Article
Tips to secure R&D tax credits: Court ruling emphasizes documentation and more
Aug. 9, 2023 · Authored by Travis Riley and Josh Harbin
Thorough documentation and reliable expertise are crucial when claiming R&D tax credits.
In Betz v. Commissioner, T.C. Memo 2023-84, the United States Tax Court rejected a taxpayer’s R&D credit, reiterating specific areas businesses should focus on during the claims process.
Explore key considerations related to R&D tax credit claims below.
Court case overview
The taxpayers in Betz were shareholders in Catalytic Products International, Inc. (CPI), an S corporation. CPI designs and supplies air pollution control systems based on customer specifications.
For tax year 2014, CPI claimed a research credit of $501,531 that was passed-through to the shareholders on their respective Schedules K-1. In July 2018, the IRS issued to each shareholder a notice of deficiency for the research credits claimed on their personal returns and accuracy-related penalties under Internal Revenue Code (IRC) Section 6662. Consequently, the taxpayers petitioned the court.
The court assessed all 19 projects for which CPI claimed the 2014 research credit. In summary, the court held that:
- For all 19 projects, the taxpayers failed to carry their burden of establishing that the products were pilot models. Thus, such costs for production weren’t creditable.
- For all 19 projects, the taxpayers failed to carry their burden of establishing that the wages of certain employees were incurred for qualified services. Thus, such wages weren’t creditable.
- For five of the projects, the taxpayer didn’t retain substantial rights in the results of the research. Thus, costs for such projects weren’t creditable.
The court also held that the taxpayers were liable for accuracy-related penalties under IRC Section 6662.
Tips to help sustain R&D tax credit claims
Enhance your chances of sustaining claimed tax credits by performing these tasks during the claims process.
Provide detailed and substantiated evidence
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