Don’t lose them to a competitor
By Michelle Powell
Key Takeaways
- Closing the knowledge gap about R&D tax credits is an easy way for CPAs to improve client value and retention.
- Look for companies that use technology to improve their products and processes. They may qualify for engineering-based tax credits (and not know it).
- Understand your clients’ businesses beyond what’s required for regular tax filings.
At this year’s AICPA Engage conference, I had an all-too-familiar conversation with the lead tax partner of a thriving small firm based in Texas. John (not his real name) started his own firm over 20 years ago after a stint at two Big Four firms. By all accounts, John’s practice is doing well, but he recently lost an important oil and gas client to a regional competitor. John’s firm hadn’t done anything wrong. The rival firm sold John’s client on doing an R&D Tax Credit study—and they took the rest of the client’s business with them.
John had long known that R&D tax credits could provide certain business with substantial tax deductions–and lucrative new business for CPAs that do the work. Getting up to speed on R&D tax credits had long been on the to-do list for John and his partner. They knew it was a capabilities gap, but lack of bandwidth (and urgency) always seemed to get in the way—until it was too late.
John’s story isn’t unusual. It’s easy to overlook R&D credits and other bona fide tax savings opportunities when everything you hear about professional development seems focused on “the technology of the future” – e.g., artificial intelligence, automation tools, blockchain and cryptocurrencies.
Getting started
Again, you don’t need to be an expert in engineering-based tax credits (after all you do have a day job); you just need some fluency in the language. Not sure where to start? Here are some simple diagnostic questions for you and your management team to consider:
1. How many manufacturers, engineering firms or software development firms do we serve? How many tech startups do we serve?
The R&D tax credit can be useful in any number of industries, but it’s especially beneficial for tech startups and established companies in manufacturing, engineering and software development.
U.S. manufacturers perform two-thirds of all private-sector R&D, driving more innovation than any other sector. Software developers, engineering firms and technology startups perform qualifying research and development activities, too. And we’re not just talking about big companies. According to the National Association of Manufacturers, 98 percent of the nation’s 250,000 manufacturers have under 500 employees. In fact, three in four have under 20 employees. Sound like any of your clients?
Biz Dev Tip: If your firm specializes in non-profit work or individual tax, you may consider using the R&D credit as a tool for developing business in some of the primary industries noted above.
2. Are you a strategic advisor to your business clients?
Do you really try to understand your clients’ businesses, or are you content with simply performing tax work as protocol demands?
By learning which clients are evaluating and refining internal processes, procedures and products, you’ll position yourself to move into the trusted advisor role and serve as an extension of your clients’ management team. This exploration doesn’t have to come in the form of an official strategy discussion–just be curious when you do talk with business clients.
Take technology for example. Tech is changing the way most companies think about their businesses – even companies in long-established sectors such as oil and gas. That’s why talking about tech is a perfect door opener for steering the conversation in the direction of how your client may be reinventing itself in the face of all the new technologies available.
3. Do your clients have engineers, designers and software developers on staff?
If so, there’s a good chance the company qualifies for the R&D tax credit. If you’re not comfortable asking and you don’t have supporting data it in your client notes, then just go to the client’s website and peruse the “Careers” page for relevant job openings.
4. Is a client’s business profitable and paying taxes?
The R&D tax credit can significantly improve a company’s cash flow and minimize its tax burden. If the business is doing well and is performing qualifying activities, it should have no problem claiming the credit and building a case for the credit that will hold up against an IRS audit.
Most experts agree that it can take up to three years for small businesses to earn a profit. Thanks to the Protecting Americans from Tax Hikes (PATH) Act of 2015, smaller businesses and startup companies that may not have federal tax liabilities can also qualify for (and apply) their R&D credits against their payroll tax.
Conclusion
Innovation is essential for remaining competitive in today’s business environment. Relying on well-established tax-savings tactics such as engineering-based tax incentives, is sometimes all the innovation you need to add lasting value to a client relationship.
Not sure if your business (or a client’s business) qualifies for engineering-based tax incentives? Don’t hesitate to contact us. We’re happy to help.
Michelle Powell is a regional director at Tri-Merit, a professional services firm specializing in the calculation, documentation, and substantiation of R&D tax credits and other specialty tax services for companies of all sizes and across all industries. The firm’s partners conduct training at CPA firms across the country and speak often at accounting industry trade shows and conferences to help educate the profession. Contact Michelle at michelle.powell@tri-merit.com or (847) 637-5677 x144.
