The recent MBJ v. Commissioner ruling highlights the important role of contract language in determining eligibility for Research and Development (R&D) Credits. MBJ, a structural engineering firm, had $190,000 in credits disallowed due to inadequate contract language.
Although MBJ's contracts allowed for phase inspections and termination for substantial failure to perform, they lacked explicit provisions making payments contingent on the success of R&D efforts or refunding payments if the client found the work deficient.
Key Takeaways:
- Inspections and Termination Clauses are Insufficient: Having provisions for inspections and approval of work, as well as allowing for termination due to negligence or failure to perform, is not enough to qualify work as unfunded research if payments are not directly tied to research success.
- Fixed Price Contracts Do Not Guarantee Qualification: Fixed price contracts do not meet the criteria for unfunded research.
- Clearly Define Product Specifications: Contracts should explicitly outline expected product specifications.
- Tie Payments To R&D Success: Contracts should explicitly state that payments are contingent on the success of R&D efforts.
A thorough contract review process is essential for anyone claiming R&D Tax Credits on contracted work. Ensure your provider conducts a detailed review of your contracts and includes supporting documentation in their reports, outlining the findings and justification for qualifying or disqualifying your contracted work.
ICS Tax, LLC (ICS) is a consulting firm providing innovative tax planning strategies. ICS collaborates with taxpayers and their tax professionals to identify credits and incentives that reduce tax liabilities and increase profitability. ICS provides nationwide service through its offices located throughout the country. Contact us to learn more about the R&D Tax Credit.
About the authors
Tyler Bonts
Director
Tyler leads the firm’s research credit, §45X advanced manufacturing, and utility sales tax exemption practices. He developed and launched the §45X and utility-study service lines and supports clients from eligibility assessment through interviews, documentation, calculation, filing coordination, and audit defense.
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Alexander Bagne
President · JD, CPA, MBA, CCSP
Alex is the President of ICS Tax, LLC (ICS). His expertise includes fixed asset reviews, cost segregation, the 179D and 45L energy efficiency incentives, accounting methods, research tax credits, and IC-DISC export incentives. Prior to ICS, Alex worked for a decade with several Big Four firms, including Ernst & Young, Deloitte Tax, and PricewaterhouseCoopers. His specialized planning ideas have saved his clients millions in tax dollars. He has given Continuing Professional Education on a variety of tax planning ideas throughout the country. He is published in the AICPA's Tax Adviser magazine and Accounting Today.
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