To execute innovation effectively, companies need to adopt new approaches to innovation, learn from their past mistakes, and set reasonable goals that they can actually achieve. However, a new Accenture survey finds that U.S. companies are struggling with various innovation pursuits – continuing a problem they have been grappling with for the past three years.

Specifically, the survey of executives and managers within 500 U.S. companies divulges that six in 10 (60 percent) said their companies do not learn from past mistakes. This is virtually double the 36 percent who self-confessed to this three years ago when Accenture last piloted a comparable survey.

In fact, approximately three-fourths (72 percent) indicate their firm’s frequently oversight opportunities to exploit underdeveloped regions or markets, versus 53 percent three years ago.  Additionally, more than two-thirds (67 percent) consider their companies as risk averse, a large increase from 46 percent publicized in the preceding survey.

Furthermore, the survey demonstrates that 82 percent disclose they do not differentiate their innovation approaches between incremental versus large-scale transformational change – meaning they use a sole “one-size-fits-all” methodology to accomplish different objectives.

Notwithstanding their companies’ innovation shortcomings, respondents are more certain on disruptive innovation than they were three years ago.  For instance, 84 percent said they believe innovation is key for their long-term success compared with 67 percent three years ago.  The same percentage of respondents – 84 percent – said they are looking for the “next silver bullet,” meaning a market-defining innovation.  Creating new products is a priority for almost half (47 percent) of respondents, an increase of 20 percentage points from three years ago.

However, just how do companies create this innovation within their own company? One way of utilizing and enhancing innovation within a firm is by investing in research and development (R&D).  Both economic theory and empirical analysis emphasize the vital position of research and development (R&D) in economic growth and innovation. R&D – which may take the structure of basic research, applied research or experimental development – fundamentally encompasses “creative work undertaken on a systematic basis to increase the stock of knowledge… and the use of this stock of knowledge to devise new applications” (OECD, 1994).

Due the contribution of R&D to productivity growth, economic performance and the achievement of social objectives, governments do have a role in encouraging the appropriate R&D levels and expenditures. In the United States, companies are granted R&D tax credits, which are tax incentives for performing qualified research (not necessarily successful) in the U.S., resulting in a credit to a tax return. Essentially, the government lets you deduct the costs of research and experimentation to develop or improve a product, formula, invention, process or technique.  Bearing in mind the broad application of the credit and recent changes to the eligibility criteria, the R&D tax credit could be a huge game changer for companies seeking to innovate. If you want to learn more about R&D tax credits, contact a Swanson Reed specialist today for further information.

New rules and regulations have made it easier for all types of businesses to profit from the R&D Tax Credit, but there is always a possibility that the credit will provoke an IRS audit. Even hearing the word audit can spur risk aversion in clients, therefore it’s best to be prepared as possible to ease your mind.

To elaborate, an R&D tax credit audit is an examination of compliance with the relevant R&D tax credit legislation, and it consists of a thorough review of the claim from both a scientific/technological and a financial/tax technical perspective.

In light of this, we’ve collated six key tips to assist companies in reducing their audit risk.

1. Recognize what qualifies as research

To start with, you need to confirm whether the activities undertaken are eligible as “qualified research.” IRS has a four-part test for this, the four parts to consider are:

• Is your research technological in nature?
• Does the research have a permitted purpose?
• Are you working toward the elimination of uncertainty about a product?
• Are you engaged in the process of experimentation?

Ultimately, you must be able to explain scientifically why this is an authentic experiment whose outcomes you were testing in good faith. Firms should especially watch out for “R&D” that is actually just standard practice.

2. Collect and organize your documentation

Documentation is the basis of the R&D Tax Credit, so having your records organized and readily available is essential. Appoint a staff member who has access to the documents to collect the data throughout the R&D project. That way one person will be responsible for having everything in once place in case an audit occurs. Read up on what documents are needed to claim.

3. Get familiar with the Audit Techniques Guides

The Audit Techniques Guides are published by the IRS to train IRS employees, but are available to the public to help provide a better understanding of the audit process. There is a large assortment of guides, each one tailored to a specific audit concern. There are four different ones for the R&D Tax Credit alone that can be found on the Research Credit page of the IRS website. Be aware that some guides are industry specific so make sure to choose the one tailored to your business. Even skimming one will help prepare you for what to expect.

4. Reinforce high deductions with proof

One of the biggest triggers for a tax audit is having high deductions compared to other taxpayers within your same tax bracket. You can account for high deductions by attaching a receipt or other documentation to your tax return. While above average deductions can trigger an audit, being proactive and providing proof will reduce your chances of being audited. Don’t be afraid to deduct expenses that are legally deductible. Instead, make sure you can justify the amount of your deduction. Write checks whenever possible and keep a copy of the cancelled check in your records.

5. Double check your maths

Addition and subtraction errors are common reasons for tax audits. They’re also easy to fix and avoid. Check and double check your numbers to make sure you’ve included the right ones.

6. Consult a specialist 

Getting advice from your tax preparer is always a good thing, but the R&D Tax Credit may be outside of their normal practice. If you do claim the credit it will be beneficial to consult with an R&D Tax Credit specialist. They will help determine your eligibility, properly prepare your claim up to IRS standards and provide guidance in the case of an audit.

Swanson Reed is familiar with the review process and knows what the government expectation is in terms of technical supporting documentation. Therefore, we can manage expectations in order to take the pressure and stress out of the equation. For more details on this service, visit our Audit Advisory page.