R&D tax rules: New risks, new opportunities
As a leading global manufacturer of automotive and motorcycle products, our client has a long history of investing in innovation. But when IRS rules around R&D tax credits changed, they needed clearer insight into the impacts on their R&D credit eligibility — and whether they were leaving savings on the table.
The client previously relied on a Big 4 firm for tax credit work, but recognized the need for a more responsive, local service provider who could deliver proactive ideas and personalized service. We were a few years into our working relationship when the IRS and Treasury issued regulations allowing taxpayers to include pilot model supply costs as qualified research expenditures (QREs) in R&D tax credit calculations. Caution was needed, however, because only certain subsets of pilot model supply costs were now eligible.
Our solution: Data-backed QRE validation, with proven financial impact
The client had substantial pilot model QREs but was unaware that this change in regulation affected them. Our team got to work and prepared a cost-benefit analysis for their consideration, which, after internal evaluation, was approved. We collaborated with their engineering, accounting, and technical teams to gather and validate detailed costing data so that only eligible expenses were claimed. Based on our work, we found that not only could the client claim these additional QREs moving forward, but they could also amend open tax years.
This proactive approach to identifying and substantiating qualified expenses proved highly effective. Through the R&D tax credit strategy, we’ve helped the client claim more than $40 million in credits over the course of our relationship.
Road-tested R&D tax credit strategies: Withstanding IRS scrutiny
In recent years, the IRS has significantly expanded its review of R&D credit claims, requiring taxpayers to provide more detailed contemporaneous documentation. As part of this heightened scrutiny, the client was selected for an examination covering five tax years and more than $13 million in credits.
Over roughly four years, we led the client’s defense from start to finish. Throughout the exam, our team managed shifting timelines, personnel changes within the IRS, and waves of information document requests (IDRs), many of which were repeats of previously submitted inquiries. To drive an efficient process and protect the client from unnecessary effort and cost, we facilitated an in-person discussion with the IRS to clarify the scope of the review. This meeting helped consolidate redundant requests, streamline communication, and refocus the exam on the appropriate issues.
By advocating for a more efficient and targeted examination, we reduced both the administrative burden and professional fees typically associated with a multiyear review while giving the client confidence that their claims were substantiated and defensible.
Positioned for future credits
The client continues to rely on our expertise for complex tax matters and future planning. With new state credits and regulatory changes on the horizon, our team remains committed to maximizing value, optimizing their tax position, and supporting their growth.
If you’d like to discuss your organization’s R&D tax credit needs with a Plante Moran specialist, please contact us.
