Many times companies will simply include all the wages, supplies and contract expenses of their designated R&D Department(s) into their R&D Credit calculation and “be done” with it. And though this might be a good way to estimate or guess the credit possibility from a high-level perspective, it is not a good way to make an accurate claim.

Were improper expenses included? Did substantially all the activities of individuals working in the R&D Department qualify for the Credit according to the tax law justifying such a claim? Were all the qualifying activities included?

Just because the department does not say “R&D” doesn’t mean that qualified activities exist. In order to qualify, the activities must meet the §41 requirements, not what people simply assume R&D to be. Furthermore, besides direct research qualifying, direct supervision and direct support of the research can qualify as well.

Maybe a product development process perspective would identify more or all the qualifying R&D areas. I have had a lot of success working with the IRS to agree to the proper credit amounts based on qualifying all the related activities of a company up to where the product meets its functional and economic requirements.

Furthermore, it is imperative that the company has and retains the technical support the contemporaneous documentation to support any research credit. In fact the documentation should be ready before any examination begins. Taxpayers obtain better results when the technical analysis is complete before the tax return is filed. Not all R&D Credit determinations are created equal – but a proper analysis with the applicable documentation can provide for an accurate and beneficial credit.

It seems like every year we have the discussion with one or two of our clients whether someone is an employee or independent contractor.  I also see court cases each year where someone was not categorized properly by the taxpayer (usually treating them as a contractor rather than an employee).  If someone is an employee, the employer is required to withhold taxes from that person as well as pay their share of employment taxes.  If they are a contractor, there is generally no withholding and all tax is the responsibility of the individual.  Recently there was another case on this very point, Bruecher Foundation Services Inc v. U.S. (CA 5 06/18/2010) 105 AFTR 2d ¶ 2010-997.  If you’re paying someone to do work for you and you’re not withholding taxes, you may want to evaluate if they truly are a contractor or should they be an employee.  These determinations are generally done on a “facts and circumstances” basis.  If you wait for the IRS, state revenue agency or department of labor to make the determination for you, it can be a very painful and expensive process to fix this.  In the above mentioned case, they list some of the items that are looked at when making such a determination, starting with:

“Whether a worker is an independent contractor or employee generally is determined by whether the enterprise he works for has the right to control and direct him regarding the job he is to do and how he is to do it. Under the common-law rules (so-called because they originate from court cases rather than from the Code), factors used to determine if an individual is a common law employee are”

• The degree of control exercised by the principal;
• which party invests in work facilities used by the individual;
• the opportunity of the individual for profit or loss;
• whether the principal can discharge the individual;
• whether the work is part of the principal’s regular business;
• the permanency of the relationship;
• the relationship the parties believed they were creating; and
• the provision of employee benefits.

This is by no means an exhaustive, list, but a start to get you thinking about the issue.  There has been a great deal published in this area.

For additional information view our previously posted blog “Misclassification of employees as independent contractors”. or visit the IRS’s summertime tax tips.

The U.S. Senate recessed for the extended July 4th holiday without acting on H.R. 4213, the American Jobs and Closing Tax Loopholes Act of 2010 (the extenders bill).  Among the bill’s numerous provisions are extensions through 2010 for the tax credit for increasing research activities; the new markets tax credit; accelerated depreciation for farming business machinery and equipment, qualified leasehold improvements, qualified restaurant buildings and improvements, qualified retail improvements, motorsports entertainment complexes, and business property on Indian reservations; the charitable tax deduction for corporate contributions of computer technology and equipment for educational purposes; ) expensing of environmental remediation expenditures; the tax deduction for income attributable to domestic production activities in Puerto Rico; the subpart F exemption (which excludes such income from the shareholder’s foreign personal holding company income) for active financing (insurance, banking, financing, or similar businesses) income earned on business operations overseas; and rules for adjusting the basis of stock of S corporations making charitable contributions of property. The bill also includes revenue raising provisions aimed at the taxation of carried interests.

Congratulations to the Colorado State Board of Accountancy for changing the continuing education (CE) requirements!  The State adopted the CE guidelines of the National Association of State Boards of Accountants and the American Institute of Certified Public Accountants.  Prior to the change, CE was segregated in two categories; A, or technical education, and B, non-technical.  Everyone referred to A as good and B as bad.  The fact that B was in a separate bucket had a negative connotation.  The first sentence of guidance – Other programs or courses which contribute to the development and maintenance of other professional skills may be acceptable – didn’t really put a positive spin on it.  A is where it was at. 

But if you looked further, the guidance from the State regarding B CE read – Such programs may include, but are not limited to, the areas of communication, quantitative methods, behavioral sciences, statistics and practice management.  Although it isn’t very clear, it doesn’t sound all bad.  Coursework aimed at being effective at communicating with clients, mentoring co-workers and running our practices.  Maybe it just got overlooked because of the presentation.

I love the new format.  No more A and B CE.  No more good and bad.  Just twenty three equally weighted fields of study that do contribute to the development of the professional skills necessary to be good at what we do.

Good communication skills won’t get you very far in the tax biz if your technical skills aren’t there.  But top-notch technical skills combined with communication, writing, counseling, leadership, time management, technology and other skills that the State is now promoting?  That’s where it’s at!