This company manufactured paint for use by municipalities on roads and paved surfaces. Over a five-year period, the company grew from a paint manufacturer to a vertically integrated corporation developing its feedstocks and chemicals to drive down costs while producing a longer-lasting, faster-drying product for its customers. The company investigated new products, production methodology, new processes, and new components of its products. As such, the company qualified to claim the Research and Development Tax Credit (R&D Credit) covering multiple years and identified qualifying research expenditures of approximately $127 million.

To document this R&D Credit, the taxpayer relied on a third-party consultant to gather information, calculate the credit, and defend the credit if audited. The effort to calculate the R&D Credit consisted of data gathering, financial model construction, verification of the financial model, and then interviews to provide supplemental information for a report related to the calculation.

Within the data gathering segment of the study, the third-party consultant used electronic transformation and loading software to help take data from different sources and different formats to create a model of year-over-year expenses for the company. This model allowed a picture to be created of the activities of the taxpayer using the source material available in the taxpayer’s records. Then job descriptions were taken from the taxpayer’s records to produce a first draft estimation of the R&D Credit model. The third-party consultant used this model in interviews to confirm the presence of qualified activities or to disqualify activities.

This approach limited the amount of time required from the taxpayer’s employees. The approach also allowed the third-party consultant to gather information about selected employees and to tour each facility of the taxpayer. The burden of gathering information, finding the right people to talk to, conducting interviews, performing analyses, and calculating the R&D Credit was offloaded from the company onto the third-party consultant, providing additional revenue without burdening existing staff or resources.

Result: The company was not paying current federal income tax; however, $1.6 million of federal income tax from prior years was recovered via R&D Credit carrybacks. Additionally, state R&D Tax Credits of approximately $866,000 were utilized. Unused federal R&D Tax Credits of approximately $9.1 million were passed along as a carryforward to the buyer upon the sale of the company. These unused R&D Credits were factored into the sale value of the company and effectively monetized.