Choosing the right partner to conduct your R&D Tax Credit study can be daunting, especially with the growing number of boutique R&D firms vying for your business. A study done by a very large firm can be expensive, while a study done by a small mom and pop shop may not yield the maximum benefits–and still, studies performed by either may run the risk of an audit. Yet the powerful tax savings ability of the R&D Tax Credit cannot be overlooked. Providing companies an estimated $12 billion a year in tax savings, the R&D Tax Credit is the largest tax incentive available to businesses and not taking advantage of this service could mean leaving hundreds of thousands of dollars on the table and risking your competitive advantage.
Over the course of our 15+ years of providing R&D Tax Credit services, we have forged many valuable and long-lasting relationships with our clients and our CPA partners nationwide, and we understand the importance of having the right balance of maximized benefits and minimized risk. To ease the process of choosing a partner, we have provided you with a checklist of the 5 most important factors to take into consideration.
1. Experience – Who is on their team and how long have they been doing it?
The single most important factor in choosing an R&D Tax Credit provider is experience. While some boutique firms may provide the comfort of a close working relationship, they may lack the necessary manpower to maximize your potential benefit. Without key players like engineers and attorneys that these smaller firms often lack, they may not be able to recognize all the qualified R&D activities or properly evaluate contractual agreements. On the other hand, firms that are especially large may prioritize their larger clients, subjecting their smaller clients to a study conducted by less-qualified seniors and staff members instead of by managers who are typically reserved for larger clients. When choosing a provider, it is important to choose one that has the following essential team members:
- R&D Specialists
There are CPAs, and then there are CPAs who have specifically devoted their entire practice to the R&D Tax Credit. Be sure that your provider is capable of expertly executing studies for clients in your particular industry and size group.
Engineers on staff are crucial for maximizing your credit. Because of their industry-specific knowledge, they are able to extract all qualified activities not only from a project but also from specific phases within the project, significantly boosting the size of your credit.
Identifying R&D activities is futile if your business does not own the rights to your R&D activities. Attorneys are necessary for reviewing your contractual arrangements with your subcontractors or your customers to determine whether you can actually claim the credit. Furthermore, attorneys are essential when it comes to defending your claim in the case of an audit.
- Technical Writers
Many R&D providers lack a team of writers dedicated to drafting technical reports for their clients. However, this important document not only provides you with a breakdown of the qualified projects and methodology that was used to generate the credit, but it also serves as the primary evidence when defending your study during an audit. Without technical writers to write your report, you must take it upon yourself to produce an informative and well-documented report—a laborious task that is neither quick nor easy.
2. Process – What is their typical process when conducting R&D studies?
A popular method among R&D providers is statistical sampling, in which a few projects are assessed and the results are then extrapolated across all projects. However, this is a risky process that can easily be challenged by the IRS. A successful study process requires the use of cost center accounting and project accounting data for a more accurate and well substantiated credit.
3. Style – Is their style aggressive or conservative?
It goes without saying that an aggressive approach to capturing R&D credits (that is, capturing any and all R&D expenses even from areas that typically don’t have R&D-qualified activities) will raise red flags for the IRS. While this approach may dramatically inflate your credit size, the chance of audit is inevitably higher, and when contested in court, you may lose some or all of your credit. Make sure that your provider exercises reasonable care when identifying your R&D expenses—only capturing expenses stemming from technical employees and not from administrative or other non-technical staff.
4. Fee Structure – Do they charge a fee with a cap that is related to the credit size?
Many providers will charge a fee that’s capped relative to the amount of credit generated; however, whether that cap is based on the gross credit or the net credit (after taxes) will have a significant impact on your fees. Furthermore, be wary of providers that are not sensitive to your cash flow. Some providers will charge you for the full fee up-front, regardless of whether the credit can be utilized immediately or must be carried forward to future tax years.
5. Audit Defense – Are audit services included?
With the growing popularity of the R&D Tax Credit, the chance of being audited is not inconsiderable. However, a well-documented credit produced with a proven method [see Process above] and adequately defended by an experienced professional, can withstand an audit. Be aware of whether your provider offers this additional service, and if it entails an additional fee.
Apex Advisors’ team includes former Big 4 CPAs, engineers, attorneys, former IRS agents, and technical writers. Since 2001, we have performed over 10,000 R&D Tax Credit studies in over 60 industries for clients ranging from startups to billion dollar companies. Our unique approach combines credit maximization and conservatism and has proven to more efficient and effective than any other service provider—in fact, the IRS has specifically complimented our process as the “best methodology.” If you believe that you may benefit from the R&D Tax Credit, partnering up with the right R&D Tax Credit provider will be to your advantage. For further information or a complimentary assessment of your eligibility and potential credit size, please feel free to reach out to us at any time.