The research and experimentation tax credit: A credit fraught with uncertainty and in a process of experimentation

Abstract

Purpose

The purpose of this paper is fourfold: to provide an overview of the alternative simplified credit (ASC) and a basic understanding of how it works; to provide a brief history of the research and experimentation credit as a whole and its evolution; to emphasize the importance of this credit to companies in maintaining a commanding research and development presence in the USA; and lastly to discuss hot topics/issues relating to the taxpayer as they pertain to capturing the maximal value of qualifying research expenditures (QREs) and sustaining this credit upon IRS examination.

Design/methodology/approach

The driver for this article came from interviews and discussions with CEOs, Vice Presidents, VPs of Tax and Director level engineers and scientists over the past two years who have demonstrated great interest in capturing the benefits from the credit but was unclear as to how to proceed.

Findings

Directors overseeing research and development commonly misclassify research and development expenses as something else. For example, specialized computer software that is used in research and development may be misclassified as general and administrative expenses. Other times, companies performing research and development do not realize that the work they perform qualifies for the research and experimentation tax credit. Consultants can potentially save a significant amount of tax dollars by carefully examining client records, interviewing client personnel to gain an understanding of a client's R&D spend to see if reclassification is possible and justifiable.

Originality/value

The author clearly describes the workings of the ASC and the status of the research and experimentation credit as a whole. The paper provides an overview of the subject, and is written so that the messages can be understood by senior management who do not necessarily possess highly tax technical knowledge. It also touches upon some interesting aspects of optimization as they relate to capturing and defending the research and experimentation credit. The author's ideas of integrating operations management and operations research tools and methodologies in optimizing the defensibility of the research and experimentation tax credit are novel and appear to be very promising.

Citation

Holtzman, Y. (2011), "The research and experimentation tax credit: A credit fraught with uncertainty and in a process of experimentation", Journal of Management Development, Vol. 30 No. 1, pp. 11-29. https://doi.org/10.1108/02621711111098334