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R&D Tax Credits, are you getting your fair share?

June 14, 2013

In today’s WSJ CFO’s Journal it noted that this quarter’s corporate earnings were lifted in some cases by 10% due to the extension of the R&D Tax credit. This was based on the accumulation of last year’s entire credit, which still averages to 2.5% a quarter of earnings growth. For Boeing taking advantage of this credit led to an additional $145 Million in earnings for the quarter. In 2009 the total credit earned by all companies was $5.6 billion. Not too bad for filling out some paper work.

Of course it’s not that easy. The article goes on to say that the R&D Tax credit is taken advantage of primarily by large corporations. That leads me to believe that many smaller or mid sized companies feel that it’s too hard to earn the credit.  For those that have not explored this credit it can be a significant opportunity to counter the effects of relatively uncontrollable costs such as commodity costs or increasing healthcare costs for their employees.

Additionally more states are also enacting R&D credits to encourage companies to move high paying jobs within their borders. This is in addition to the federal credit.

Take a look at Ceradyne, a high performance ceramics company recently acquired by 3M. According to their 2011 annual report, they earned $2.9M in tax credits on revenues of $400M and earnings of $29M in 2010. That’s right, they increased their annual net income by 10% through this credit.

Why did I select Ceradyne as an example? Because I worked with them in the past and they clearly understood that in order to accurately track wages spent on qualified R&D expenditures….and keep the credit through an IRS exam…that they needed solid record keeping. In their case they extended their use of their existing timekeeping system to include their engineers.

How did they get their engineers and other employees who were working on qualified research to start accurately collecting time? They explained the value of the record keeping to them in terms of profits which directly impacted the engineer’s employment.

Sure there are other ways to collect the records, but it’s going to be a quite a negotiation when the IRS examines your records. Especially if you try and claim wages based on your general ledger’s cost centers. The first thing the IRS will do is to look at the roles allocated to that cost center and pull out the wages paid to managers and administrators. Even though in today’s flattened organizations it’s likely that many people are performing multiple roles, some of which probably are eligible for a tax credit.

Next Steps

If you are in Operations or HR, go spend a couple of minutes with your in-house finance or tax expert. There are also consultants such as Hackett or Deloitte that have specialists in this area. Ask them if collecting accurate time records would help increase your company’s credit. Discuss what activities are eligible and make sure these are all being tracked to ensure you get full credit.

If you all agree it makes sense, then you can justify increased data collection. This data will not only ease the IRS examination and likely increase your tax credit but it can also be re-used to help project performance. Would it be helpful to know on a daily basis who is (or is not) working on a project, what phase it’s in or how many dollars have been invested to date?

Before you start collecting the data, spend the time explaining the personal benefit of this tax credit to your employees (increased share price/profit sharing/bonuses, stable employment/more investment in projects that interest them) and your change management job will be a simpler too.

Want to learn more about R&D tax credits (by the way, you can claim more than wage expenditures)?

Here’s a couple of good links:

http://www.irs.gov/pub/irs-pdf/f6765.pdf

http://www.journalofaccountancy.com/issues/2010/mar/20092122

http://www.statetaxcredits.org/

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One Comment leave one →
  1. Nicola permalink
    August 22, 2013 5:36 am

    I think R&D tax credits is a great incentive for organisations. Although from some initial research and reading it seems there is still a great number of companies/individuals which don’t have a full understanding of the scheme. This should probably be addressed by local government/councils.

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