R&D Tax Credit

Does my company qualify for the R&D tax credit?

The simple answer is that if a company has projects which meet the requirements of IRC Code Section 41, they will generate expenses which qualify for the tax credit.

The research tax credit is entirely dependent on qualifying projects, and quantifying the allowable expenses associated with those qualified projects. As a result, any company can qualify, but to determine if they actually do require an evaluation of the facts and circumstances of their projects.

Under the expanded coverage introduced in the PATH Act, companies with average revenues of less than $50 million over the past three years may use credits to offset the Alternative Minimum Tax and newer companies with under $5 million in gross receipts may be eligible to offset some payroll tax obligations.

What is the audit risk?

The IRS has included the research tax credit on its  "Dirty Dozen" list of tax scams.

As a result, it is imperative to ensure that qualified expenses have been properly quantified, and that documentation is properly prepared to support the credit position taken.

The research credit is said to be incremental. What does this mean?

When Congress established the research credit, their intention was to encourage companies to increase spending on technological development. To accomplish this goal, a base amount was included in the calculation of the tax credit. The base amount serves as a hurdle or minimum amount that qualified expenses must exceed in order to generate a credit.

My company receives payments from customers for development projects. Do we still qualify for the research tax credit?

Congress intended that to qualify for the research tax credit, the taxpayer must bear the financial burden of the research. As a result, funded research is specifically disallowed from the research tax credit.

However, a funded research project could still qualify for the tax credit if the taxpayer is bearing the financial burden for the research. There is a two-part test to determine if the taxpayer is bearing the financial burden of the research. First, if payments are contingent on the success of the project, the research is considered not funded. Second, research is considered not funded if the taxpayer retains any substantial rights to the results of the research. Both requirements must be met for the research to be considered not funded.

Making a determination on funded research is a case-by-case decision based on a review of the terms and conditions of the contract or agreement.

What are the documentation requirements for the research tax credit?

Unfortunately there are no explicit guidelines for documentation required to support the research credit. The only guidance available is that taxpayers are required to retain sufficient documentation to support the credit claimed.

Typical recommendations for documentation would include project files that demonstrate how projects meet the qualification requirements, documentation that links employees to their involvement on qualified projects, and documentation supporting the base amount calculation.

I was not aware of the scope of R&D tax credit opportunities in the past. Is there a way to claim expenses from prior years?

Yes. If we conduct a review and find eligible activities, Tri-Merit can work with you to prepare an amended return for up to three previous filings.

My company was launched in the last few years and has not yet reached profitability. Are we eligible for R&D tax credits?

Potentially. A Qualified Small Business (QSB) with less than $5M in gross receipts may offset a portion of their payroll taxes if valid criteria are met.

Cost Segregation

Can I amend prior returns to take advantage of Cost Segregation?

An appropriate review of past years’ returns can provide additional depreciation deductions in the current year. This can be done without amending prior returns.

What types of property are eligible for Cost Segregation?

Cost Segregation rules apply to commercial real estate purchases or improvements placed in-service during eligible period. A Cost Seg analysis can be performed on office buildings, hotels, factories, manufacturing sites, retail outlets and more.

What type of documentation is needed for a Cost Seg analysis?

It will vary based on whether the property is new construction or an acquisition. For new property, documentation may include a tax depreciation schedule, site survey, AIA payment application and as-built drawings for civil, architectural, structural, plumbing, HVAC and more. Acquired properties will require closing documents, an appraisal, current rent roll, land value allocation and a complete site survey. One of our specialists can discuss your particular situation to review required documents.


Are energy efficient improvements eligible for tax credits on commercial properties.

In general, the answer is yes. It is best to review your options and tax incentive opportunities under Section 179D of the tax code before beginning work, but deductions can be claimed once the work is completed. Physical changes related to lighting, HVAC, plumbing, even water heaters may be eligible for property owners or lessees.


Who can complete a 45L claim?

Someone who has been accredited by the Residential Energy Service network (RESNET) or similar rating network must complete the analysis. The person cannot be affiliated with the contractor seeking the claim in any way. The process should include computer modeling and testing completed on-site as part of the submittal package.

Does the homeowner or unit owner receive the 45L credit?

A 45L Energy Efficient Home credit is available to the contractor who owned or had a basis in the unit at the time it was constructed or remodeled. If that person hires a 3rd party contractor, the 3rd party is not eligible, only the contractor who owns the unit is.