Getting paid by a client won't cost you the R&D tax credit. Your contract can. Two tests decide whose credit it is when a client pays for the work. In part two of a four-part solo series on the research and development tax credit, David Wiener, Mr. Cash Flow, walks through the funded research rule in plain English. The risk test asks whether you were going to be paid whether the research worked or not. The rights test asks whether you can use what you figured out in your own business without paying the client for it. You have to pass both. Fail the first and you can lose some or all of the credit on a project. Fail the second and you lose all of it.
Along the way: how hourly, capped, fixed fee, and milestone contracts hold up under the risk test, why a work for hire or IP assignment clause buried in a master service agreement can zero out a project, a software shop that loses the credit on one project and keeps it on another for the same client in the same year, and what two federal appeals courts held in Geosyntec and Meyer, Borgman and Johnson. Whether a fixed fee contract where you eat the overruns satisfies the risk test is still debated by courts and practitioners, and the episode treats it that way.
Built for engineering firms, architecture practices, software developers, product design studios, and custom manufacturers whose research runs through somebody else's paperwork. If you pay outside engineers or developers to do research for you, the same two questions run in reverse. Tax professionals get notes on why funded research comes up early when a service firm's claim is examined, and why the master agreement belongs in the file.
CHAPTERS
00:00 R&D tax credit on client work: when a client pays, whose credit is it?
04:00 What is funded research? The R&D credit rule in plain English
06:05 R&D credit risk test: who pays when the research fails?
09:51 Hourly, capped, fixed fee, milestone billing: which contracts fund the research
12:12 Failed the risk test? How a cost overrun can still count toward the credit
14:35 Substantial rights test: the contract clause that can zero out the R&D credit
16:56 Work for hire and IP clauses for architects, engineers and software firms
22:34 R&D credit project by project: Form 6765 Section G and two court cases
29:46 Paying a contractor for R&D: the 65% rule and who claims the credit
33:10 R&D tax credit playbook: 6 steps to check your client contracts this week
Nothing in this episode is tax advice for your firm. Your facts need a tax professional who knows them and, on this topic, an attorney who knows your contracts too. Tax evasion is a crime, but tax avoidance is mandatory.
Your host: David Wiener, "Mr. Cash Flow"
https://davidhwiener.com
mailto:David.wiener@cashflowstrategies.us
770-224-8504x2
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