folks on the phone I do serve clients they claim R&D tax credit I’m right there in the boat with you guys I certainly have clients that that claim credits and so so again you know hopefully you guys find some key takeaways from this presentation that we helpful and applying those to your clients I think it’s very important that we spend some time talking about what is research and when we say what is research really what we’re talking about is an IRS definition of research and development if you were to go to your clients and let’s say your client has an engineering department or they have an R&D department and you were to say to an individual within that department you know what do you think of when you think of research and development chances are they’re going to define it as you know groundbreaking technology groundbreaking discoveries so things you know that have never been thought of in the world things that are completely new to the industry may be a situation where they’re expanding or refining the principles of a given science and so you know they really have this definition of what we would often call you know the definition of pure research or basic research so things that are just completely new that nobody has done before and so when you start to think about that type of definition if it’s a fairly narrow definition and if that was the definition that we had to operate within we wouldn’t see a lot of companies out there claiming research tax credits and so the thing that we like to stress to our clients and the in the prospects that we talk to is you know let’s really expand this definition of R&D and let’s really broaden the type of activities that we feel fit within this definition and so we’ll spend a few minutes just going over what is often lovingly referred to as the four-part test and so if you were to look at the tax code and the regulations and this is Tax Code section 41 if you boil it all down you really see these these four main requirements that must be met for an activity to be considered research and development so the first requirement just says that you know a company is developing a new or improved business component and the definition of a business component could be a product process technique formula invention or software item so they’re a business component can almost be anything right so what essentially what we’re saying there is we want to see that that company is developing something again that’s new or improved and so if we were to highlight some keywords there what we’d want you to highlight again is is new and especially the improved component so again when you have an existing product and you say you know what we want to improve the functionality of it the quality of it really you know take it up a notch take it to another version again that’s something they can qualify for the credit a couple other things to note while we’re on that requirement is one when they’re developing a new or improved business component it really means that it’s newer improved of the taxpayer so newer improved to your client doesn’t have to be new or improved to the world doesn’t even have to be new or improved to their particular industry it just has to be newer improved to them and something where they’ve had to invest internal resources to develop it and figure it out so again really new new to your client here the other thing to keep in mind is that you know improvements don’t necessarily have to be significant even small incremental improvements can take a lot of time effort energy and resources to get there so again just because the end result of something seems insignificant doesn’t mean that it’s not qualified for the credit the the other thing that this worthwhile to point out here in a common question we get is you know does the research have to be successful in order to qualify for

the credit and the answer to that is no it doesn’t the research credit is out there for both projects that are successful and projects that ultimately fail so the outcome of the project is somewhat irrelevant it’s a matter of you know did you go through effort that constitutes are indeed to try to figure it out the second requirement just says you know what we want the research to be technological in nature this requirement was put in back in the you know mid to late 1980s so it’s been there for a while and really all this requirement says is they want companies when they’re undertaking a research project to utilize principles of the hard sciences so hard sciences could be engineering principles chemistry biology physics computer science those types of things this requirement is really in there to rule out research based on economics research into new financial products things like that as well as to exclude research based on social sciences arts humanities those types of things what’s been clarified with this requirement over time is that again it’s simply about utilizing existing principles you don’t you know your clients don’t have to necessarily be you know developing new principles or refining existing principles they just have to be utilizing what’s already out there so again when you think of software development and developing you know software platforms software products again those individuals are utilizing computer science principles it doesn’t necessarily mean that they’re discovering new principles they’re just using existing ones and that’s completely fine and that’s enough to meet that requirement similarly when you look at manufacturing and you think about you know product development product improvement you know chances are they’re utilizing mechanical engineering principles electrical engineering principles and so again that’s where you’d see that requirement being met similarly on on process design when it comes to manufacturers again a lot of engineering used so again it’s usually not a hang-up for clients claiming credits again it’s more just to help say you know there are certain things that don’t meet that again such as financial products or social sciences arts humanities things like that the third requirement is what’s often referred to as the uncertainty requirement and so when you look at a qualified project we want to see that there’s some uncertainty there related to the development or improvement of that business component and so if you were to look at the code it says you know uncertainly exists if the information available to the taxpayer does not establish the capability method or appropriate design of the business component and so simply put what that really means is that at the outset there’s some questions there that that have got to be that you’ve got to work through it might be questions as to if it can be done how to do it what’s the appropriate design of it and so again it’s just saying you know there’s unknowns here and these are these unknowns have created the need for us to go through research and development another way to look at this requirement is to say you know due to the technological nature of the project there’s a risk for failure a chance that you may not succeed and so when the credit was put into place they said well okay what you know what type of projects do we want this incentive to be out there for and they said well you know we want people when they’re sitting around a conference room table saying you know we’re not sure whether or not they undertake this project there’s uncertainty there there’s risk there you know this is supposed to you know this credit supposed to be one of those factors that helps push them forward so again saying you know we’re gonna provide an incentive for you to go ahead and undertake that project oftentimes when when we work with our clients and we’re identify identifying projects and then identifying the uncertainties we would say well you know let’s talk about what your goals and objectives are for this particular project and and generally you know there’s some performance requirements functionality requirements quality requirements and as you start to look at all those you say okay well were you certain you can hit all those or you know you or were they more as scenario in which yeah you know we we thought we could hit those otherwise we wouldn’t have undertaken the project right but you know we weren’t a hundred percent sure and so again that’s how we would identify some of those uncertainties and then finally this process of experimentation requirement so what this says is they want to see tax payers go through a process of experimentation to eliminate

those uncertainties and so again when people hear that word experimentation it’s pretty common for them to think of people that work in labs so you know people that wear white lab coats people that use test tube speakers those types of things and that can certainly be part of of experimentation but more importantly what this process of experimentation is about is about developing new ideas new concepts new alternatives and then going through a process design to test and analyze those ideas to come up with something that works and so the way that we commonly explain this process of experimentation is to say well you generally go through some common steps and this generally applies whether it’s product software process related research you on the front end you okay this is what we want to develop okay this is what we’re aiming for and then generally brainstorming starts to occur and in that brainstorming session that’s really your start of this process of experimentation and the start of qualified research because that’s where the development of these new concepts really starts to take place and then from there somebody’s going to take that or a group of individuals and do some detailed development on it and eventually that’s going to lead to you know let’s say a prototype or an experimental model and then testings going to be done on that whether it’s you know computer modeling and simulation or maybe it’s physical prototype testing but takes place so they can gather data they’re going to analyze that that data and then to the extent that something doesn’t work they’re going to make modifications so we revise that original concept and then go through those those testing steps again and so that’s really what makes up this process of experimentation i’ve going through those types of steps and again each company is a little bit different so you know you’ll see that those steps you know be done a little bit differently depending on where you’re at but from a high level that’s generally what you’re going to see so when you couple that with that uncertainty requirement and you say well how do we how do we Ella straight that there’s uncertainty that there’s a process of experimentation how do we identify you know qualified projects taking place again when you think about risk for failure you say well let’s really highlight those projects that failed and so if you have clients or you’re talking to a prospect and they have an R&D project that failed there’s a very good chance that that’s research and development because again you have uncertainty because it failed and then you know they would have had to design a concept and test it to know that it failed so you see those elements of a process of experimentation but again you know a lot of the companies that we work with are very successful right that’s why they’re in business and so in those situations we’d be saying well let’s talk about those projects where you didn’t get it right the first time it was maybe the second third fourth fifth iteration before you’re successful and again what you’re doing there is you’re highlighting you know what we often see are the failures along the way and so am i doing that you start to highlight that there’s uncertainty and again that they went through this process of experimentation so then the nutshell is is the four-part test and again the easiest way to to you know work with clients and prospects to learn about what they’re doing again it’s just a you know let’s talk about those projects that where you had difficulties you know projects where you had to try different things so this slide just simply shows different examples of qualified research activities so some of the things you know we see our clients involved in the qualify for the credit so certainly a lot of new product development type activities certainly product improvement you know we’ve mentioned software development probably worth highlighting or just the bulleted items on the on the right hand side so generally when you see and these relate a lot to manufacturers obviously because it’s a lot of process related research so automation of processes you know generally that that’s good opportunity for research expenses certainly on the tooling design so when we think about tooling what comes to mind for us would be if you have clients that are metal stampers so you know they they design develop production tooling to punch out parts for clients so that’d be more on that on the metal side of things when you think about plastics you know we think about injection molding so plastic injection molder ‘s again they’re going to be developing you know tooling or injection molds to be able to to manufacture part

and so again the design and development of that tooling in those molds is something that can qualify for the credit new equipment development or equipment modifications if you envision the scenario in which you have a client that you know seeking to improve a process and they say you know what it’d be great if we had a machine that does XYZ the problem is there’s not a piece of equipment on the market that they can buy and just implement you know they may say well you know we have talented people on staff we’re just going to develop our own piece of equipment and so you know designing developing that own in-house equipment can certainly qualify for the credit and then finally scale up activities for production and there is a Union Carbide court case back in 2009 that really hit on this particular topic and so generally where you’re going to see scale up activities you know we see it mostly with our with our chemical manufacturers and so generally the idea there is when you do your initial research and development you make pilot patches or test batches you’re generally doing that on a very small scale so in a pilot lab and then of course when you take that to a production environment and you scale it up for mass production you know they’re just some other external factors that come into play and so there can still be you know uncertainty on that large-scale production process that you didn’t necessarily encounter when you’re making a small pilot batch and so we just want people to be aware that the scale-up activities to take it from you know from lab setting to a production setting can certainly qualify for the credit so polling question number two does this definition of research and development expand the way you think about clients qualifying for the R&D tax credit so again they’re the famous response is yes now we’re unsure a mic my guess is what we’ll have a variety of responses to this one as well know hey we we didn’t we didn’t have a variety of responses oh okay yes so I’ll take that as a good thing so and I think it’s good that fans away that that you consider the research tax credit and how it applies to your to your clients so we’re gonna switch gears here a little bit just talk about qualified research expenses so you know step one is is identifying qualified activities step two is identifying the cost excuse me associated with those activities and so qualifying expenses break down into three different buckets wages supplies contract research for the majority of our clients what really drives the credit is wages and and this will be the wages of employees that are involved in qualified research activities so employees that are directly involved in the R&D people involved and direct support or people involved in the direct supervision and so direct research you think about those engineering groups the scientists the chemists the ones that you know have their sleeves rolled up and getting their hands dirty direct support what you would generally think of there would be you know these these other people can on the fringes that support those activities through maybe prototype testing so you might see a quality department that’s that’s participating in that you might see a drafting department that’s putting together drawings things like that so again some of those support related activities and then finally direct supervision would be you know let’s say you have an R&D department you’ve got an R&D manager he’s directly managing those folks reviewing their work time spent directly supervising those R&D activities is nothing that can qualify as well and so typically when you’re looking at qualified wages it’s it’s a matter of identifying who within the organization is involved in R&D and again it essentially can be anyone within the organization it’s not limited to particular departments but who’s a Mullen Rd and then allocating their time to qualified research activities and then what whatever percentage of time is spent in R&D taking that percentage of their w-2 wage for the year not throwing that and your R&D bucket so a couple things to note when we talk about wages we are talking about w-2 wages or taxable wages the code is specific and that we’re limited to looking at that so you know we need to exclude non-taxable fringe benefits so 401k contributions you know insurance premiums things like that so again if if you have clients that are currently claiming credits and they’re just simply passing you a work paper every year showing what they’re qualified research expenses are we’d say well you know look at that wage number make sure you have

w-2 wages and not gross wages just to make sure we’re including the appropriate amount the other thing that always consider is this 80% or more rule that says if an individual is spending 80% or more of their time and qualified research activities that is substantial all their time and you can you can take a hundred percent of their wages and so again in the in the calculations that we do we show whatever percentage that individual comes back at so let’s say it’s 85 percent we chose a spreadsheet and we can still identify 85 percent within our formula and the in the cell showing the math thinking you know the percentage of their w-2 wage would just go ahead and round that up to 100% so again they you know if you have clients that are that are putting these work papers together on their own another thing that we can look at on our end is you know do they have anybody that’s over 80% and if so are they claiming 100% of their wages because you know we have clients that pass us work papers showing the accumulation and expenses and we’ve seen instances where you know if it is 85 percent they’re still just taking the 85 percent of the wage and so again that’s an easy way for us to boost the expenses related to Rd supplies are generally raw materials that are going into prototypes or materials used for testing the big exclusion here would be anything that’s considered appreciable property so generally you’re talking about equipment expenses a common question we have here is you know a client will have an R&D lab or test lab and they see you know we bought some equipment specifically for the lab it’s only going to be used for R&D purposes so it’s not used for anything else can we include that for the tax credit and unfortunately the answer is no because all that equipment is you know it’s considered depreciable property so again you know if if we have situations where clients are passing us work papers and we have supply expenses one of the checks that we want to do is to make sure that we don’t have any to persuade thumbs in their or they’re not trying to capture depreciation itself so again it really is going back to prototype expenses or materials used for testing the other thing worth noting on supplies is a general and administrative expenses such as utilities and things like that are generally going to be excluded from the calculation as well the only instance in which you might consider including utility expenses is if the nature of the research called for an extraordinary usage of those of a particular utility or utilities so you know they give some examples and the regulations and say you know if you think about nuclear research or laser research you know that’s going to consume you know large amounts of electricity and so in those situations you know that might be an example of utility that could be picked up and then finally we have contract research which expenses you know contract research is simply where you know a client utilizes a third party to carry out R&D activities on their behalf so somebody’s doing research for the company it just so happens that they’re not an employee so generally you might see some independent contractors you might see some outside testing labs things along those lines a couple things to keep in mind is you know one we want to see that whoever’s claiming the credit we want to see that our client retains ownership rights to the research results and we also want to see that our client is financially at risk for the R&D so being financially at risk just means that they’re paying for the research regardless of the outcome so whether it succeeds or whether it fails they’re going to be paying for it so again those are a couple things keep in mind and then also that there’s a 65% limitation on contract research expense and so you know to make the math easy right look let’s say somebody spends $100,000 on contract research that hundred thousands qualified for credit well only 65 thousand of that would be included towards the actual credit calculation and so again you know when we have again when we have clients that are sending in work papers showing their there are the expenses and they have contract research you know one question we often ask is you know is this the 65% number that you’re providing us or is this the gross number so that way we make sure we get the right number into the tax credit calculation when you think about contract research you know one thing that companies don’t often think about would be certification testing so you know we have a lot of manufacturers that develop products and that product has to be ul certified before they can really take it to market

and so we look at those UL expenses as being qualified research expenses we look at is really an extension of this process of experimentation because it’s testing and this testing that occurs before that product is released for commercial production and if for some reason you know part of that test is not passed you know the company’s going to make adjustments to that and go through the testing again and so again companies don’t often associate those types of expenses with paying rnd and so again that’s something that we often look at with our clients and then the important distinction there is making sure that we’re we’re capturing testing expenses for products that have not been commercially released versus annual listing expenses or maintenance expenses to continue to have products listed year after year after year and so again you know that distinction does have to be made but that’s an example of a contract research expense that people don’t don’t often typically think about so the research credit calculation you know the crowd has been around since 1981 and the mechanics behind the credit calculation I’ve gone through adjustments over that period of time you know they the good news for us is that the two methods that are out there now the regular credit and the alternative simplified credit both those have been around since 2007 and they’re the only two methods that we can choose from as we sit here today and so it’s really an annual election to determine you know which method to use and so clients are allowed to calculate the credit using both methods and then certainly use whichever one gives the best result the only thing is you know once you clean the credit once that returns filed you cannot go back and amend the return and change methods so once you claim it you’re locked in for that particular year but in subsequent years you may decide to change methods and that’s completely fine the nice thing that came out I think it’s been a year and a half ago now so June 2014 they came out with guidance saying that the alternative simplified credit could actually be used on a minute return so prior to that they said well that the election to use the alternative simplified credit had to be made on an original return so that I would filed original return and so all that said was if you’re minting returns you’re stuck using the regular method which can be problematic for a lot of clients so again that was a nice change and so what that did was really open the door for companies that have not claimed credits to really think a lot more about amending returns using the alternative simplified method the one thing that you want to watch out for with clients is if they’ve been using the regular method for several years and everything gets updated basically on the same as last year basis and and so you just always use that regular method you know we would strongly encourage you to go ahead and just punch in the numbers on the alternative simplified method because we’ve certainly seen that situations on our end where that will give a better result and so it’s a nice way to boost without a lot of additional time going into it so again that’s why we say always compare the two methods our rough rule of thumb that you can go out the clients with is generally a 5% of their qualified research expenses will come back in the way of attack savings so again some situations will be more than that some it’ll be less than that but again that’s generally going to put them in the right ballpark so the the credit calculation is a credit for increasing research activities so whether you’re talking regular method or alternative simplified method you calculate a base amount and then whatever you spend over that base amount is which calculate your credit on and so here you kind of see the regular credit calculation you would determine your current your qualified research expenses determine your base amount and essentially whatever you spend over that base amount you’re gonna get a 13% credit on and so that the catch on the base amount here is to calculate that you have to first calculate a fixed base percentage and then multiply that fixed base percentage by the average prior four years gross receipts and so the catch there’s a fixed base percentage is calculated using information from 1984 to 1988 and so it becomes problematic for companies as if they were around you know it’s like 30 years ago now they may not have any information from that time period in which to determine this fixed base percentage and so we certainly run into situations where companies say you know what but we just don’t have access to that information it’s either been you know discarded or there’s been ownership changes and it’s not available you know what have you and we say oh well okay

you know we don’t have to we don’t have to look at that method we can just default to the alternative simplified method and so you certainly see situations where company just just bypasses this regular credit calculation if the company wasn’t around in 1984 to 1988 that’s fine they fall under what we call the startup company rules and there we would be basically you’re looking at an alternative way of calculating that fixed base percentage and so in those situations generally you’re still going to be looking at 1998 to 2003 to calculate that fixed base percentage so you know you’re still looking you know 10 to 15 years ago to calculate that and even that can be a little bit problematic so again those are things that we consider for companies that are not currently claiming credits or maybe companies at our and we say well you know is there any risk associated with that with that base amount calculation so the alternative of course is this alternative simplified credit and so it does become much easier to calculate and again the difference is how we calculate base amounts and there’s also differences on the credit amounts but the way you calculate the base amount here is just taking 50% of the average annual qre s for the prior three years so instead of looking back several years in the past you know you’re only looking back three years so if you guys are calculating credits for 2015 you know you’d be looking at two thousand twelve thirteen and fourteen to calculate this base amount and then that’s just going to roll forward you know every year you you’d update that calculation for the prior three years and then the credit amount is you know 14 percent of your expenses over the base amount and then sixty five percent of the 14 percent amount to get your reduced credit so the common question there is you know and you see it on the regular method – well why would we elect to take reduced credit and the reason being is you know if you if you use the fourteen percent credit amount that’s fine whatever the value of the credit is they say you have to reduce your deductions by the value of the credit so let’s say it’s a $10,000 you know 14 percent of times Curie’s over the base mountain equals $10,000 well you’d essentially pay tax on an additional ten thousand dollars of income and in you know the way to get around that adjustment is to select a reduce credit so the reduced credit would be sixty five hundred dollars and their adjustment and so that that’s why people would claim that reduced credit States offer research tax credits you know I hesitate to say this is an all-inclusive list just because states are changing you’re in and you’re out it seems like so the important thing that you know we want to keep in mind is you know let’s look at the state in which a client’s operating and has qualified research expenses to determine if if a credit should be claimed and some credits will have or some states will have credits that sunset or or expire and they may expire for a couple years and then and then come back so an example of that is the state of Texas so they had a credit credit went away and then you know the credit came back and I think there was a six or seven year period there where there were no state credits in Texas but certainly when it came back you know clients want to be able to claim that and so you can see similar situations with other states so pulling question three have you ever worked with an outside firm to help a client document the R&D tax credit so I imagine here we will my guess would be we’d see a variety of responses and so yeah yeah you know we have a variety there some yes I’m know someone sure and again that’s probably what we expected on that one so just like everything else we do you know documentation is key when we talk about documentation we’re generally talking about two types one being financial documentation so how do we how do we quantify our expenses and then the second is project documentation so okay we’ve got these R&D projects how do we prove that they qualify for the credit so now financial documentation again you’re looking at items related to wages supplies contract research you know supplies in contract research are generally the easy ones typically clients are capturing those expenses and GL accounts you know there might be purchase orders or invoices that you can go get for documentation when you think about contract research you know if they’re written contracts in place this contracts become important for documentation so things like that generally the wages is the thing that’s a little bit trickier for clients just because you know they don’t have time tracking systems or things like that and we say you know the use of estimates are fine and generally what they’re going to do there’s have a have a time questionnaire template that they’ll complete to where they’re identifying employees that worked on R&D

and then allocating there are any time to particular projects and so what that does is just create a nexus between their qualified projects and their qualified expenses and so that the time questionnaire template that we use with our clients they fill fill one out for each employee the employee name would go at the top left-hand column be a list of R&D projects then they say okay you know tell us how much time you spent on each of those projects and then that becomes the basis of the percentage of their w2 wage that we take the IRS does prefer a project-based approach versus a task base or departmental based approach and again they the reason being they just want to see that connection between qualified expenses and qualified projects and so again one of the nice things about a project-based approach is that it does allow you to end up with a with a good rnd project list so a list of you know all the R&D projects that were undertaken so then when you start to talk about project documentation again you want to have a list of those Rd projects because commonly an IRS exam you know one of the first request we’ll get is you know provide us a list of of the R&D projects and then provide us a narrative stating why those projects qualify for the credit and so project narratives become important now depending on the IRS agent you know they may be satisfied with the project narratives and may not ask to see supporting documentation every once while we’ll see agents that want to see some supporting project documentation and so I would say you know it’s important to have the narratives and then you know still important but not quite as important it’s just be able to identify supporting project documentation the clients having their files that help support that yes there are uncertainties and that they did go through a process of experimentation so examples of supporting documentation could be meeting minutes project status updates test reports test analysis technical emails back and forth if engineers are keeping log books on projects things like that things that just show the evolution of a project revision histories can certainly be important because that shows again the evolution of the project now for a client that just has you know has tons of projects or maybe a smaller credit value you know are we going to say well you have to have project narratives for every every project we wouldn’t necessarily say that we’d say well you know in those situations what becomes important is to really focus on the largest projects and have that serve as a representative sample so again we want to make sure that you know at least something is being done in the way of project documentation and then some of the other documentation the clients may maintain that help support their case to claim a research tax credit yep job descriptions Department overviews you know an overview of the process that they use for R&D maybe it’s a stage-gate process maybe it’s a different type of approach but again some of those some of those things can help support involvement and qualified research activities so again when you think about a client going through a research tax credit study you know if some of these things don’t exist that you see that’s where a study may may help put some of those items in place and again those aren’t necessarily items a change every year so again they provide general overviews that can be used on an annual basis to help support the case for claiming a research credit so again you know we want to see the clients or maintaining documentation and we want to see that you know they have more than just a spreadsheet that shows what they’re qualified research expenses are and I think the other key word here with documentation is you know flexibility so you know we’re gonna document a hundred thousand credit a lot differently than we would a ten thousand dollar credit and so again I think it’s important to have that flexibility and again are the the documentation requirement for the research credit just says you know the clients have to maintain documentation sufficient to substantiate the credits claimed so again you know they have some leeway there so pulling question for it do you believe the R&D tax credit should be made permanent hopefully we’ll have a lot of yes there so the credit itself is is you know it’s been around since 1981 but it’s always been a temporary credit and so what we’ve seen over the years is just you know the credit will routinely expire and then binax and then be extended for several years they’ve been talking about making the research credit permanent it’s just something where they where they haven’t they haven’t taken that step yet so 95% yes I’ll take that as a victory so if we apply our substantially all rule we can we can count that as a hundred percent yes so updates impacting our clients you

know number one on the list is I think a credit expiration and extension so again it is always mentioning the credits always been a temporary credit so you know technically the credit expired at the end of 2014 we are pretty confident that they will extend it for 2015 you know it’s wrapped up in the current tax extenders package that they’ve been discussing they’re still talking about a potential permanent credit so again we we think it’s going to be there for 2015 and beyond you know if we didn’t we wouldn’t be having it you know this webcast today you know and I I’m not looking for another job at this points okay so again I’m confident it’s going to be out there and again that’s our that’s our message to clients it’s that this really impacts the most would be fiscal year end clients so when you think of you know a June 30 year in client or at September 30 year in client they may be intent on filing their returns in a timely fashion and and if so that’s fine but again that research credit really only needs to be based on expenses incurred up until 12 31 2014 so a June 30 year end client would really only be looking at six months worth of credits and then when the credits extended they can certainly go back file an amended return and claim and pick up that extra six months worth of credits so the conversations that we’ve had with our clients is you know well that’s maybe then that return and just wait for the credit to be extended and file one return or reclaim you know twelve months worth of credits and and be done and so that’s really what you know well we’re looking out for their section 174 regulations there are some proposed regulations issued earlier this year we mentioned two court cases below that TG Missouri and Trinity industries and really what all this relates to is you know what I would say is the definition of a prototype and what and what prototype expenses can be included towards a credit so a common conversation that companies may have with their clients when it comes to supply expenses is what happens if we develop a prototype and then we subsequently sell that prototype to a customer and what comes to mind is this exclusion for funded research so if somebody’s paying you to do R&D generally you’re not going to claim a credit on that and say said well we sold that prototype so we simply got paid for it and so what all this does is say well it’s okay if you sell that prototype you can still take a research tax credit on it and the reasoning behind that is really for you to get paid for your research you have to be successful and you have to have a prototype that works and so you’re only being paid content contingent upon success and so what that does is paint a scenario in which you are financially at risk for that research because if you fail nobody’s going to give you any money for that if you fail you’re eating all those costs and so again that demonstrates that you’re financially at risk and therefore you can claim credits on that tgd Missouri is is a little bit more unique Trinity industries was all about shipbuilding and whether or not these first in-class ships are prototypes and should they be included in the credit calculation because you know those first in-class ships are ultimately sold and so again at Trinity industries they found that yeah those first in class ships could be qualified research expenses TG Missouri is all about plastic air is all about a an engine Jackson Mulder in the automotive industry and what was examined there was the nature of production molds and so TG Missouri said well we do R&D on these on these molds have to bring them in test them out and so they’re there their supply that’s used in research activities and then that production mold is ultimately owned by their customers and so that production mold is depreciable to the customer but not to TG Missouri so TG Missouri argued well it’s the supply expense we used in research it’s not the principal to us therefore we should be able to include it in the calculation and the court this the court sided with TG Missouri and said yeah we agree with you for that exclusion for depreciable property to apply it has to be depreciable to you the taxpayer so again all that really deals with supply expenses some of the more recent case law that’s come out in the last year or two is related to the suitor case and then there’s geosyntec and Dianetics and so Souter is all about executive level involvement and research and development and you know can it can an owner essentially be involved in our ID and you know will that fly and and what comes out of that is yeah certainly

an executive can be involved in R&D documentation becomes important so you want to document as technical background you want to you know is he an engineer by training has he had that that kind of training or experience and so does that put him in a position to be involved in our ID and so what that case says yeah you know if you can document that yeah they can be involved and it could be a substantial percentage so in your small companies you might see that owner that’s paying himself a lot of money right that’s heavily involved in R&D and so that in and of itself can help drive up a meaningful credit geosynthetic and Dianetics what those two really get in and into is the world of contractors the world of engineering firms and when you look at mechanical contractors electrical contractors one can they be involved in research and development and two what’s the roadmap for including those types of activities and so that’s what geosynthetic and dynamics does is provide that roadmap and so again if you have contractors again a conversation about the research credit could be worthwhile because they could certainly have some activities that qualify the other thing that came out this year with some proposed regulations for internal use software and so this is a good development helps better define what internal use software is I think the good news that goes along with that is yeah we have these new regulations but it hasn’t really impacted how we view internal use software so internal use software is you know where clients are developing you know in internal systems generally software that’s going to control backend functions that you would generally associate with with any company in any industry so HR software management software accounting payroll billing those types of things so internal your software development can qualify if it can qualify for the credit there’s just some additional criteria that need to be met and so again you know that can be widely applicable to a wide range of companies probably where had the most impact would be with these companies that utilize the software as a service model to where they they develop a platform and they don’t necessarily license or lease the software but that software enables them to do business with their customers that’s what these internal you software regulations do is say even though that software’s not being licensed or leased to a third party it’s still not internal your software because it’s enabling that interaction with third parties and then finally the IRS has done away with this tiered issue process so the research credit at least four amended return claims fell under this tier one designation and and you know there was a lot of kind of a lot of Hoops to jump through in an exam to get to a result and so at the end of the tiered issue process the good news for us is that theoretically it’ll make it a little bit easier to get through research exams related to research credits because what it does is it gives you no high RS agents a little more leeway and developing their approach to examining that issue and then gives them a little bit more freedom and coming to an agreement at the exam level on what should be allowed forces you know not allowed and so again definitely a good good development there and so with that that’s what we have for you today and I will open it up for any questions that come through and I’ll turn it back over to Brandon all right thanks Ashley as a reminder to ask a question click on the questions tab located in your GoToWebinar tool bar and type in your question it looks like we have time for about one question which we have had one question from the audience today actually it says here if a company has never claimed QR es in the past I mean and in particular this company was incorporated in 2015 is the base amount still nil ok so yeah if you’re looking at it yeah if you’re looking at a company that started in 2015 and you look at look at the regular method they will have a zero base amount just because there’s no no prior history there and so you know that that can make the regular method pretty appealing and pretty pretty simple to go through likewise on the alternative simplified credit again you would not have a base amount because you don’t have the history but what you want to watch out for is this those credit rates become different on the alternative simplified method so instead of that 14 percent of expenses over the base amount since you don’t have a base amount you would be simply taking your current year expenses times 6% and then times 65% ticket to reduce credit all right we have had another one popping here just a second ago

is the software developed for internal use specifically excluded from QR e it’s it’s not specifically excluded I mean those are expenses that can still qualify our general message to clients is that when it comes to internal you software it’s a little bit more aggressive position just by nature of it being internal you soft and really what you want to look at in order to be able to qualify it as qualified research expenses is to be able to say well you know there’s nothing really commercially available that would do everything that we needed to do and so highlighting that it’s not commercially available is really what we do to start to make the case that it’s qualified for the credit all right if your question today goes unanswered or if you have any additional questions our presenters will follow up via email thank you again for attending today’s webinar and have a great day