Posted by Jeffrey Feingold on 05.19.16
Now that the Protecting America from Tax Hikes (PATH) Act of 2015 has made federal Research & Development (R&D) tax credits permanent, CPA firms have more reason than ever to add this powerful tax-savings tool to the client services they offer. After all, a successful firm wants to not only offer clients what they want and need, but also recommend opportunities of which they may be entirely unaware.
Originally created in 1981 to create jobs and spur technology in the U.S., the R&D tax credit was modified over the years to apply to a host of businesses in industries ranging from manufacturing and construction to engineering and software development. Most often, these tax savings offset salaries for R&D work performed by employees, but they can also cover qualified expenses for supplies, contract research and certain payments to qualified organizations for basic research. Further, more than 40 states offer their own R&D tax credits with attractive features and additional advantages.
While more than 14,000 U.S. companies claim federal R&D tax credits annually, less than 33% of companies that qualify for federal R&D tax credits actually utilize them due to misconceptions about qualification and the complexity of necessary documentation. From my perspective, most CPA firms are aware R&D tax credits exist but are not focused on getting their clients involved in the process. Yet, if you don’t offer this increasingly popular tax credit to your clients, someone else will.
For many accounting firms, the process of establishing new client relationships is burdensome—it requires the firm to devote resources to an effort with no guarantee of success—resources that could serve existing clients. Your clients may also perceive the documentation process to be challenging; yet having expertise behind the numbers minimizes the risk of an audit and maximizes the likelihood of a successful defense should an audit occur. That is why I recommend that CPA firms partner with an external expert to manage the nuts and bolts of an R&D tax credit study for their clients. Most firms don’t have the expertise needed to perform this type of credit study, and it’s far more cost-effective to outsource the effort.
Once you understand that R&D tax credits present an outstanding opportunity to grow your practice, you will want to look for specific qualifications in a tax credit joint partner. The ideal partner will:
If you think a client might be unsure about either the potential benefits of the R&D tax credit or working with a joint venture partner, I recommend that they have a conversation with other end-user clients of the firm to better understand the process and the opportunity for potentially large tax savings. The bottom line is for clients to be aware that they are entitled to R&D tax credits if they perform qualifying activities. Most CPA firms are surprised at just how many do.
Jay Nisberg is an internationally recognized consultant to the public accounting profession. He also leads the strategic advisory board for Tax Point Advisors.
The R&D tax credit can be a lucrative incentive for innovative businesses. Given the new permanent nature of the tax credit, now is the time to consider whether activities performed by your company qualify for major cash-saving tax credit opportunities. To learn more about whether your industry and company activities meet the R&D four-part test, request our free assessment today. Tax Point Advisors, a firm with expertise in working with small and midsize companies, works with businesses that may qualify for R&D tax benefits. For more information, please contact (800) 260-4138 or please leave us a message below.