AMA: Corporate R&D Tax Credits with Adam Quattlebaum of DHG

At Shadow Ventures, we’ve built a community of tech-focused industry professionals who refuse to accept the status quo. In our community Slack channel, we frequently host Ask Me Anything (AMA) sessions on issues that pertain to our ecosystem. Recently, we had the pleasure of talking to Adam Quattlebaum of DHG. Here’s what Adam told us.

BACKGROUND:

  • Presenter: Our Speaker Adam Quattlebaum has helped establish, grow, and now lead R&D tax credit practice for DHG. Adam has experience serving publicly traded and closely held companies in the manufacturing, construction, government contracting, and technology industries. Adam’s focus is on federal tax specialty services and he leads the firm’s Research & Development tax credits practice. He has extensive experience defending and successfully sustaining R&D tax credits through IRS and state audits, as well as tax consulting services for large corporations and closely held businesses. 
  • Topic: Dixon Hughes Goodman ranks among the top 20 public accounting firms in the nation. With more than 2,000 professionals across the United States, they combine deep experience with a strong commitment to personal service. They are passionate about helping their clients succeed—and do so through a resourceful approach to solving problems, providing results and helping clients achieve their goals.

AMA CLIFF NOTES: 

  • To kickoff, Adam can you please go ahead and give us an overview of your role at DHG and also today’s AMA topic!
    • Hey guys, I’m Adam Quattlebaum. I’m a Partner with Dixon Hughes Goodman CPA firm. I specialize in Research and Development tax credits. I help many CAE firms navigate the R&D tax credit process to ensure that the credit is maximized and supported in a way that it will be sustained through IRS or state audits.
  • So a little more specifically, what does that mean for this channel? What’s the value for them in understanding how these credits can be applied and how it could inform how they do business?
    • Many construction firms, architects, and engineers do not realize that their day-to-day activities qualify for the research credit. I’ve worked with companies in this space to generate significant cash savings in the form of tax credits. So if you are in the CAE space this topic could translate to cash savings. For example, I’ve worked with several construction companies where we have generated well over $1M of savings for each.
    • Architects and engineering firms are even easier to qualify than construction firms.
    • It comes down to if the organization participates in the design process of a structure.
  • What kinds of day-to-day activities are we talking about here?
    • If your firm is evaluating alternative designs to fit a specific customer’s needs that effort would qualify. If you are using BIM to identify conflicts or modify a design. Value engineering can also qualify.
    • Here is a more exhaustive list:
        • Design Activities
        • Designing and developing unique solutions or designs
        • Exploring alternative designs to determine which best meet the customer’s needs
        • Designing building systems (HVAC, electrical, plumbing) to improve efficiency
        • Exploring opportunities for value engineering and cost savings
        • Utilizing building information modeling (BIM) or alternative design software to evaluate designs
        • Designing drainage and water management systems
        • Materials and Construction Processes
        • Exploring alternative materials or combination of materials to determine which material best meets the customer’s needs
        • Exploring alternative means and methods of construction or development of innovative assembly techniques
        • Development of designs or techniques that achieve certifications or standards (LEED, BREEAM, NBIS, etc.)
    • The more involved you are in the design process the easier of an argument it is to make. I wouldn’t say that it is difficult for a construction firm to qualify, I’d just say architects and engineers are clearly involved in the design process.
  • Do things like improving job site efficiency and transparency, reducing waste, improving safety, etc. qualify?
    • Yes, process improvements can qualify. The more technical the improvement the more likely it is to qualify
  • Does the stage of the company or adoption of the technology impact credits? Ex. If I use Procore on my job site to manage the construction process vs using an unproven construction management software?
    • Stage of the company doesn’t impact your ability to qualify. Although, early stage companies are more likely to be going through a process of discovering new information.
  • What backup do you need to track to justify the R&D tax credit? In addition to back-up, can you briefly describe the submittal process to the IRS to get approval for the tax credits?
    • We are typically looking at about 10% of dollars identified translating to cash savings. So if I identify $1M of eligible costs that translates to $100k of cash savings. Here are some case study examples of savings:
        • Construction firm with revenues of $500M of annual revenue» Conducted a study and claimed more than $2M of R&D tax credits
        • Company with revenues of $250M » Claims approximately $1.1M of federal and state R&D tax credits annually » IRS audited R&D claim; resulted in “no change”
        • Company with revenues of $150M » Conducted a retroactive study and claimed more than $1.25M of R&D tax credits
    • On the submission process, the credit is claimed on form 6765 on your company’s tax return. This is a two page form which has about 10 relevant lines of information on the costs that you are capturing. Documentation and support of your activities is required if your credit is audited. The IRS will be looking to see your methodology for estimating your qualified expenditures as well as to confirm that the projects and activities that you qualified actually do meet the criteria.
  • Can you talk about the payroll tax credit and their requirements?
    • Sure… For the federal payroll R&D credit to be applicable you have to be in your first 5 years of revenue and have less than $5M of gross receipts. If that is the case, you can use the credit to offset payroll taxes. This is mainly set up for start up companies who can’t use the credit to offset income taxes because they are not yet profitable / not yet paying income taxes.
  • Can the R&D credits be claimed retroactively. Meaning, can you go back two or three years and claim credit for expenses that are not in the current year?
    • Yes, you can generally go back a minimum of 3 years to retroactively claim the credit. Typically, our first year working with a company we are claiming 4 years worth of credits. So year 1 is a windfall of savings.
  • Can the payroll taxes be claimed retroactively?  What do you need to substantiate the R&D credit?
    • Payroll cannot be claimed retroactively. It has to be on an originally filed return. So if you haven’t filed 2019 yet, we could pursue the payroll offset for 2019. To substantiate the credit, you have to show how your activities meet criteria.
  • What are some of the most common mistakes you see from companies trying to use R&D tax credits?
    • The biggest mistake, especially for CAE firms is not understanding what all qualifies and not knowing how to support those activities. Here is a good article relevant for Construction firms pursuing the R&D credit.
  • These credits can be applied to internal (developing internal technology innovation) and external (partnering with a startup or testing a new technology) R&D correct?
    • Correct. When you partner with an outside company / developer it is important to understand the contractual relationship. If the arrangement is T&M development then those costs will likely qualify. If the outside developer is doing work on a fixed price basis (developer is at risk for success) then the developer’s cost likely will not qualify.

For the entire conversation check out the Industry Professional Slack or click here to apply.

Tags: