R&D Tax Credit Court Case Update- Moore V. Commissioner

The research and development (R&D) tax credit is one of the most valuable tools businesses can use to incentivize innovation, offset tax liabilities, and stimulate growth. However, the R&D tax credit comes with specific rules and criteria.

The Case: What Happened?

In this case, the U.S. Court of Appeals for the Seventh Circuit upheld the Tax Court's decision, which denied the inclusion of wages paid to an S Corporation's Chief Operating Officer (COO) in the company's Section 41 research credit claim. The key issue? The taxpayer couldn't adequately substantiate the time the COO spent on qualified research activities, nor did the COO engage in direct supervision or direct support of such research.

The taxpayer, the sole shareholder of Newco, Inc.—a manufacturer of scoreboards and related equipment—claimed the COO's salary and bonus as qualified research expenditures for the 2014 and 2015 tax years. However, while Newco had payroll records, they didn't capture the COO's specific tasks. Moreover, the COO couldn't estimate how much time he spent on qualified research, even approximately.

Why This Matters: The Importance of Strong Documentation

This case offers a valuable lesson on the power of thorough documentation. It underscores the importance of keeping detailed records substantiating your R&D credit claims. The Seventh Circuit emphasized that there's no way to verify the time spent on qualified research activities without solid evidence- like detailed time sheets or project logs.

But here's the good news: by taking the proper steps, you can ensure your R&D credit claims are well-supported and stand up to scrutiny.

Here's how to make sure your claims are rock-solid:

1. Keep Detailed Records: Go beyond essential payroll records. Document the specific tasks your employees are performing, especially those involved in R&D. Time sheets, project logs, and detailed notes can all help substantiate your claims.

2. Substantiate Every Claim: When you claim an R&D credit for an employee's wages, ensure you have the evidence to back it up. This is particularly important for employees in managerial roles, like COOs, where it might not be immediately apparent how much time is spent on R&D.

3. Highlight Direct Supervision and Support: For wages to qualify, the employee must be directly involved in the research—whether by performing it, supervising it, or supporting it. The Moore case illustrates how closely courts will look at these roles, so ensure your documentation reflects the employee's direct connection to R&D activities.

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Turning a Challenge into an Opportunity

The Moore case is a reminder that while the rules are strict, they're also transparent. By investing time in good documentation practices, you're not just protecting your claims but setting your company up for success. Clear, detailed records will help you maximize your R&D credits with confidence.

Here are a few positive steps you can take:

?Create and maintain detailed records for all R&D activities, ensuring you capture who did what, when, and how long it took.

?Empower your team by training them on the importance of documenting their work, primarily related to R&D.

?Regularly review and update your documentation practices to align with IRS requirements.

To learn more, click this link https://research.taxprepadvocates.com/dbr/?refid=AA0043

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