Businesses claiming the research tax credit face a documentation challenge: documenting their research activities from nearly four decades ago. The fixed-base percentage is part of the calcuaiton. It equires companies to access financial records from 1984 through 1988, a period when many businesses used paper filing systems and floppy disks. This requirement creates numerous practical difficulties that can significantly impact a company’s tax benefits. The recent Sixth Circuit decision in Audio Technica U.S., Inc. v. United States, 963 F.3d 569 (6th Cir. 2020), explains these challenges and provides guidance on how courts view documentation issues in research credit disputes. Facts…
Category: Research Tax Credit
Research Tax Credits for Architectural Design Services: When Fixed-Price Contracts Qualify as “Unfunded Research”
When does payment from a client disqualify an architectural firm from claiming research tax credits? Do fixed-price contracts for architectural services create “funded research” that makes the firm ineligible for these credits? The Tax Court case Populous Holdings, Inc. v. Commissioner of Internal Revenue, 2019 WL 13032526 (U.S. Tax Ct. Dec. 6, 2019), provides an opportunity to examine this issue for architectural firms and other design professionals. Facts & Procedural History Populous Holdings, Inc. is an architectural design firm that provides services under fixed-price contracts. For tax years 2010 and 2011, Populous claimed research tax credits under Section 41 relating…
The Process of Experimentation Test: Why Many Research Tax Credit Claims Fail
Many businesses engage in activities they believe qualify for the research tax credit under Section 41 of the tax code. They conduct tests, develop products, and innovate processes, but still find their credit claims denied by the IRS. Why? Often, the answer lies in the “process of experimentation” test—a requirement that trips up even companies genuinely engaged in research and development. The disconnect typically occurs between what businesses consider research and what the tax code defines as qualified research. Simply conducting tests or developing new products isn’t enough. The tax law requires a structured, methodical scientific approach that many businesses…
When Is Government-Contracted Research “Funded” for Tax Credit Purposes?
Many government contractors engage in sophisticated research and development activities that push the boundaries of science and technology. These contractors rightfully wonder whether they can claim valuable research tax credits for this work. The answer hinges on a critical question: Is the research considered “funded” by the government under the tax code? If it is, those expenses don’t qualify for the research tax credit, potentially leaving millions of dollars in tax savings unclaimed. A recent Court of Federal Claims case, Dynetics, Inc. and Subsidiaries v. United States, 121 Fed.Cl. 492, provides an opportunity to consider when government contractors can claim…
