Missing R&D Expenses: Don’t forget Support Activities
If a company files for the research credit, they would be aware of the “Four-part” test for qualified activities. Part one, a qualified activity has a purpose to create or improve a company’s product or process; part two, these improvements are made through the application of hard sciences principles and techniques; part three, there are uncertainties as to how to use or design the improvement with the hard sciences; and part four, there needs to exist a process to evaluate design and development approach in order to mitigate the improvement uncertainties.
What companies might miss are the types of expenses that can relate to qualified activities, specifically wage expenses. The eligible research expenses for wages fall into three categories of qualified services: those engaged in qualified research; those who are directly supervise, and those who directly support.
Most of the time, companies understand which employees are engaged in qualified activities and even who supervises them. The missed opportunities are usually with employees who directly support research activities. Companies should be willing to look past employees who are directly involved in qualified activities, in order that they not miss employees who, while not fully engaged in a substantially all capacity, are still performing qualified activities.
The R&D Credit states that direct support is anyone who is helping support either those engaged in qualified activities or directly supervising them. Direct support can include employees like technicians, project managers, quality assurance personnel, and assistants. The R&D Credit gives further examples:
- A secretary for typing reports;
- A laboratory worker for cleaning equipment;
- A clerk for compiling research data;
- And a machinist for machining parts for a prototype model.
Most companies at first glance would probably not have selected a secretary or machinist wages as qualified for the R&D Credit. The important aspect to those supporting employees is that it is direct support. General administrative work would not be qualified, things like accountants preparing checks for engineers, or janitors cleaning the research laboratory.
A good rule of thumb is to look around the employees who are directly involved and see if there are other employees who support the work. It might be surprising what types of employees can qualify for supporting R&D activities.
The R&D Credit provides an opportunity to reduce tax liability. In order to maximize the R&D Credit impact to don’t forget to capture all the expenses that should qualified, especially wages that are direct support. To learn if you’re eligible for the R&D Credit or have more questions related to qualified direct support, please contact CFO Services.
CFO Services Can Help With Your Research Credit & Tax Incentive Needs
The R&D Credit provides an opportunity to reduce tax liability. In order to maximize the R&D Credit impact to don’t forget to capture all the expenses that should qualified, especially wages that are direct support. To learn if you’re eligible for the R&D Credit or have more questions related to qualified direct support, please contact CFO Services.
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