1. 1. If Im doing research, I can get a credit You need to not only be doing qualified research, but also have the documentation that supports the credit. There isnt a bright-line documentation test, so each taxpayer must analyze his or her documents to determine which ones support the credit. Youll need documentation that: Shows that you meet the four-part test Shows that you dont fall into one of the exceptions Connects your costs to your activities A good example is the issue of technical uncertainty. Its not enough to know that your scientists or engineers had an uncertainty. Youll need to have documents as evidence that the uncertainty existed. 5 misconceptions about the R&D tax credit 2. I can compute a state credit from my federal credit with a few changes Some taxpayers approach their state R&D credit as an afterthought. They use essentially the same calculation in their state credit as in their federal credit with just a few modifications. Be aware of some important differences between state and federal credits, and how they might affect your state application: Some state credits have unique rules and deviate from the federal rules. Some state credits are permanent, but the federal credit is temporary. Some state credits are larger than the federal credit, depending on your businesss fact pattern. Some taxpayers in California, for example, could qualify for a state credit that exceeds the federal credit. It can be worthwhile to conduct or arrange for a review of the R&D credit in the states where your business operates. With Congress debating the future of the federal R&D tax credit, its a good time to check your understanding of the credit and how you could use it more effectively. Here are five common misconceptions about the credit. Mark Andrus, Regional Partner, Strategic Federal Tax Services

2. 2 5 misconceptions about the R&D tax credit 3. Interviewing my subject matter professionals is the best source of information Tax professionals may think they need to simply interview their engineers or scientists for a description of the project, the uncertainty and the amount of time spent. The accounting department then takes the percentage of time spent and multiplies it by the salaries of those involved. While employees are a good source of information, the interview process can be time-consuming and interrupt important R&D activities. An analysis of available documentation can be an effective way to obtain information needed to compute and substantiate the R&D credit. Combining both document analysis and interviews has proved to be an efficient method to gather information and reduce an organizations cost of compliance. 4. My company isnt in technology, so it wont qualify Approximately 80% of R&D credits go to companies in the manufacturing industry, according to electronic regulatory filing data gathered by XBRL US Inc. Some other industries that might qualify for the credit are agriculture and livestock, and food and beverage. Companies in these industries dont always develop base technology, but technology is embedded in what they do. Making incremental improvements to products or manufacturing processes is often eligible for the credit. 5. Managing documentation is more trouble than its worth Managing the process of gathering and analyzing the documents may seem almost impossible. For many taxpayers, the challenge is how to substantiate R&D credit issues using documents produced in the normal course of business. They dont want to create R&D-credit- specific documentation and they dont need to. Grant Thornton LLPs R&D Tax Credit team uses electronic tools and processes to help clients gather, analyze and index support documentation located throughout their companies while reducing any security risks. In one case, our team created secure protocols for a client and extracted more than 1 million documents that were analyzed to support the R&D credit. In another case, our team worked within a clients network, analyzing more than 1.5 million documents in a few days time without removing any documents from the network. 3. Documents can make or lose a case Documentation or the lack thereof affected decisions in two recent court cases: 1. Union Carbide Corporation and Subsidiaries v. Commissioner of Internal Revenue To support qualified research activities, the taxpayer presented the employees testimony and documentation that corroborated the employees testimony. The court sided with the taxpayer and accepted the employees testimony because it was corroborated by documentary evidence. Contact Mark Andrus Partner, National Practice Leader R&D Tax Credit Services Grant Thornton LLP T 503.276.5910 E mark.andrus@us.gt.com 2. Basim Shami and Rania Ardah, et al. v. Commissioner of Internal Revenue The taxpayer presented employees firsthand testimony to support the employees own qualified research activities. Because the taxpayer didnt present supporting documentation, however, the court didnt side with the taxpayer. Tax professional standards statement This document supports Grant Thornton LLPs marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document, we encourage you to contact us or an independent tax adviser to discuss the potential application to your particular situation. 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GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one anothers acts or omissions. Please visit grantthornton.com for details. 2014 Grant Thornton LLP | All rights reserved | U.S. member firm of Grant Thornton International Ltd Connect with us grantthornton.com @grantthorntonus linkd.in/grantthorntonus R&D tax credit legislation Read how congressional activity could extend or make the federal R&D tax credit permanent.