Red Ink and R&D Tax Credits

Brady Bryan, CEO
It is no secret that industries and companies experience cyclic ups and downs depending on a number of factors. Or perhaps the company is a startup that has yet to see black ink. In all of these cases, companies sometimes see net operating losses (NOLs) for several years. For companies that are performing qualified research (per IRC Section 41) and find themselves in the aforementioned predicament, it can be a difficult decision on how to proceed.

CFOs, tax directors, and controllers may ask themselves, “Is the juice worth the squeeze?” In other words, if there are either accumulated NOLs or the taxpayer is currently in NOLs, does the company expend time and resources to perform an R&D tax credit study? Obviously, this is a business decision every taxpayer must make. Other factors may also affect this decision, including future plans for the company, tax entity status and election, and more. Below are some reasons and one example of performing R&D tax credit studies even in years of “famine.”

First, the federal R&D tax credit may be carried forward for up to 20 years, and carried back one year. In California, there is no carryback, but a taxpayer may carryforward indefinitely. So the taxpayer has plenty of time to utilize the credits. Here is one public company that elected to take advantage of such carryforwards. Recently, CalAmp Corp. of Oxnard, CA (Nasdaq: CAMP) reported Q2 results of $69.8 Million in revenues, and $3.5 Million in net income. “Although the Company’s GAAP-basis effective tax rate of 37.0% in the latest quarter approximates the combined US federal and state statutory tax rate, the Company’s pretax income is still largely sheltered from taxation by net operating loss and research and development tax credit carryforwards, and is expected to remain so for the next several years.”

Second, collection and preservation of contemporaneous documentation of research and experimentation closer in time with the actual R&D is always a good idea. Over time, systems change and old documentation can easily be destroyed or lost. Key employees, and subject matter experts with requisite historical knowledge may also leave or be terminated, resulting in the loss of that documentation and testimony.

Third, the taxpayer may also realize the best overall value. For example, when a taxpayer waits and has a multiple year R&D tax credit study performed, it may cost them more. It may cost more not only in fees from outside consultants, but just as importantly, in time and effort of their key internal personnel “dungeon diving” for many years of financial and technical documentation. However, BRAYN is comprised of many experienced R&D experts that can efficiently assist in identifying necessary documentation, and show clients via a complementary Phase I Assessment (1) the estimated credits, (2) proposed fixed-fees, and (3) discuss level of effort a study might take.

Additionally, even if you’ve waited several years to document the R&D tax credit, fear not. A recent change in the tax regulations (Treasury Regulation Section 1.41-9T) makes it easier for some businesses to take advantage of amending tax returns for R&D tax credits. For clients that did not take the credit for some years in the past, the IRS now allows the use of Alternative Simplified Credit (“ASC”) Method. The ASC requires the tax payer to look at qualified research expenses (QREs), and the maximum range of about the most recent 4 years (or three years prior to the tax year at issue). Most times this eliminates exhaustive searches in storage facilities, “dungeon diving” and dusting off ancient 1980s returns and financial information, as well as attempting to contact former employees and owners who may have long-since retired or moved.

Therefore, as one can see, there are at least three good reasons to perform R&D tax credit studies, even in down years. BRAYN can provide free Phase I Analyses to show estimated credits, proposed fixed-fees, and discuss options available to you. Whether you’ve waited a number of years, were previously unaware of the credit, or would just like a competitive bid, feel free to give us a call.

Feel free to reach out to me direct at brady@braynconsulting.com and 888-773-8356, Ext. 700.

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