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“Having Neo.Tax AI do the work and then me review really reduces my time and also creates a more accurate and quality product.”
Fintech company Mercury has grown at lightning speed by prioritizing technological innovation. Mercury provides startups and ambitious companies banking* and software to power their financial workflows. Mercury continues to create new products but this rapid growth created a complex challenge for controller Christine Andrews.
She needed to scale their R&D credit and ASC 350-40 processes to fit the company’s trajectory without burdening the engineering team that is driving the innovation.
On the tax side, Mercury claimed a substantial R&D credit, but Christine wanted stronger documentation backed by granular data to make her confident the credit would withstand audit. On the accounting side, Mercury needed to start reporting on internally developed software (ASC 350-40) at a detailed level for their first year of audited financials.
Both processes needed input from Mercury’s engineering team, but Christine wanted to improve on the traditional approach of creating separate, mostly redundant processes that wasted engineers’ time.
“We wanted something where there’s actual supporting documentation rather than trying to guess someone's percentage of time,” Christine says. “But also we didn't want to go the direction of time tracking either.”
At previous companies, Christine found the traditional approach of quarterly reviews with product leads inefficient and inaccurate. It took too many meetings to get everyone on the same page and the product leads often lacked detailed context about what engineers worked on.
“For both capitalized software and the R&D tax credit, it can't just be accounting making assumptions,” she says. “You really have to get the data from the actual managers who truly know and oversee these projects and individuals.” She wanted a process that incorporated real-time data that was convenient and easy to use.
Neo.Tax’s system for automating the R&D credit & ASC 350-40 from Mercury’s R&D team’s existing data — saving time and money and creating audit-ready substantiation
Christine partnered with Neo.Tax to solve both problems at once. Using NeoTax’s unified project system and Linear integration, Mercury leveraged their project management data to streamline both the R&D credit and ASC 350-40 processes.
First, Christine used Neo.Tax to go back and identify all their capitalized projects for the prior year and calculate time spent per project for each engineer. For example, Neo.Tax identified Mercury’s newly launched Personal Banking product as a R&D project and the engineers who worked on it with an estimated percentage of time.
Then, Mercury leveraged Neo.Tax’s unified system to complete their R&D credit process–in record time! Christine used Neo.Tax’s system to condense the granular capitalized software projects into R&D credit projects and to generate the detailed documentation to support their qualification.
“The ability to do granularity for cap software and then copy that over to leverage the work, but at a higher level for R&D tax credit, made it really easy to use,” she says.
Saved Weeks of Engineering+Accounting Time
Christine estimated it took each Engineering Manager less than an hour to review. “We got really good feedback from engineers who have gone through this at prior companies, and they were very thankful with how easy it was to use,” she says. “I did not have to have one meeting, one phone call with anyone.”
Since the Engineering team had already reviewed their project time for ASC, the R&D part was a breeze. “Again, it probably took them less than an hour,” Christine says.
Smooth Financial Audit
The granular projects and level of detail made for a smooth audit too. “[Our auditors] really liked that it was based on the tickets and that there was a clear calculation that they could follow.”
“More accurate, higher quality” Study vs CPA Firm
NeoTax’s AI system automatically created a detailed 500-page study, substantiating the four-part test for each project from Mercury’s linear tickets.
“Having Neo.Tax AI do the work and then me review really reduces my time and also creates a more accurate and quality product,” Christine says. “When we got the final PDF, it was over 500 pages. That's a lot of support. That's a lot of backup. And I think that's exactly what you need, when you have over 200 people and over 50 projects, to really have that level of granularity and backup across all the four requirements for R&D tax credit.”
Christine sees these benefits only growing quarter after quarter as Mercury continues to scale. “Having myself, our engineers, and the product teams use the same system throughout the year for cap software, and then annually for R&D tax credit, and not changing the process, besides getting even more accurate, creates efficiencies,” she says. “Neo.Tax really understood what our problems were and solved them.”
*Mercury is a financial technology company, not a bank. Banking services provided by Choice Financial Group and Evolve Bank & Trust, Members FDIC.
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Fintech company Mercury has grown at lightning speed by prioritizing technological innovation. Mercury provides startups and ambitious companies banking* and software to power their financial workflows. Mercury continues to create new products but this rapid growth created a complex challenge for controller Christine Andrews.
She needed to scale their R&D credit and ASC 350-40 processes to fit the company’s trajectory without burdening the engineering team that is driving the innovation.
On the tax side, Mercury claimed a substantial R&D credit, but Christine wanted stronger documentation backed by granular data to make her confident the credit would withstand audit. On the accounting side, Mercury needed to start reporting on internally developed software (ASC 350-40) at a detailed level for their first year of audited financials.
Both processes needed input from Mercury’s engineering team, but Christine wanted to improve on the traditional approach of creating separate, mostly redundant processes that wasted engineers’ time.
“We wanted something where there’s actual supporting documentation rather than trying to guess someone's percentage of time,” Christine says. “But also we didn't want to go the direction of time tracking either.”
At previous companies, Christine found the traditional approach of quarterly reviews with product leads inefficient and inaccurate. It took too many meetings to get everyone on the same page and the product leads often lacked detailed context about what engineers worked on.
“For both capitalized software and the R&D tax credit, it can't just be accounting making assumptions,” she says. “You really have to get the data from the actual managers who truly know and oversee these projects and individuals.” She wanted a process that incorporated real-time data that was convenient and easy to use.
Neo.Tax’s system for automating the R&D credit & ASC 350-40 from Mercury’s R&D team’s existing data — saving time and money and creating audit-ready substantiation
Christine partnered with Neo.Tax to solve both problems at once. Using NeoTax’s unified project system and Linear integration, Mercury leveraged their project management data to streamline both the R&D credit and ASC 350-40 processes.
First, Christine used Neo.Tax to go back and identify all their capitalized projects for the prior year and calculate time spent per project for each engineer. For example, Neo.Tax identified Mercury’s newly launched Personal Banking product as a R&D project and the engineers who worked on it with an estimated percentage of time.
Then, Mercury leveraged Neo.Tax’s unified system to complete their R&D credit process–in record time! Christine used Neo.Tax’s system to condense the granular capitalized software projects into R&D credit projects and to generate the detailed documentation to support their qualification.
“The ability to do granularity for cap software and then copy that over to leverage the work, but at a higher level for R&D tax credit, made it really easy to use,” she says.
Saved Weeks of Engineering+Accounting Time
Christine estimated it took each Engineering Manager less than an hour to review. “We got really good feedback from engineers who have gone through this at prior companies, and they were very thankful with how easy it was to use,” she says. “I did not have to have one meeting, one phone call with anyone.”
Since the Engineering team had already reviewed their project time for ASC, the R&D part was a breeze. “Again, it probably took them less than an hour,” Christine says.
Smooth Financial Audit
The granular projects and level of detail made for a smooth audit too. “[Our auditors] really liked that it was based on the tickets and that there was a clear calculation that they could follow.”
“More accurate, higher quality” Study vs CPA Firm
NeoTax’s AI system automatically created a detailed 500-page study, substantiating the four-part test for each project from Mercury’s linear tickets.
“Having Neo.Tax AI do the work and then me review really reduces my time and also creates a more accurate and quality product,” Christine says. “When we got the final PDF, it was over 500 pages. That's a lot of support. That's a lot of backup. And I think that's exactly what you need, when you have over 200 people and over 50 projects, to really have that level of granularity and backup across all the four requirements for R&D tax credit.”
Christine sees these benefits only growing quarter after quarter as Mercury continues to scale. “Having myself, our engineers, and the product teams use the same system throughout the year for cap software, and then annually for R&D tax credit, and not changing the process, besides getting even more accurate, creates efficiencies,” she says. “Neo.Tax really understood what our problems were and solved them.”
*Mercury is a financial technology company, not a bank. Banking services provided by Choice Financial Group and Evolve Bank & Trust, Members FDIC.
In July, the government moved for a summary judgment ruling that Kyocera AVX, the multinational ceramics and electronics manufacturer, is not entitled to the $1.3 million amended Section 41 R&D Credit they recently claimed. The company had hired PricewaterhouseCoopers (PwC) to make the filing, and the accounting firm did interviews with subject matter experts to compute the eligible amount of Section 41 credits they could claim for the tax years 2017-2020. PwC found $1.3 million worth of unclaimed credits, which they filed in the amended Section 41 study. But, ultimately, the IRS claims that the R&D Study and documentation provided were not sufficient to support the claim, and when the IRS requested additional documentation to support the claim neither Kyocera nor PwC could produce it.
Two of the government’s objections in its case against Kyocera are especially relevant to any company that files for an R&D tax credit: 1) “The PwC study exclusively relied on interviews to determine employees' time spent on projects; it did not use documentation” and 2) “Kyocera does not have a centralized system for tracking employee time, and generally does not track employee time on projects.”
The IRS has been emphasizing the necessity of contemporaneous documentation for decades, as far back as Eustace v. Commissioner in 2002. But this recent motion for summary judgment against Kyocera could mark a potential shift towards a stricter application of their long-standing policy.
The direction seems clear—reliance on after-the-fact interviews without supporting documents is increasingly untenable.
Kyocera's reliance on a PwC-conducted study, which was ultimately deemed insufficient by the IRS due to lack of proper documentation and over-reliance on estimates, highlights a systemic risk in the current practices of R&D credit calculation.
The IRS mandates strict substantiation requirements for claiming R&D tax credits under Section 41 of the IRC. Specifically, Treasury Regulation § 1.41-4(d) emphasizes the necessity for contemporaneous documentation to support the expenditures claimed. This documentation must detail the nature of the qualifying activities and their direct connection to the claimed credits—a challenging task for businesses relying on traditional methods, particularly for those that do not have employee time tracking systems in use.
In the case of Kyocera, the IRS disputed the R&D tax credit claims due to inadequate substantiation of the research activities claimed under Section 41. The agency focused on the lack of contemporaneous documentation, relying instead on retrospective estimates from interviews conducted by PwC long after the fact. This method was seen as inadequate in the eyes of the court; they demanded a more rigorous substantiation to prove that the activities qualified as R&D.
This is where Neo.Tax separates itself in the R&D tax space. Unlike traditional methods that often rely on after-the-fact recollections and manual calculations, Neo.Tax leverages advanced AI to analyze real-time data from integrated systems such as Jira and GitHub. This not only ensures greater accuracy but also provides a contemporaneous, auditable trail of documentation that meets IRS requirements. Better yet, our AI not only reviews these systems to identify the research activities, but also uses the meta data to help allocate the time. And because the meta-data is recorded "at the same time" as the tickets in Jira, it is — by definition — "contemporaneous documentation."
By accessing data from systems such as Jira and GitHub at the time of tax preparation, Neo.Tax’s platform can automatically extract, classify, and substantiate qualifying R&D activities. This method aligns with the IRS's emphasis on contemporaneous records. The agency prefers these types of records because they are more reliable than documentation created far after when the activity occurs — certainly, an engineer creating a timesheet of his work at the end of the month is likely more accurate than asking them to recollect their work on a project completed a year, or multiple years, in the past.
Unlike traditional R&D studies conducted by large accounting firms, which rely on retrospective interviews and questionnaires, Neo.Tax’s solution utilizes real-time data to support R&D credit claims. This direct link to project-specific activities minimizes reliance on employee recollection and significantly enhances the accuracy and defensibility of claims during IRS audits.
We often speak of the way our AI solution saves time for controllers, heads of tax, and engineers by eliminating the need for time-consuming retrospective interviews. But the Kyocera case highlights another, far more stark and costly risk of relying on memory and estimations for look-back claims. The IRS is making it clear that they’re emphasizing the need for contemporaneous data. Companies who rely on the R&D credit should take note.
As businesses increasingly adopt project-management tools that capture their developmental activities in real-time, a new approach to R&D tax credit documentation is possible. Neo.Tax’s AI-powered platform provides a reliable, efficient, and IRS-compliant method to claim R&D tax credits. By leveraging data directly from the systems so-often used by innovative companies, Neo.Tax ensures that your spending on R&D is rigorously documented in accordance with current tax laws.
We can get you the money you’re owed. Just as importantly, we can deliver the data-rich study that the IRS prefers and expects.
Given the importance of extending runway in today’s high-interest-rate reality, it’s shocking to learn that just 3 out of every ten companies that qualify for the R&D Tax Credit claim the money they’re owed. In 2011, “the largest 0.13 percent of all firms in the US claimed 14 percent of the credits,” according to research by the Mercatus Center at George Mason University. So, if you’re on the fence about claiming the credit, remember that the big guys are claiming it; shouldn’t you, too?
But this isn’t an article designed to make you feel foolish. FOMO Marketing is not our thing. We at Neo.Tax have built our AI-powered R&D Credit filing tool to make sure every innovative American business can claim the money they’re owed. So, get in touch with our team of experts to walk you through the process! And if you didn’t file for your credit last year (or the year before that, or the year before that…), don’t worry. We can help with that, too!
Many people don’t know this, but you can claim the R&D tax credit for the current tax year plus amend returns for the previous three tax years. For example, in 2023, you could claim credits for 2023, 2022, 2021, and 2020. That retroactive tax filing could be worth hundreds of thousands of dollars (or more) for your company. Neo.Tax doesn’t just stop at your prior three years, though. Due to the mechanics of the credit calculation, it may be beneficial to go back even further to substantiate qualified research activities to maximize the credit in your amended tax years. We can help with that – the lapsing of time is not a limiting factor to our technology! We know that’s getting very inside baseball; again, book a call, and we can talk you through it…
But even those who do know about the value of a Multi-Year Lookback R&D Credit often decide against filing because of the expenditure of time and effort to correctly calibrate the amount you’re owed. The big change with Neo.Tax is that by linking with your existing project-management system, our AI-powered tool can seamlessly identify qualified expenses from past years. What used to be difficult (or impossible, if enough engineers had moved on and are unreachable for interviews) is now quick, low-lift, and much more accurate than human memory could muster.
With Neo.Tax, it’s simple: if your company has a project management system that goes back x number of years, just plug it into Neo.Tax, and our groundbreaking tool can generate the projects and assign the effort for employees across each of those years. In solving for the pain of filing an R&D credit, we also built a tool to make Multi-Year Lookbacks painless and worth it for every innovative company.
The big guys have been claiming it for years. Now’s the time to claim it too.
