Group A

What is the research and development (“R&D”) tax credit?

Companies use the R&D tax credit to claim significant financial benefits to accelerate growth. Originally intended for developers of industry leading products and technology, the law has been expanded to include a wide range of activities from various industries. The tax credit allows companies to reinvest in their business by offsetting current and future tax liabilities.

Why haven’t I heard of the R&D tax credit?

The R&D tax credit is one of the most misunderstood tax incentives available. Considering the myriad of industries and activities that legally qualify for the credit, the term “research and development” is a misnomer. Additionally, the R&D tax credit requires specialized knowledge and technology to identify and calculate the incentive properly.

What is Parachor’s role in the tax preparation process?

Parachor is not an accounting firm, we focus specifically on the R&D tax credit. We partner with CPA firms to complement their services and deliver benefit to their clients.

Which industries qualify for the R&D tax credit?

Companies of various industries are unaware that they are eligible to claim the R&D tax credit. Under the Internal Revenue Code’s definition of R&D, many common activities qualify. Our specialists have successfully identified and delivered tax benefits for clients in industries including architecture, engineering, construction, manufacturing, and technology. Additionally, the following industries also qualify for the R&D tax credit:

How long does an R&D tax credit study take?

Each tax credit study is tailored to ensure that Parachor can analyze the required information and perform the necessary calculations to meet the needs of each client. A typical tax credit study lasts about six weeks, however, in the event of a pressing deadline, Parachor can complete a study in as quickly as one week.
Parachor’s three-phase process is designed to identify and deliver the maximum tax credit possible that is within the letter of the law. Our process uses proven methodologies to substantiate and document the R&D tax credit in a manner that is approved by the IRS.

How much does an R&D tax credit study cost?

We don’t charge our clients unless we find a benefit. Additionally, if our clients are not satisfied with their credit estimate after Phase 1 of our process, they may walk away without paying for services rendered during the Value Identification portion of the tax credit study. If the client continues with the tax credit study, we charge a flat fee determined by a percentage of the benefit we identify. The cost of a tax credit study will never exceed the benefit received by the client.

Group B

How many years can I go back to claim the R&D tax credit?

The R&D tax credit can be claimed for all open tax years. Generally, open tax years include the prior three tax years due to the statute of limitations period. In certain circumstances, the law allows businesses to claim the R&D tax credit for an extended period of time. It is common for companies to amend previous tax years to claim this benefit and reduce the maximum amount of tax liability.

What are qualified R&D activities?
The four-part test as outlined in the Internal Revenue Code is used to determine qualified R&D activity.

The Four-Part Test

1). New or Improved Business Component

Creation of a new product, process, formula, invention, software, or technique; or improving the performance, functionality, quality, or reliability of existing business component.
  • Construction of new buildings or renovation of existing buildings
  • Invention of a software application
  • Manufacturing of a new product or the improvement of the production process for an existing product
  • Creation of design documentation

2). Technological in Nature

The activity fundamentally relies on principles of the physical or biological
sciences, engineering, or computer science. A taxpayer does not need to obtain information that exceeds, expands
or refines the common knowledge of skilled professionals in a particular field.
  • Physics (relationship between mass, density and volume; loading as the
    result of gravitational attraction)
  • Engineering (mechanical, electrical, civil, chemical)
  • Computer science (theory of computation and design of computational systems)

3). Elimination of Uncertainty

Uncertainty exists if the information available to the taxpayer does not establish the capability or method for developing or improving the business component, or the appropriate design of the business component.
  • The capability of a manufacturer to create a part within the specified tolerances
  • The appropriate method of overcoming unsuitable soil conditions during construction
  • The appropriate software design to meet quality and volatility requirements

4). Process of Experimentation

A process designed to evaluate one or more alternatives to achieve a result where the capability or method of achieving that result, or the appropriate design of that result, is uncertain as of the beginning of the taxpayer’s research activities.
  • Systematic process of trial and error
  • Evaluating alternative means and methods
  • Computer modeling or simulation  Prototyping  Testing

Where do I file the R&D tax credit?

Partnerships and S corporations must file this form to claim the credit. The credit will flow from the Form 6765, to the Schedule K-1, to the Form 3800 on the individual’s tax return. For individuals receiving this credit that have ownership interest in a partnership or S corporation, Form 6765 is not required on the individual return.

How do individuals claim this credit on their tax return?

Individuals claiming this credit can report the credit directly on Form 3800, General Business Credit if their only source for the credit is a partnership, S corporation, estate, or trust. Otherwise, Form 6765 must be filed with the individual’s tax return (e.g. sole proprietorship).

What if the taxpayer is an estate or trust with beneficiaries?

In this case, the Form 6765 must be filed with the estate or trust’s tax return.

Is there a limit to how much credit can be used in any given tax year?

For tax years prior to 2016, the credit can be used to reduce the taxpayer’s regular tax liability down to the tentative minimum tax. The credit cannot be used to offset alternative minimum tax. Beginning in tax year 2016, eligible small businesses have expanded utilization for the credit. For these eligible small businesses, the regular tax liability can offset alternative minimum tax using the “25/25” rule.