To amend or not to amend? That is the question

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OBBBA and R&D Deductions: Should You Amend or Hold Off for 2024?

The One Big Beautiful Bill Act (OBBBA) gives small businesses a valuable opportunity: the ability to immediately deduct research and development (R&D) expenses incurred in 2022, 2023, and 2024. Yet, a gap in the law’s wording has left business owners uncertain about how to properly handle their 2024 tax returns.

Where the Uncertainty Lies
The statute says amended returns are required for any year “affected by the election.” This phrase has led to two competing approaches:

Play It Safe: File the original 2024 return under the old capitalization rules, then amend once the IRS clarifies the election process. Lower risk, but delayed benefit.

Take a Bold Stance: File the 2024 return claiming the full deduction up front, arguing this reflects Congress’s intent to provide immediate relief. Faster benefit, but more exposure if challenged.

Why Prior Years Matter
A common oversight is assuming you can just deduct 2024 costs on the original return. If 2022 and 2023 remain on the books with capitalized expenses, the IRS may see that as an impermissible accounting method change.

Practical Approach for Now
Until the IRS issues official instructions, the cautious move is to:

File 2024 following capitalization rules.

Watch for IRS guidance on Section 174A.

Be ready to amend 2022–2024 to claim deductions once procedures are announced.

Looking to 2025
From 2025 onward, businesses can freely deduct R&D costs again and may also “catch up” deductions from 2022–2024. For some taxpayers, waiting until then could be the simplest and least risky way forward.

Do you want me to suggest a few other replacement options for “confusion” (like ambiguity, lack of clarity, or gray area) so you can pick the one that fits best with your style?

R&D Tax Credit Eligibility AI Tool

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directive for LBI taxpayers

What is the R&D Tax Credit?

The Research & Experimentation Tax Credit (or R&D Tax Credit), is a general business tax credit under Internal Revenue Code section 41 for companies that incur research and development (R&D) costs in the United States. The credits are a tax incentive for performing qualified research in the United States, resulting in a credit to a tax return. For the first three years of R&D claims, 6% of the total qualified research expenses (QRE) form the gross credit. In the 4th year of claims and beyond, a base amount is calculated, and an adjusted expense line is multiplied times 14%. Click here to learn more.

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R&D Tax Credit Preparation Services

Swanson Reed is one of the only companies in the United States to exclusively focus on R&D tax credit preparation. Swanson Reed provides state and federal R&D tax credit preparation and audit services to all 50 states.

If you have any questions or need further assistance, please call or email our CEO, Damian Smyth on (800) 986-4725.
Feel free to book a quick teleconference with one of our national R&D tax credit specialists at a time that is convenient for you.

R&D Tax Credit Audit Advisory Services

creditARMOR is a sophisticated R&D tax credit insurance and AI-driven risk management platform. It mitigates audit exposure by covering defense expenses, including CPA, tax attorney, and specialist consultant fees—delivering robust, compliant support for R&D credit claims. Click here for more information about R&D tax credit management and implementation.

Our Fees

Swanson Reed offers R&D tax credit preparation and audit services at our hourly rates of between $195 – $395 per hour. We are also able offer fixed fees and success fees in special circumstances. Learn more at https://www.swansonreed.com/about-us/research-tax-credit-consulting/our-fees/

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Swanson Reed’s Triumph: Earning ISO 27001 Certification and Powering Innovation with Cutting-Edge Tools

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Swanson Reed, a global leader in R&D tax credit consulting, has just raised the bar by achieving the prestigious ISO 27001 certification, the gold standard for information security management. This milestone underscores their commitment to protecting client data while delivering innovative solutions like TaxTrex and creditARMOR. Let’s dive into how this certification and their standout products are transforming the R&D tax credit landscape!

Why ISO 27001 Certification Matters

ISO 27001 is the international benchmark for a robust Information Security Management System (ISMS), ensuring top-tier protection against cyber threats. For Swanson Reed, this certification means their clients’ sensitive R&D and financial data is safeguarded with world-class security measures. In an era where data breaches are all too common, this achievement is a testament to their dedication to trust and reliability.

Swanson Reed’s Game-Changing Products

Swanson Reed isn’t just about securing data; they’re revolutionizing how businesses claim R&D tax credits with innovative tools designed for efficiency and compliance. Here are their key offerings:

  • TaxTrex: This AI-driven software is a market leader, streamlining R&D tax credit claims by preparing them in just 90 minutes. TaxTrex uses advanced artificial intelligence to analyze project data, identify eligible activities, and generate compliant documentation with features like intelligent risk assessment, automated surveys, and secure document storage. It’s a game-changer for businesses looking to self-claim credits quickly and accurately.
  • creditARMOR: This R&D tax audit insurance product is one of the most cost-effective tools on the market. creditARMOR combines AI-driven risk management with comprehensive audit defense, covering costs for CPAs, tax attorneys, and specialists during IRS audits. Its proactive compliance framework minimizes audit risks, giving businesses confidence to pursue R&D credits without fear of regulatory challenges.
  • R&D Tax Credit Consulting Services: With over 30 years of experience, Swanson Reed exclusively focuses on R&D tax credit preparation and audit advisory. Filing over 1500 claims annually, their team of engineers, scientists, and CPAs provides meticulous claim preparation and robust audit defense, ensuring maximum benefits and compliance across all 50 U.S. states and internationally.

What ISO 27001 Means for Clients

Swanson Reed’s ISO 27001 certification enhances the value of their products and services, offering clients:

  1. Unmatched Data Security: Your proprietary R&D data is protected by a globally recognized security framework, ensuring confidentiality and integrity.
  2. Enhanced Trust: The certification solidifies Swanson Reed’s reputation as a reliable partner, giving clients confidence in their data handling and tax credit processes.
  3. Future-Ready Solutions: With a commitment to continuous improvement, Swanson Reed ensures their tools and services evolve with the latest security and regulatory standards.
  4. Global Reach with Local Expertise: Operating in countries like the U.S., Australia, and the UK, Swanson Reed combines international standards with localized expertise.

How Swanson Reed Achieved ISO 27001

Earning ISO 27001 required Swanson Reed to implement a comprehensive ISMS, involving rigorous risk assessments, advanced security controls, and a culture of security-first thinking. This process ensures their products, like TaxTrex and creditARMOR, operate within a secure environment, protecting clients from cyber risks while delivering seamless R&D tax solutions.

Why Choose Swanson Reed?

Swanson Reed stands out as the largest specialist R&D tax advisory firm in the U.S., with a focus on confidence, transparency, and simplicity. Their ISO 27001 certification complements their innovative tools, making them a trusted partner for businesses of all sizes. Whether you’re a startup leveraging TaxTrex to claim credits quickly or a corporation relying on creditARMOR to navigate audits, Swanson Reed empowers you to innovate fearlessly.

Unlock Your R&D Potential Today

With ISO 27001 certification and cutting-edge products like TaxTrex and creditARMOR, Swanson Reed is redefining R&D tax credit consulting. Visit www.swansonreed.com to discover how they can help your business maximize tax credits, secure your data, and drive innovation forward. Here’s to a future of secure, efficient, and innovative growth with Swanson Reed!

R&D Tax Credit Eligibility AI Tool

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directive for LBI taxpayers

What is the R&D Tax Credit?

The Research & Experimentation Tax Credit (or R&D Tax Credit), is a general business tax credit under Internal Revenue Code section 41 for companies that incur research and development (R&D) costs in the United States. The credits are a tax incentive for performing qualified research in the United States, resulting in a credit to a tax return. For the first three years of R&D claims, 6% of the total qualified research expenses (QRE) form the gross credit. In the 4th year of claims and beyond, a base amount is calculated, and an adjusted expense line is multiplied times 14%. Click here to learn more.

directive for LBI taxpayers

R&D Tax Credit Preparation Services

Swanson Reed is one of the only companies in the United States to exclusively focus on R&D tax credit preparation. Swanson Reed provides state and federal R&D tax credit preparation and audit services to all 50 states.

If you have any questions or need further assistance, please call or email our CEO, Damian Smyth on (800) 986-4725.
Feel free to book a quick teleconference with one of our national R&D tax credit specialists at a time that is convenient for you.

R&D Tax Credit Audit Advisory Services

creditARMOR is a sophisticated R&D tax credit insurance and AI-driven risk management platform. It mitigates audit exposure by covering defense expenses, including CPA, tax attorney, and specialist consultant fees—delivering robust, compliant support for R&D credit claims. Click here for more information about R&D tax credit management and implementation.

Our Fees

Swanson Reed offers R&D tax credit preparation and audit services at our hourly rates of between $195 – $395 per hour. We are also able offer fixed fees and success fees in special circumstances. Learn more at https://www.swansonreed.com/about-us/research-tax-credit-consulting/our-fees/

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How Multiple Entities with Common Ownership Can Benefit from R&D Tax Credits

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When businesses operate as part of a controlled group, navigating the complexities of the Research and Development (R&D) Tax Credit can be challenging. Controlled groups—consisting of multiple entities under common ownership—can share resources, expertise, and intellectual property. However, understanding how to allocate R&D tax credits effectively requires careful planning and strategic execution.

In this article, we’ll break down how controlled groups can benefit from R&D tax credits, including key considerations for credit allocation, and how to ensure compliance with IRS regulations.

Understanding Controlled Groups

Controlled groups are combinations of two or more entities under common control or ownership. According to the IRS, “all members of a controlled group are treated as a single taxpayer for purposes of computing the research credit.” The group must calculate the R&D Tax Credit as if it were a single taxpayer and then distribute the credit among its members based on the proportion of R&D activities performed by each entity.

There are three types of controlled groups:

  1. Parent-Subsidiary Controlled Group: One or more entities are connected through stock ownership with a common parent owning more than 50% of the other entities.
  2. Brother-Sister Controlled Group: Two or more entities are owned by five or fewer individuals, trusts, or estates with “controlling interest” (at least 80% ownership) and “effective control” (over 50% identical ownership).
  3. Combined Controlled Group: A mix of parent-subsidiary and brother-sister groups where at least one entity is the common parent of the parent-subsidiary group and a member of the brother-sister group.

Click here for a more detailed explanation of Controlled Groups, including examples.

Allocating R&D Tax Credits Among Controlled Group Members

Allocating R&D tax credits within a controlled group involves two key steps:

  1. Determining Qualified Research Expenses (QREs): Identify the QREs performed by each entity. Per Reg. Section 1.41-6(i)(2), the entity that performs the research claims the in-house QREs (i.e., wage payments and direct supply costs), even if other members reimburse them. The paying entity cannot claim these as contract research expenses.
  2. Proportional Credit Allocation: Once total QREs are calculated for the entire group, the R&D tax credit is allocated proportionally based on each entity’s contribution to the group’s total QREs.

Example:
Assume a controlled group, X, consisting of three entities—B, C, and D—has a total R&D tax credit of $100 for the year. If B, C, and D contributed $200, $300, and $500 in QREs respectively, the credit is allocated as follows:

  • B: $20 credit (20% of total QREs)
  • C: $30 credit (30% of total QREs)
  • D: $50 credit (50% of total QREs)

Strategic Planning for Maximum R&D Credit Utilization

Controlled groups can maximize R&D tax credits through strategic planning:

  • Identify Key R&D Activities: Determine which entities perform the most significant R&D activities and allocate resources accordingly.
  • Document Intercompany Transactions: Keep detailed records of intercompany transactions to justify QRE allocations.
  • Review Entity Structure: Reevaluate entity structures to optimize credit utilization.

Proper planning and documentation are essential to avoid issues with the IRS and ensure that each entity in the controlled group receives its rightful share of the credit.

Conclusion

Controlled groups present unique challenges and opportunities for R&D tax credit utilization. By understanding the definitions and rules around controlled groups, identifying QREs accurately, and strategically allocating credits, businesses can significantly reduce their tax liability.

As regulations and interpretations can be complex, consulting with tax experts experienced in R&D credits and controlled group rules is highly recommended. This approach ensures compliance while maximizing tax savings across all entities involved.

If your business is part of a controlled group and you’re looking to leverage R&D tax credits, reach out to a Swanson Reed R&D tax professional to explore how you can optimize your tax strategy.

R&D Tax Credit Eligibility AI Tool

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directive for LBI taxpayers

What is the R&D Tax Credit?

The Research & Experimentation Tax Credit (or R&D Tax Credit), is a general business tax credit under Internal Revenue Code section 41 for companies that incur research and development (R&D) costs in the United States. The credits are a tax incentive for performing qualified research in the United States, resulting in a credit to a tax return. For the first three years of R&D claims, 6% of the total qualified research expenses (QRE) form the gross credit. In the 4th year of claims and beyond, a base amount is calculated, and an adjusted expense line is multiplied times 14%. Click here to learn more.

directive for LBI taxpayers

R&D Tax Credit Preparation Services

Swanson Reed is one of the only companies in the United States to exclusively focus on R&D tax credit preparation. Swanson Reed provides state and federal R&D tax credit preparation and audit services to all 50 states.

If you have any questions or need further assistance, please call or email our CEO, Damian Smyth on (800) 986-4725.
Feel free to book a quick teleconference with one of our national R&D tax credit specialists at a time that is convenient for you.

R&D Tax Credit Audit Advisory Services

creditARMOR is a sophisticated R&D tax credit insurance and AI-driven risk management platform. It mitigates audit exposure by covering defense expenses, including CPA, tax attorney, and specialist consultant fees—delivering robust, compliant support for R&D credit claims. Click here for more information about R&D tax credit management and implementation.

Our Fees

Swanson Reed offers R&D tax credit preparation and audit services at our hourly rates of between $195 – $395 per hour. We are also able offer fixed fees and success fees in special circumstances. Learn more at https://www.swansonreed.com/about-us/research-tax-credit-consulting/our-fees/

Schedule a Teleconference

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Congress passes tax bill to permanently restore R&D expensing and allow amendments for prior years

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Congress Passes Bill Restoring Immediate R&D Tax Deductibility

In a major win for American innovation, Congress has officially passed a bill on July 3, 2025, restoring the immediate expensing of domestic research and development (R&D) costs under Section 174 of the tax code.

The legislative change reverses a provision from the 2017 Tax Cuts and Jobs Act that, starting in 2022, required businesses to amortize R&D expenses over five years-15 years for foreign R&D. This amortization rule significantly increased the after-tax cost of innovation, drawing widespread criticism from startups, manufacturers, and technology firms alike.

The newly passed bill reinstates the pre-2022 expensing rules retroactively, allowing companies to immediately deduct qualifying domestic R&D expenditures incurred from tax year 2022 onward. This move is expected to improve cash flow, support job creation, and incentivize investment in critical technologies across the U.S.

Importantly, the bill also retains the distinction between domestic and foreign R&D costs: foreign R&D must still be amortized over 15 years, a measure aimed at encouraging more innovation activity within U.S. borders.

Industry groups, including the National Association of Manufacturers and the Information Technology & Innovation Foundation, praised the legislation as a long-overdue correction. Tax professionals are now advising companies to revisit prior-year returns and consider amended filings to capture the retroactive benefits.

The restoration of full expensing for R&D is widely seen as a bipartisan signal that American competitiveness and technological leadership remain top national priorities.

R&D Tax Credit Eligibility AI Tool

directive for LBI taxpayers

directive for LBI taxpayers

What is the R&D Tax Credit?

The Research & Experimentation Tax Credit (or R&D Tax Credit), is a general business tax credit under Internal Revenue Code section 41 for companies that incur research and development (R&D) costs in the United States. The credits are a tax incentive for performing qualified research in the United States, resulting in a credit to a tax return. For the first three years of R&D claims, 6% of the total qualified research expenses (QRE) form the gross credit. In the 4th year of claims and beyond, a base amount is calculated, and an adjusted expense line is multiplied times 14%. Click here to learn more.

directive for LBI taxpayers

R&D Tax Credit Preparation Services

Swanson Reed is one of the only companies in the United States to exclusively focus on R&D tax credit preparation. Swanson Reed provides state and federal R&D tax credit preparation and audit services to all 50 states.

If you have any questions or need further assistance, please call or email our CEO, Damian Smyth on (800) 986-4725.
Feel free to book a quick teleconference with one of our national R&D tax credit specialists at a time that is convenient for you.

R&D Tax Credit Audit Advisory Services

creditARMOR is a sophisticated R&D tax credit insurance and AI-driven risk management platform. It mitigates audit exposure by covering defense expenses, including CPA, tax attorney, and specialist consultant fees—delivering robust, compliant support for R&D credit claims.  Click here for more information about R&D tax credit management and implementation.

Our Fees

Swanson Reed offers R&D tax credit preparation and audit services at our hourly rates of between $195 – $395 per hour.  We are also able offer fixed fees and success fees in special circumstances.  Learn more at https://www.swansonreed.com/about-us/research-tax-credit-consulting/our-fees/

Schedule a Teleconference

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R&D Tax Credits and Alternative Minimum Tax (AMT)

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Businesses with average annual gross receipts under $50 million can now use R&D tax credits to offset both regular tax and AMT. Previously, companies subject to AMT couldn’t use R&D credits to lower their tax liability.

Eligible Small Business Definition

Under Section 38(c)(5)(C), an “eligible small business” is defined as:

  • A non-publicly traded corporation, partnership, or sole proprietorship.
  • It must have average annual gross receipts of $50 million or less for the three-taxable-year period before the current tax year.

Special Rules (Section 448(c)(3)):

  • If the business or its predecessor was not in existence for the full three years, the gross receipts test applies to the period it was in existence.
  • For short tax years, gross receipts must be annualized.

Additional Details

  • Gross Receipts Adjustment: Gross receipts must be reduced by returns and allowances.
  • Controlled and Affiliated Groups: All members of controlled groups or businesses under common control are treated as a single entity.
  • Partners and S Corporation Shareholders: Both the partnership/S corporation and the individual partner or shareholder must meet the gross receipts test to qualify.

This change provides greater tax planning flexibility for small businesses engaged in R&D, potentially lowering their overall tax burden.

For more information, contact our team or consult with your Swanson Reed tax advisor to understand how you can benefit from the R&D tax credit.

Senate Fails to Pass Bill to Reinstate R&D Deduction

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Six months ago, we watched a bipartisan tax bill fly through the House with overwhelming support. Now, we’ve seen it fail in the Senate with a vote to end debate coming in at 48-44.

The Tax Relief for American Families and Workers Act (HR.7024), sponsored by House Ways and Means Chair Jason Smith (R-MO) and Senate Finance Chair Ron Wyden (D-OR), tied together three provisions. First, and most important to us, the bill would have revived expired tax provisions to reinstate R&D expense deductions. The other provisions included expanding the low-income housing tax credit, child tax credit, and cutting off the employee-retention tax credit.

On August 1, the Senate floor vote was held and only three Republicans voted in favor: Senators Josh Hawley (R-MO), Markwayne Mullin (R-OK), and Rick Scott (R-FL).

Senator Maggie Hassan (D-NH) has made clear her disappointment in the bill not passing and R&D deduction being passed over. She added “I am going to continue to work across party lines to pass my bipartisan measure to restore the full R&D tax deduction and cut taxes for hard-working families.”

Are you developing new technology for an existing application? Did you know your development work could be eligible for the R&D Tax Credit and you can receive up to 14% back on your expenses? Even if your development isn’t successful your work may still qualify for R&D credits (i.e. you don’t need to have a patent to qualify). To find out more, please contact a Swanson Reed R&D Specialist today or check out our free online eligibility test.

Who We Are:

Swanson Reed is one of the U.S.’ largest Specialist R&D tax advisory firms. We manage all facets of the R&D tax credit program, from claim preparation and audit compliance to claim disputes.

Swanson Reed regularly hosts free webinars and provides free IRS CE and CPE credits for CPAs. For more information please visit us at www.swansonreed.com/webinars or contact your usual Swanson Reed representative.

US Government Launches $1.6B Advanced Chip R&D Competition

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The Commerce Department has announced plans for a $1.6 billion advanced chip R&D competition. This CHIPS for America program will make awards of around $150 million each to promote private sector investment in five research areas.

The money will come through the 2022 Chips and Science Act in an effort to accelerate the US’s expertise in advanced packaging. Advanced packaging technology is in high demand now with advances in semiconductor technology powered by the growth of artificial intelligence applications and microelectronics. Currently, this market is dominated by Asian countries, and the US is estimated to control just 3% of the world’s capacity.

The US government outlined its vision for boosting its advanced chip capabilities in the National Advanced Packaging Manufacturing Program (NAPMP), which was unveiled last year. It has already handed out financial incentives to companies such as Intel , SK Hynix, Amkor and Samsung to boost the domestic advanced packaging sector.

With this new announcement the US Commerce Department is targeting five R&D areas:

  • Equipment, tools, processes, and process integration
  • Power delivery and thermal management
  • Connector technology, including photonics and radio frequency (RF)
  • Chiplets ecosystem
  • Co-design/electronic design automation (EDA)

Are you developing new technology for an existing application? Did you know your development work could be eligible for the R&D Tax Credit and you can receive up to 14% back on your expenses? Even if your development isn’t successful your work may still qualify for R&D credits (i.e. you don’t need to have a patent to qualify). To find out more, please contact a Swanson Reed R&D Specialist today or check out our free online eligibility test.

Who We Are:

Swanson Reed is one of the U.S.’ largest Specialist R&D tax advisory firms. We manage all facets of the R&D tax credit program, from claim preparation and audit compliance to claim disputes.

Swanson Reed regularly hosts free webinars and provides free IRS CE and CPE credits for CPAs. For more information please visit us at www.swansonreed.com/webinars or contact your usual Swanson Reed representative.

US R&D Spend Continues to Grow According to BEA Report

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The Bureau of Economic Analysis (BEA) has recently released a report examining R&D spending across the nation. The report, which evaluated spend during the 2017 – 2021 tax years, indicated that R&D activity accounted for 2.3% of the U.S. economy in 2021.

In 2021, the country reported R&D spend of $542.7 billion – a massive increase compared to the $378.2 billion spent in 2017. This shows a continuous growth in R&D investments, despite the hard times faced since the onset of the COVID-19 pandemic.

Each state was evaluated and compared, using R&D as a share of each state’s gross domestic product (GDP). On the lower end of the spectrum, Louisiana and Wyoming sat around a 0.3% spend while New Mexico topped the list at 6.3%.

The top 10 R&D producing states account for 70% of the entire country’s spend. California alone accounts for almost a third of U.S. R&D. Other top R&D-producing states include Washington, Massachusetts, Texas, and New York.

The report further analyzed R&D by sector and determined 85% of R&D value added is generated by the business sector, followed by government, and nonprofit institutions serving households. Ofcourse, “Business Sector” is quite a broad category and so the report broke it down further.

Those in the business sector who run professional, scientific, and technical services account for 40% of the sector’s 85%. This was followed by Information services at 15% and chemical manufacturing at 12%.

Are you developing new technology for an existing application? Did you know your development work could be eligible for the R&D Tax Credit and you can receive up to 14% back on your expenses? Even if your development isn’t successful your work may still qualify for R&D credits (i.e. you don’t need to have a patent to qualify). To find out more, please contact a Swanson Reed R&D Specialist today or check out our free online eligibility test.

Who We Are:

Swanson Reed is one of the U.S.’ largest Specialist R&D tax advisory firms. We manage all facets of the R&D tax credit program, from claim preparation and audit compliance to claim disputes.

Swanson Reed regularly hosts free webinars and provides free IRS CE and CPE credits for CPAs. For more information please visit us at www.swansonreed.com/webinars or contact your usual Swanson Reed representative.

Senators Propose Using Emergency Funds to Develop Non-Defense AI R&D

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On May 15, 2024, a bipartisan group of senators released an outline of a solution to drive innovation in the U.S., particularly in AI. The blueprint proposes Congress rapidly ramp up federal spending on AI R&D using “emergency” appropriations.

Led by Senate Majority Leader Chuck Schumer (D-NY), a key architect of a similar emergency infusion for semiconductor manufacturing and R&D provided by the CHIPS and Science Act of 2022. The group’s other members are Sens. Todd Young (R-IN), Martin Heinrich (D-NM), and Mike Rounds (R-SD).

The proposed solution would fund non-defense AI R&D programs across the government to at least $32 billion per year. This value would match the level proposed in 2021 by the National Security commission on AI (NSCAI). The commission estimated that federal agencies spent about $1 billion on such R&D in fiscal year 2020 and proposed that Congress double that figure each year over five years.

Despite this recommendation by the NSCAI, there has not been even close to this pace of funding.

The proposal identifies priority programs for the funds to be spent on, including:

  • A cross-government AI R&D effort that spans the Department of Energy, National Science Foundation, National Institute of Standards and Technology, National Institutes of Health, NASA, and other relevant agencies;
  • An “AI-ready data” initiative that has a focus on “fundamental and applied science, such as biotechnology, advanced computing, robotics, and materials science”;
  • Efforts authorized by the CHIPS and Science Act that have not been fully funded, including but not limited to NSF’s education programs and its Directorate for Technology, Innovation, and Partnerships, DOE’s advanced computing and microelectronics programs, and the Commerce Department’s regional technology development hubs;
  • NSF’s National AI Research Resource and its National AI Research Institutes;
  • “AI Grand Challenge” programs that focus in part on developing applications to “fundamentally transform the process of science, engineering, or medicine”;
  • NIST’s AI programs as well as construction projects to “address years of backlog in maintaining NIST’s physical infrastructure”; and
  • A joint NIST-DOE test bed to “identify, test, and synthesize new materials to support advanced manufacturing through the use of AI, autonomous laboratories, and AI integration with other emerging technologies, such as quantum computing and robotics.”

In their blueprint, the senators recommend funding efforts to mitigate threats from AI-enhanced biological, chemical, and nuclear weapons, including through testbeds and model evaluation tools developed by DOE.

Any initiative will also need buy-in from the House. Schumer said he intends to raise the subject soon with House Speaker Mike Johnson (R-LA), who established his own bipartisan taskforce on AI  in February.

Are you developing new technology for an existing application? Did you know your development work could be eligible for the R&D Tax Credit and you can receive up to 14% back on your expenses? Even if your development isn’t successful your work may still qualify for R&D credits (i.e. you don’t need to have a patent to qualify). To find out more, please contact a Swanson Reed R&D Specialist today or check out our free online eligibility test.

Who We Are:

Swanson Reed is one of the U.S.’ largest Specialist R&D tax advisory firms. We manage all facets of the R&D tax credit program, from claim preparation and audit compliance to claim disputes.

Swanson Reed regularly hosts free webinars and provides free IRS CE and CPE credits for CPAs. For more information please visit us at www.swansonreed.com/webinars or contact your usual Swanson Reed representative.

8th Circuit Affirms Tax Court, Denies R&D Credit for Being Funded

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Meyer, Borgman & Johnson, Inc. v. Commissioner, No. 23-1523 (8th Cir. May 6, 2024). Full decision of the 8th Circuit available here.

The U.S. Court of Appeals for the Eighth Circuit affirmed a decision of the Tax Court that the taxpayer was not entitled to research tax credits because the taxpayer’s research was “funded” within the meaning of section 41(d)(4)(H).

Background

Meyer, Borgman, & Johnson, Inc., a structural engineering firm, sought R&D tax credits for its expenses incurred in creating documents for the structural design of building projects. The taxpayer claimed approximately $190,000 in tax credits for the years ending September 30, 2010, 2011, and 2013. The credits were denied by the Commissioner on the basis that the research was “funded”. The Tax Court ruled that the taxpayer had no financial risk as payment was to be made regardless.

The taxpayer argued that the Tax Court erred as payment for their research was in fact contingent on the success of its research. Furthermore, they argued that their contracts have a fixed price which is not generally considered to be funded work – statement supported by Case Law: Populous Holdings, Inc. v. Commissioner 2019 WL 130325266, at *2 (T.C. Dec. 6, 2019) (non-precedential order by Tax Ct. R. 50(f)). 

Legislation

 26 U.S.C. § 41(d)(4)(H) states that “Any research to the extent funded by any grant, contract, or otherwise by another person (or governmental entity)” is not qualified research. The legislation clarifies that taxpayers who are paid to conduct research – such as through a contract – must have rights to use the IP and must be paid on a basis that indicates payment for the research is contingent on the success of the research.

This specification is essential as it clarifies who is at financial risk for the research taking place. If a taxpayer is paid regardless of the outcome or success of the research, there is no financial risk involved. However, if payment is contingent on the success of the research, financial risk falls on that taxpayer.

Outcome

The Eighth Circuit affirmed the Tax Court’s decision and stated that the Taxpayer’s contracts lacked the specificity required to prove financial risk. In particular, they specified that the contracts lack the express terms that courts have identified as important to establish payment was contingent on the success of the research and highlighted Dynetics, 121 Fed. Cl. at 505 and Little Sandy Coal Co., Inc. v. Commissioner, 62 F.4th 287, 298 (7th Cir. 2023).

Dynetics was used as an example because the Taxpayer’s contracts did not include rejection language nor did it limit payment to work that was accepted. Little Sandy Coal Co was used as this case law provides a description of qualified research, (holding that “qualified research” does not include “testing to determine if the design of the product is appropriate,” cannot just be “any design or modification to meet customer specifications,” but must remove uncertainty “related to the ‘development or improvement’ of the product”

In summary, the Taxpayer’s contracts had verbiage outlining general economic risk of investing resources without a commitment to be paid, but that the risk was not contingent on the success of the research itself. Requirements to comply with pertinent codes and regulations or to perform pursuant to a general standard of care does “not mandate success” (citing Geosyntec Consultants, Inc. v. United States, 776 F.3d 1330, 1341 (11th Cir. 2015)). 

Are you developing new technology for an existing application? Did you know your development work could be eligible for the R&D Tax Credit and you can receive up to 14% back on your expenses? Even if your development isn’t successful your work may still qualify for R&D credits (i.e. you don’t need to have a patent to qualify). To find out more, please contact a Swanson Reed R&D Specialist today or check out our free online eligibility test.

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