Brady Bryan, CEO
Many companies are already taking advantage of the R&D tax credit. However, many of these same companies may be doing the same thing year over year, so far as the R&D tax credit documentation process is concerned.
The average Fortune 1000 or 500 company (or similarly situated) is likely taking advantage of the R&D tax credit. The traditional model works as follows: pay a top 10 accounting firm to do R&D consult (fees are typically in the six figures), and every year there is a mad dash to do the R&D tax credit consult. This mad dash likely interferes with our scientists, engineers, architects, and other subject matter experts from doing what they do best: research and development. And typically every year is a repeat of the prior year consult. What is improving? If one is honest, there is a good chance nothing is really improving. Also, this consult, or the results thereof, must hold up to IRS scrutiny.
While the IRS has eliminated the tiered-audit system, it sometimes still rears its head in audit practice, for example, the R&D tax credit was previously listed on the Tier 1 issue list. What that means, is that certain types of companies, meeting certain criteria, would have their R&D tax credit claims for refund audited as a matter of course. The “Super IDR” or Super Information Document Request was part of this approach for this Tier 1 issue R&D audit issue. While the IRS has eliminated the Tier 1 categorization, mandatory audit approach, the Super IDR and audit approach to R&D tax credits remain in practice. The second question typically asked was as follows:
Did you use project accounting to capture costs in your financial books and records? If yes, did you use this project accounting to identify and capture the qualified research expenses (“QREs”)? If no to either question, describe the method used to identify and capture the OREs and describe how this alternative method connects OREs with the financial books and records.
Answers in the negative typically result in pages, sometimes hundreds of pages, in explanations. More often than not, it also results in deeper looks that sometimes include client site visits, interviews of subject matter experts, and more. This is should not scare off deserving taxpayers from claiming the R&D tax credit just because they do not use project tracking. Most taxpayers, in our experience either do not use project tracking, or do not use it exclusively, in documenting qualified research expenditures (QREs). However, if audited the taxpayer should have adequate documentation to substantiate such claims. Contemporaneous Documentation (CD) is documentation created or generated simultaneously or contemporaneously with the research, development, and experimentation. Consider one of the next questions the Super IDR asks:
With respect to each QRE amount identified…, do you have contemporaneous documentation substantiating the QRE amount? If so, then for each new or improved business component, provide a list of the documents available that substantiates.
Many times, the cost of such documentation efforts, either internally, or externally through qualified R&D consultants. While there is a cost to everything, the taxpayer should always be on the lookout for ways to improve their value proposition.
What if I told you that you can improve your value proposition, and that it might not even cost more? It will likely even save you some dollars. Since 2011, BRAYN has been working on solutions with these goals in mind:
- Improving the quality of the R&D Documentation Process
- Improving costs related to R&D documentation efforts
- Improving the likelihood of success at audit
- Improving the nexus between qualified activities and qualified expenses
With this in mind, we created Braynware™. Braynware is an online, time-tracking system set up for clients whereby users can access and use as appropriate. It simplifies time and expense tracking to projects, and facilitates your ability to determine whether projects, activities and costs qualify for R&D tax credits. For example, the champion, typically the Controller, Tax Director, or CFO, will have a universal access where they can get top-level views of QREs, Projects, Project Costs, and various reports available to them. Braynware has been tested an approved by a number of clients; below is an example of one of our customers who utilizes a top 10 CPA firm for tax compliance and preparation:
Employees: Approximately 250-500 Employees
Below is feedback from the Corporate Controller:
Braynware has significantly reduced the amount of time incurred by internal personnel compiling the necessary documentation to support the R&D Tax Credit. Utilizing Braynware and the services of Brayn Consulting has allowed us to forego the annual R&D Tax Credit consulting engagement with our accounting firm, resulting in a significant reduction in overall cost.
We would highly recommend Braynware to other companies.
Using Braynware, a typical subject matter expert (SME) user merely logs in and puts in their time as appropriate. The SME needs not know or consider the tax code, just input their time as appropriate. The SME may also enter supplies and contract research costs associated with projects. Braynware’s proprietary process and algorithms will compute QREs and project costs in the back-end. The champion user now can see changes in QREs in real time.
What does this mean? This means that as long as the persons performing qualifying R&D are logging time appropriately that once the tax year is over, all of the QREs are already computed! No mad dash up to the minute March 14th or September 14th the following year! This also means no hordes of 1st and 2nd year consulting firm associates roving the halls and keeping your SMEs from doing what they do best: developing new and improved products and processes. Having real time QRE computations are not only helpful at the end of the year, but also throughout the year. As taxpayers calculate their quarterly tax payment provisions, accuracy in the estimated credit is essential.