Unlocking R&D Tax Credits: Lessons from Meyer, Borgman, & Johnson, Inc. Case

Introduction:

Navigating the eligibility for Research and Development (R&D) tax credits can present intricate challenges, particularly in the assessment of contracts. A recent legal case, Meyer, Borgman, & Johnson, Inc. v. Comm'r of Internal Revenue, No. 23-1523 (8th Cir. May. 6, 2024), brings forth significant insights and ramifications for firms operating in fields such as structural engineering and other R&D-intensive sectors.

The Case Overview:

MBJ, specializing in structural engineering, filed claims for research tax credits totaling $190,000 over several fiscal years. However, the claims were contested and ultimately denied by the Internal Revenue Service (IRS) and upheld by the United States Tax Court. At the heart of the matter was the eligibility of MBJ's contracts for these tax credits.

Understanding Contract Eligibility:

The Eleventh Circuit's ruling in the Geosyntec case set a precedent regarding funded contracts, which were deemed ineligible for tax credits. These contracts implied substantial financial backing and autonomy, without payment tied to research outcomes. MBJ's contracts shared similarities, lacking clear payment contingencies linked to research success.

Key Arguments and Counterarguments:

MBJ argued that their contracts mandated comprehensive designs meeting stringent project requirements, with termination clauses for substandard performance indicating payment dependency on research success. However, the Tax Court disagreed, emphasizing the absence of explicit payment conditions tied to research milestones.

Implications for R&D Analysis:

The MBJ case underscores several critical considerations for R&D tax credit eligibility:

1. Clarity in Contract Language: Contracts must explicitly outline payment dependency on research success.
2. Distinction between Services and Research: Contracts focusing solely on delivering services up to professional standards, without provisions for innovative outcomes, are less likely to qualify.
3. Assessment of Risk Assumption: While financial risks may exist in contracts, they must be directly tied to research success to qualify for tax credits.
4. Importance of Precedent and Judicial Interpretations: Referencing relevant legal precedents, as done in the MBJ case with Geosyntec and Fairchild, provides a framework for evaluating contract eligibility.

Conclusion:

The MBJ case highlights the intricate process of assessing contract eligibility for R&D tax credits. It underscores the importance of consulting with seasoned R&D Tax Credit experts to ensure accurate analysis for eligibility and compliance. Connect with R&K Partners today for further discussion and guidance!