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Huntsville, AL 35801
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Research and Development Credits
By Derek Morgan
Research and development activities (R&D) are commonplace in the Huntsville area with the level of technology development conducted here both by private sector and government-funded operations. As such, many institutions potentially qualify for the Research and Development tax credit. This credit, while very beneficial, is also a whirlwind of complex rules provided by the Internal Revenue Code, Revenue Rulings, and court cases from the last decade.
In Huntsville, one of the most important questions a company can ask is what is an allowable cost for Research and Development credit purposes? The answer to that question is much more complex than most people anticipate, as a company must meet a four prong test in order to prove a cost qualifies for the credit. The test requires the company to show that 1) the research is eliminating uncertainty; 2) the research is technological by nature (physical, biological, computer science or engineering based); 3) a process of experimentation was used; and 4) it meets a required permitted purpose. Furthermore, a company must also prove to have financial risk and technological ownership of the materials being researched for purposes of the credit. These last two factors in particular cause issues for many government-funded contractors in the Huntsville area.
Private researchers can typically prove R&D through contemporaneous documentation alone. Government contract researchers, on the other hand, must prove the same standard as private researchers, along with the fact that they have substantial resources at risk (credit is for amounts in excess of government reimbursements) and that they have the technological ownership rights to the technology. As such, most types of contracts do not allow a contractor to qualify for the credit. The complexity of these rules make looking at R&D credits a very tough field to navigate on your own. As such, it is always important to have a professional help you ensure your documentation is thorough enough to provide justification in the event of an IRS audit. For more information, or help determining if your activities qualify, please contact your tax professional.
Unfortunately, it is impossible to give comprehensive tax and accounting advice over the internet, no matter how well researched or written. Before relying on any information provided here, contact a tax or accounting professional to discuss your particular situation.
