Over the last few months we have covered a lot of ground related to documenting various aspects of the research and development tax credit. You can find the various articles throughout our blog but here are several links that will help identify them for you:
Today I wanted to start a new series that discussed some of the positions within a company and how their time and effort can qualify as qualified R&D time under the Internal Revenue Code.
Starting at the top, let’s review management’s role in R&D and how their actions can add to the qualified R&D time.
As we go through the product development cycle and specific actions taken by management, keep in mind that owners, presidents and other management employees are often the highest paid employees in the company. Because qualified hours are translated into wages spent on qualified projects, the higher the W-2, the more qualified research expenditures.
Product Development Cycles: Phases
Every company has a variation on the product development cycle. So, for our purposes today, we will use a sample found in Wikipedia. Wikipedia uses the following phases or process:
- Idea Generation
- Idea Screening
- Concept Development and Testing
- Business Analysis (Not qualified)
- Beta Testing an Market Testing
- Technical Implementation
- Commercialization (Not Qualified)
- New Product Pricing (Not Qualified)
Depending on the size of the company, management will typically be involved in both the product development and business analysis sides of a new product development effort. Tasks related to business analysis and commercialization typically do not meet the necessary tests to qualify for R&D tax credits. However, product development efforts can be analyzed to determine if they meet the 4-part test (See Navigating the R&D Tax Credit minefield-part 2 for a discussion of the 4-part test) and will qualify for R&D tax credits. Looking at the phases defined above, management may be involved as follows:
Idea Generation/Idea Screening
- Leading/participating in product development or brainstorming sessions
- Meeting with customers to discuss new product ideas or enhancements
- Attending industry conferences or trade shows to develop new ideas
- Evaluating ideas for technical feasibility or production feasibility
Concept Development and Testing
- Direct supervision of CAD, engineering details
- Lead/participate/supervise features and design elements to be included
- Assess manufacturability through computer aided rendering
- Oversee/directly supervise prototype development and testing
- Oversee packaging design and testing
- Directly supervise/conduct appropriate usage tests
- Directly supervise initial run and quality control testing
- Develop/directly supervise quality control tests
- Directly supervise engineering operations planning
The size of the company and levels of management can adjust many of the tasks listed above. However, most organizations will have someone filling these roles and time related to the above tasks should be captured contemporaneously.
In our next blog we will review other employee functions on a task level to better define qualified versus non-qualified activities.
What say you friends?
Does your CEO or President have an Engineering or other technical background?
Do you have a system that can easily and quickly capture time related to the above tasks?
Are you maximizing the available R&D credits available to your company?
Randy Eickhoff, CPA is President of Acena Consulting. With more than 20 years of tax and consulting experience, Randy focused on helping companies successfully document and secure tax incentives throughout the US. He has been a long-time speaker nationally as well as conducted numerous training sessions on R&D tax credits and other US tax incentives.