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THE APRIL 18TH TAX DEADLINE IS APPROACHING FAST
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February 1, 2024
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Yesterday, the House voted 357 to 70 to pass the Tax Relief for American Families and Workers Act of 2024. The bill is the long-rumored compromise to restore both the R&D Tax Credit to its original, pre-Tax Cuts and Jobs Act form and the Child Tax Credit, which was implemented during Covid to help working families.
As CBS News explained it: "The legislation would make it easier for more families to qualify for the Child Tax Credit, while increasing the amount from $1,600 per child to $1,800 in 2023, $1,900 in 2024 and $2,000 in 2025. It would also adjust the limit in future years to account for inflation. When in full effect, it could lift at least half a million children out of poverty, according to the Center on Budget and Policy Priorities."
And for innovative companies, the restoration of the pre-TCJA R&D Credit is also massive news. The TCJA had changed the cost-benefit analysis for research-minded American companies both big and small when it came to building innovative products. By creating aspects of R&D that had to be amortized rather than deducted in the same year, the cost of research and development rose exponentially. (Read our Founder's Guide to R&D Capitalization to get a better sense of how the profitability analysis has shifted.)
The new law keeps the provision from the TCJA that makes it so R&D costs incurred outside the United States must be amortized over 15 years. However, if this law passes the Senate: "The provision delays the date when taxpayers must begin deducting their domestic research or experimental costs over a five-year period until taxable years beginning after December 31, 2025. Therefore, taxpayers may deduct currently domestic research or experimental costs that are paid or incurred in tax years beginning after December 31, 2021, and before January 1, 2026."
By restoring the domestic R&D Tax Credit to its earlier form, where R&D costs can be deducted rather than capitalized, American companies are once again incentivized by business tax law to create new, game-changing products.
It's still up in the air whether the Senate will approve the Tax Relief for American Families and Workers Act of 2024, but we'll let you know as soon as a decision is made.
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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.
