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Everyone Qualifies for R&D.  Really? That would be the best statement ever, if only it were true. I’ve been in the tax consulting business for over 15 years and have met with thousands of companies across the country, some considered to be the most innovative in the world, and others that are equally awe-inspiring, but not considered innovative. I am consistently amazed at how many of these awe-inspiring companies are sold on the idea that they have qualified research activities, when unfortunately they do not.

Often, they have been approached by a specialty tax consulting firm that presents the Research & Development Tax Credit (R & D) in a way that positions the company to believe they would qualify for R & D. However, their activities may not pass the 4-part test.

Let me give you an example, a few years ago, I was introduced to the owner of a woman’s clothing store on the west coast by their CPA, Donna (not her real name). Donna was frustrated because the owner was in the process of claiming R & D with a tax specialty firm, and she wanted me to confirm that the companies activities qualify for R & D. The owner said that the firm they were working with claimed that changing the floor layout, clothing location, the aisle width, and the shoppers traffic flow were all considered process assessment and improvements. The owner went on to say that she was told their R & D Tax Credit would be close to $80,000 for the past 3 years. Given those numbers, and that the firm would stand behind the work should it be audited, she didn’t see any downside.

As we were talking, I was listening for key words or phrases that would allow me to believe she had the right activities to qualify for the credit. She focused the conversation on the fact that they were trying to analyze the traffic flow of customers, and the location of clothing to maximize sales. She explained that a lot of time is spent on this analysis, by her as well as others within the company. I inquired as to how this analysis is done, and she explained that the staff watches what people look at when they walk in and which areas they spend the most time in relation to what they buy. All of which are manual processes.

We reviewed the definition of R & D and discovered that the work her company was doing, did not match the intent of the law. Therefore, she would not qualify to claim the credit.

While there may be clothing stores that qualify for the R & D Tax Credit, the work performed has to pass the 4 Part Test. If you are not sure that your work will qualify for the R & D Tax Credit, please feel free to contact our R&D partner Michael Warady. Within 10 minutes, he can tell you if it will or it won’t.