Maximizing R&D Tax Credits with Controlled Group Analytics

By Julia Sosa and Justin DiLauro

Companies claiming an R&D tax credit receive a dollar-for-dollar reduction in their tax liability based on the qualified research activities undertaken and the associated qualified research expenses (QREs) related to those activities. However, many owners, officers, and CPAs of companies across all industries often find themselves being talked out of pursuing the R&D credit because they are under the impression that they do not qualify. For instance, a company may believe the work they perform falls under the realm of funded research, and it very well may. Take for example an engineering company who is a sub-contractor to other companies and is compensated solely on a time and material basis and no compensation based on a fixed-fee/lump sum/hard bid basis. In a typical situation, they would likely be considered disqualified from the credit given the specifications detailed in IRC Section 41(d) of the Internal Revenue Code. However, can the eligibility for claiming the R&D credit change depending on whether that company is actually a member of a Controlled Group? The answer is YES! A company that on their own does not qualify for the R&D tax credit could become eligible in unique Controlled Group situations.

Controlled Group Analysis

When in a controlled group, all members are treated as a single taxpayer. Treasury Regulation Section 1.41-6(c) explains:

“The group credit is allocated to each member of the controlled group on a proportionate basis to its share of the aggregate of qualified research expenses […] taken into account for the taxable year by such controlled group purposes of the credit”. [1]

This means that all QREs associated to qualified research activities are pooled together and then distributed out to the appropriate company within the controlled group. What if a company finds itself eligible to be a member of more than one controlled group though? Treasury Regulation Section 1.41-6(h) provides the following guidance:            

“A trade or business may be a member of only one group for a taxable year […] If the business was not included for its preceding taxable year in any group in which it could be included as of the end of its taxable year, the business shall designate its timely filed (including extensions) return the group in which it is being included. […]” [2]

So what if you find yourself in this exact scenario, how do you chose the correct controlled group? Can even you choose your controlled group?  Would it even make a difference, if based on our earlier example, you don’t qualify for the credit anyways given your work is considered funded?

Mechanical Engineering Case Study

So, what does happen when a company finds itself in a scenario where they could become a member of two different controlled groups in the same tax year? Making the choice for which controlled group to align your company with may seem immaterial; however, that choice could have a meaningful impact on your bottom line.

For example, during tax year 2020 Company A, who provides contract engineering support services to outside companies, separately met the requirements for controlled group status with Company B, a Building Automation Engineering company, and Company C, a land surveying company, both in a Brother-Sister Controlled Group arrangement, but was not in a three-member controlled group with both B and C together. Further, Companies B and C were not in any controlled group with each other.  Because Company A was a time-and-materials sub-contractor to Companies B and C, they were under the impression that they did not qualify for the R&D credit. Furthermore, they believed that because all of their work was performed on other companies’ projects, they did not have any qualified activities of their own to claim towards the credit. However, this was not the case. Reg. Section 1.41-6(i)(2) states:

“If one member of a group performs qualified research on behalf of another member, the member performing the research shall include in its QREs any in-house research expenses for that work [i.e., wage payments and direct supply costs] and shall not treat any amount received or accrued as funding the research. […] For purposes of determining whether the in-house research for that work is qualified research, the member performing the research shall be treated as carrying on any trade or business carried on by the member on whose behalf the research is performed.”[3]

For Company A, this meant that QREs tied to the direct R&D undertaken by the company’s fifty salaried engineers, totaling $3,300,000 QREs, was being left on the table! Had Company A understood its controlled group status with Company B, they would have been eligible to receive a federal tax credit of upwards of $135,000.The question then is how does a company understand its position to maximize the tax savings?Luckily, Company A sought out the expertise of BRAYN Consulting to assist in their 2020 R&D analysis.

BRAYN Consulting has tax experts with decades of experience and in-depth knowledge to help you evaluate your R&D tax credit benefit. Further, BRAYNiacs are experienced in the intricacies of the Internal Revenue Code and Treasury Regulation nuances to assist you in making informed decisions regarding your tax return.  For more information on how to maximize the tax benefits available to you or your clients, contact BRAYN Consulting at info@brayn.com or (888) 773-8356.

Julia Sosa is a Senior Consultant in BRAYN’s R&D Team, and after working in the Energy Industry, Julia has spent the last four years consulting with businesses on R&D Tax Credit claims. Justin DiLauro is a Partner of BRAYN Consulting LLC, and as a degreed engineer and licensed attorney, is in his second decade of supporting businesses and their CPAs to maximize specialty tax credits and incentives. 

BRAYN is a niche consulting firm that guides businesses to greater value through tax credits and incentives.  BRAYN Consulting LLC is not a CPA firm, finance, tax, law, or engineering firm, and nothing contained herein can be construed as legal, financial, accounting, tax, or engineering advice.

IRS Circular 230 Disclosure – To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.


[1] Treas. Reg. Sec. 1.41-6(c).

[2] Id at 1.41-6(h).

[3] Id at 1.41-6(i)(2).

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