At Acena Consulting, we've seen firsthand how many business owners miss out on capital-generating R&D tax credits simply because they don't realize that their current operations pass program eligibility mandates. It's a costly miscalculation. The U.S. R&D tax credit is one of the most significant incentives available to U.S. enterprises; effectively tapping into this multi-billion dollar program can unleash a massive upswing in cash flow that directly impacts a company's liquidity.
To qualify for the research tax credit, development activities must pass the statutory four-part test outlined in Section 41 of the Internal Revenue Code and Regulations:
- Business Component
- Technological in Nature
- Technical Uncertainty
- Process of Experimentation
According to these standards, it's not enough for an activity to be technological in nature; to tap into the potential principal surge offered by the innovation tax credit, every claim must also be performed with the intent of reducing uncertainty around a product, process, software, technique, formula, or invention.
Businesses in Every Industry are Uncertain About Technical Uncertainty
According to Section 41, passing the Technical Uncertainty component of the four-pronged test mandates that:
“…research is undertaken for the purpose of discovering information if it is intended to eliminate 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.” (IRC Regulations 1.41-4(a)(3)).
Put simply; technical uncertainty exists if the currently known and available data about a process or product cannot be applied to achieve the desired result, essentially forcing business owners to ask themselves two vital questions:
- Can we develop it?
- How do we develop it?
Proper Documentation on Technical Uncertainties is Critical to Claim R&D Tax Credit
Of course, identifying technical uncertainties is only one step in successfully claiming research and development tax credits; effectively documenting supporting operation and activity also plays a vital role in legally substantiating your claims. Court cases related to R&D tax credits are riddled with varying (read: inconsistent) testimony outlining why and how a specific business component is documented.
Unfortunately, many companies complete necessary documentation many years after the project's conclusion, relying on interviews with engineers and business owners to backfill any data gaps. As a result, the IRS often only accepts some of these interviews, rejecting a significant percentage as not offering viable verification of research tax credit qualifications based on several key indicators, including:
- Time has passed since activity completion
- Interviewee's role in the activity
- Availability of supporting documentation to corroborate or refute testimony
- Depth of detail provided from individual related to activity
For many executives, limited insight, experience, and resources make accurately and thoroughly documenting technical uncertainty across every business component virtually impossible. The best way to eliminate inconsistencies, mitigate potential risk, and optimize research and development returns is to partner with a professional R&D tax credit expert. A proficient accounting firm that specializes in the innovation and technology vertical will create a customized data capture approach for your organization that quickly pinpoints all qualifying development activities. Your chosen partner will properly document every phase for auditing purposes, protecting your business interests throughout the entire process for maximum value corporate results.