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THE APRIL 18TH TAX DEADLINE IS APPROACHING FAST
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July 25, 2022
1 min read
By Neo.Tax Team
5 min read
Stephen Yarbrough is the epitome of a founder who is walking the walk. And if you’re asking, can he talk the talk? Stephen is a veteran of The Big 4 and the IRS… enough said. Despite his resume, what really stands out most about him is his energetic laugh that makes you feel you’re talking to an old college friend–even through the screen during a zoom call.
An openly out and proud gay man, Yarbrough is taking a “lead by example” approach to visibility, representation, and inclusion. As one of three ethnically and racially diverse founders of Neo.Tax, a tax automation software startup, Stephen believes that senior leadership’s responsibility lies in setting an example and following through. “It's much more empowering [to say] during work conversations, ‘hey, I'm gonna be out of the office for pride, or telling stories and being open about when you got married to your husband or same-sex partner.’ I think that level of openness actually has a bigger impact when it comes from senior leadership. It’s important for senior leadership to be open and comfortable.”
By the same token, Yarbrough acknowledges it isn’t always that easy and that the choice of whether to be out at work shows a bigger cultural shift that needs to happen.
The reality of what employees have to go through takes Stephen back to a time when discrimination was all too real for him while working for a Big Four accounting firm–back when it was still called the Big 6.
Fast forward to 2022 and 40% of LGBTQIA employees stated they had witnessed homophobic harassment working at tech companies. A recent ICA & CalCPA study cited a lack of fair treatment, diversity, and inclusion were key reasons LGBTQIA+ identifying professionals are leaving the accounting profession entirely.
Visibility and cultural shifts go hand in hand. It’s not enough to see an underrepresented person in a position of power and leadership, it’s equally important to see shifts happen within the boots-on-the-ground, day-to-day, watercooler culture that is fundamental to everyday life in a workplace, be it remote or in the office. And for Stephen, affecting positive change in the Fintech space that Neo.Tax occupies is what motivates him. “I think leading by example is important. But I also recognize that organizations have difficulty doing this. You can't just say find the gay partner [at a firm] and push them out there to be open. When you have senior leadership that is open, it makes it easier for everybody else. And that translates into the culture here [at Neo.Tax].”
That ease around company culture and relaxed approach to inclusion are apparent in the interactions between employees, founders, and senior leadership at Neo.Tax. And especially with matters of the heart, love is love. “One of the interesting conversations I had with Ibrahim,” another co-founder of Neo.Tax, “was about a second date I was going on with a Muslim man. I wanted to know which meats to avoid when picking a restaurant. So he gave me some advice. It didn’t matter who I was dating.”
Walking the walking is not always easy. And in Stephen Yarbrough’s case, it has meant moving across the country to find an environment where he could be himself and still work in what many consider a “conservative” profession. But with the power of visibility, inclusion, and respect in the workplace, it can mean that walking the walk, or rather putting action behind the words, makes it less of a singular, individual path and more of a collective journey.
Advice for founders? Take a top-down approach and remember being inclusive doesn’t have to be showy, as long as companies put inclusivity into action.
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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.
