THIS WEEK'S STORY
The R&D credit is real. And so is the audit risk.
Jake called me last month.
He runs a design-build firm in the East Bay. A research-credit company told him he was leaving real money on the table.
He wanted to know if the credit was legitimate.
It is.
Construction businesses can qualify. But doing difficult or creative work does not automatically make that work qualified research.
So I asked Jake one question: Who carried the financial risk while your team figured it out?
He paused. That answer can make or break the claim.
If your customer must pay regardless of whether the research succeeds, the work may be treated as customer-funded. Contract terms matter. So does whether your company keeps meaningful rights to the research. The IRS looks beyond who performed the work and asks who actually carried the risk.
Then comes the second problem.
Adapting an existing design to fit a particular customer’s needs generally does not qualify. But a project is not automatically excluded just because it was built for one customer. The real question is whether your team faced technical uncertainty and evaluated different ways to solve it.
The third problem is documentation.
Your claim should connect specific employees, expenses, uncertainties and experiments to specific projects. That means dated design versions, engineering notes, alternatives tested and approaches rejected.
A payroll estimate created after year-end is not enough by itself.
I told Jake to ask the study firm three questions:
Show me the project-level analysis behind the number.
Tell me exactly who will create the supporting documents.
Explain who handles the work—and the cost—if the claim is examined.
Get every answer in the engagement letter.
