There are likely thousands of organizations that can qualify yet remain unaware of tax credit opportunities. PMBA’s R&D experts work hard every day to get the word out. This involves directly reaching out to companies that may qualify, writing articles, keynoting conferences, and teaching CPE-accredited courses for CPA’s nationwide.
Once they’re aware of the opportunities, PMBA is often asked by company executives and CPA firm professionals how to go about vetting R&D tax credit specialists. This post lays out areas of inquiry to help you choose top-level professionals who can determine whether you or, in the case of CPA firms, your clients, can qualify and apply – and, as important, that they can justify their claims on the audit.
Here Are Seven Key Questions to Ask:
1. What is Your Client Profile?
This is a simple one. Do the R&D Tax Credit Specialists have industry experience in your field or that of your client? Identifying, gathering, and documenting an R&D tax credit is different depending on whether your client is in the aerospace industry, a life science industry, or is a commercial bank developing software for its clients’ online banking needs. If the answer is ‘no’, move on.
2. How Knowledgeable Are You About Both Federal and Multi-State R&D Tax Incentives?
In addition to being conversant with the qualitative and quantitative R&D tax credit program, it is critical that the subject matter expert is also knowledgeable with multi-state level tax laws which will encompass state statutes, state-level administrative authority, and state-level judicial interpretations. Any specialist you work with must be familiar with R&D tax credit opportunities in your state. Further, if a company is planning regional or national expansion wouldn’t it be important to focus on locations where there are tax incentives related to its business? Think Amazon HQ2. Your choice of the right R&D tax credit specialist can not only add value to the current tax picture but can also pay off in future strategic planning. Consider that hiring a specialist with national capabilities will cover present and future needs.
3. How Much Experience Do You Have in the R&D Tax Credit Area?
The R&D Tax Credit program is not new. It was initially added to the U.S. Internal Revenue Code through the Economic Recovery Tax Act of 1981 as a temporary provision. Aside from only one year when it wasn’t renewed, the program has been available ever since and was made permanent in 2016. This is a very deep and complex area of tax practice. It takes many years of learning industries, state statutes, federal regulations and how they all evolve and change to be successful for today’s audit environment at the federal and multi-state level. Simply stated, the more relevant experience the better. The R&D Tax Credit Specialists will be making recommendations that can impact bottom line results and, therefore, must be highly competent. This goes hand-in-hand with experience.
4. What is Your Process for Identifying and Claiming R&D Tax Credits?
Do not work with a firm that cannot articulate their methodology from a quantitative and qualitative perspective. How do they go about identifying qualifications for tax credits? Do they put “boots on the ground?” There’s no substitute for onsite discovery to view processes firsthand and personally interview those involved in qualified activities.
- How do they document their work? The right answer will vary depending upon a variety of factors. For example, is your business or the qualified activity you want to claim regulated or unregulated? Regulated businesses in the aerospace and defense industry (e.g., regulated by both the FAA and the DCAA) and the life sciences industry (e.g., regulated by the FDA), will have documented their research and development meticulously and on a contemporaneous basis. Unregulated businesses may have failed to compile contemporaneous records. In that case, the R&D specialist you want to work with will search for what exists that can demonstrate the R&D efforts. In our digital world, this could include emails or texts between researchers and testers as they work through issues.
- Do they help you gather existing documentation in support of claims? If the answer is no, then go.
- What are the final deliverables? You should expect and receive an executive summary report that goes through the quantitative and qualitative aspects of the claim. It must provide the bridge to and the nexus between the qualified activities and the personnel who perform them.
- What do reports consist of? In addition to the executive summary, the report must include a professional sample of the contemporaneous documentation that supports the claim.
- What happens in the event of an audit? Will they be involved? The top R&D specialist’s work does not necessarily end with the deliverables. Because of the complexities of claiming R&D incentives, audits are not uncommon. The specialist’s job is to protect his or her client and to do whatever is required in support of a claim. Here at PM Business Advisors, we have found it a successful strategy to reach out proactively to the federal and/or state auditor as soon as our client receives word that an audit will be commencing. We’ll walk the auditor through the processes and documentation, and sometimes tour them through the client’s facility. This significantly cuts down on the number of initial IDRs (Information Documents Request) while building a rapport with the examiner. Also, how skilled a negotiator is your R&D specialist? The art of negotiation is critical to success. Strategies like this and ongoing involvement through an audit process is required to sustain R&D claims.
5. How Do You Price Your Services?
Circular 230 prohibits federal level tax services from being priced on a contingent fee basis. Look for a subject matter expert that will charge based on the time and expense incurred in rendering their services or at a fixed fee.
6. Would You Please Describe Your Client Service, Support, and Partnering Philosophy?
Successful R&D tax credit engagements rely on timely filings, clear, ongoing communication and much hard work. A client-centric culture is a must when vetting a tax credit specialist. These engagements require a trusted partner relationship with your specialist. After all, they’ll be deep into your books and your business. If you’re a CPA bringing on specialized services, the consultant will be working closely with your clients and you want to be sure they’ll be happy with your recommendation.
Assure yourself that customer service includes doing whatever it takes to reach a successful conclusion, that you will be supported regarding what you must contribute to the process, and that the specialist sees his or her role as an investor in your success. Of course, your specialist is in business and must also be profitable, but you want someone who invests appropriate resources to do the job correctly.
7. What is Your Record of Sustainability on Audit?
This is where the rubber meets the road. What good is claiming and receiving tax credits when you must relinquish them if you’re audited and further assessed interest and penalties. In reality, it’s not unusual for R&D claims to trigger audits, so a solid record of defending and sustaining credits is of enormous importance. Ask for some specific examples of how the consultant retained credits when challenged through audit. Also, ask how he or she was involved in the process.
If you have any questions, please feel free to reach out to the PMBA National R&D Tax Credit Practice at R&DTaxIncentives@pmbusinessadvisors.com or by using the button below. You can find more information about R&D tax credits here.