In its 20 years of existence, Engineered Tax Services has processed thousands of R&D tax creditclaims successfully through the IRS. But in 2019, we saved a client—a California marketing company—an amazing $1.5 million in taxes. How did we do that?
Rebecca Branch, an R&D Manager with ETS, did the site visit with the client (a client of ETS EVP Kim Lochridge), and she undertook R&D tax credit studies for them for three tax years—2016, 2017, and 2018. She shed some light on how we pulled off such a spectacular coup.
A Marketing Company With a Unique Focus
“Our client was a marketing company that had a unique focus,” she said. “They weren't just doing marketing. They were developing software to make that marketing better. For example: let’s say you were a professional like a doctor or lawyer, and you maintained a number of social media accounts.
The problem is, you want your contact information and logo, all your personally identifiable information, to match across all your accounts, so if you changed your phone number or email address, that fact would be reflected accurately and instantly everywhere.
“This marketing company developed an exclusive form of software that interfaced directly with multiple outside third-party systems, such as Facebook, Twitter, and Instagram. There was nothing like it on the market, and they expended a huge amount of resources to create this one-of-a-kind solution.
It really required a lot of development, a lot of research, a lot of time on their employees’ part, and that was only one example of the type of software they were developing.”
Understanding That the R&D Tax Credit Is a Wage Credit
ETS was able to save the client such a huge tax windfall because we understand that the R&D tax credit is primarily a wage credit. The lion’s share of R&D tax credits are found in a client’s payroll records—and that’s where Rebecca dug deeply.
Not only did she dig into the employee records with all of the wage information—in 2017, she performed an onsite visit to conduct employee interviews, obtain work logs, and estimate how employees were spending their time.
“One thing that was very challenging was determining how much employee time was actually spent on development,” she said. “We had to identify who the developers were and then schedule interviews with them to learn how much of their time was devoted to developing the functional and structural portions of the software.
One reason we did the site visits was to discern the activities that might not be qualified. I made it a point to talk in person to the right people—but they're busy professionals. They’d be at their computers clicking and working away sometimes as I was trying to talk to them, because they had deadlines to meet.
We don't want to be obtrusive, and we don't want to be taking the employees away from their work. Trying to capture everybody's individual time was a difficult challenge.
“We ended up working with one of their team leaders to create a matrix in Excel to capture individual people's time. We devised a matrix that included the individual employee names, the jobs that they were working on, and the tasks they were focusing on, because we wanted to guarantee we only included those qualified tasks. A big part of it was, as you interview people, you realize they're doing things that maybe they don't realize qualify as R&D, so you have to capture that in your report.”
In all, she interviewed between 10 to 15 employees in the office, especially the managers of every different department to learn what everybody working under them was doing. After that, there followed a multitude of conference calls.
The R&D Tax Credit Catapulted Them in the Software Space
She added: “At ETS, our focus is small and mid-sized businesses. One of the big areas that we focus on is newer companies that are growing, and this client was just starting to get into software development. In 2017, we got them $500,000 in R&D tax credits for the 2016 tax year. In 2018, it increased to $600,000 for the 2017 tax year. Then in 2019, they moved up to a $1.5 million for the 2018 tax year. With the tax savings the ETS was able to get them, it helped them propel themselves into that software space in a way they hadn’t been able to reach before.”
That’s how ETS was able to win a client $1.5 million in tax savings in one year—through hard work, diligence, and above all else, the fact that we’re experts in the R&D tax credit arena: we know where to look for tax savings for our clients.Kim Lockridge commented: “It is my pleasure to work with this client, and we are happy to prepare and thoroughly substantiate the credits for them each year. The value this has brought to the client year over year is substantial.”
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