Case Study: Do You Qualify? Lessons from Risky R&D Providers

The R&D tax credit rewards companies that take financial risks to develop new or improved technology. But not every company that pays engineers or files for patents qualifies. The rules hinge on funding, ownership, and the nature of the work. Unfortunately, some providers gloss over these details. They push clients to claim credits that later collapse under IRS review.

At MASSIE, we believe it’s better to give a hard “no” than a risky “yes.” This case study shows why.

The Situation

A mid-sized technology services company reached out to us. Their engineers supported large clients, including global names in social media and cloud computing. At first glance, leadership assumed they qualified for R&D credits. After all, their teams worked on advanced solutions, filed for patents, and even maintained a lab.

The company had already spoken with another provider. That firm offered them a quote but did not explain how funding or contract terms would affect eligibility. Unsatisfied, they turned to MASSIE for a second opinion.

What We Found

• When we reviewed their contracts, several red flags appeared:
  Funded research: Their agreements required their client to pay them hourly for services. When a customer bears all the financial risk, the work usually does not qualify.
• Ownership of intellectual property: The contracts gave the client full rights to all deliverables. Without ownership, the service provider cannot usually claim R&D tax credits.
• Deliverable-based clauses: Some contracts included “money back” language if the client rejected their work. While that added pressure to innovate, it still left the client holding ownership and financial risk.
• Audit expectations: Leadership wanted guarantees, such as a refund if the IRS denied credits. No reputable accounting firm can promise that outcome.

On the surface, the company had the hallmarks of innovation: patents, high payroll for engineers, and ongoing technical problem-solving. But the structure of their contracts told a different story.

The Risk of Bad Providers

Some providers ignore these details. They claim credits based only on job titles, patents, or vague descriptions of “innovation.” That approach can produce a short-term cash boost, but it carries long-term danger.
When the IRS challenges a weak claim, the taxpayer—not the provider—must return the credits with interest and sometimes penalties. We have seen this play out in recent Form 6765 updates and increased IRS scrutiny. The risk is real, and “bad providers” leave clients holding the bag.

Where R&D Credit Might Exist

In this case, we noted one potential path: “background technology.” If the company developed technology outside of client-funded contracts—such as tools created in their internal lab—those projects might qualify. Their engineers did spend limited time on this type of work, and they had filed a handful of patents.

Still, those activities represented only a fraction of their total operations. Claiming credits for the entire business would have been reckless. A smaller, carefully documented claim might exist, but it required more evidence and tighter scoping.

Why This Matters

This case highlights several lessons for any company considering the R&D tax credit:

• Not all engineering qualifies. Working on client deliverables under contract presents significate hurdles to claiming the credit and requires careful scrutiny.
• Ownership is key. If your client owns the results, you likely cannot claim the credit.
• Beware of easy promises. Providers who say “you definitely qualify” without reviewing contracts have no idea if it qualifies and are putting you at risk.
• IRS scrutiny is growing. With new Form 6765 requirements and cases like Kyocera’s R&D lessons, documentation matters more than ever.

The MASSIE Approach

We pride ourselves on being direct. Sometimes that means telling a company, “No, you don’t qualify.” That honesty saves time, money, and frustration down the road. Other times, we find a narrow path to credits—but only with strong evidence.

We also coach teams on better processes. For example, documenting R&D activities in real time can prevent confusion about what qualifies. And when controversy arises, our Director of Controversy leads the defense with confidence.

Conclusion

The R&D credit is a powerful incentive, but only when claimed with precision. This case study shows how risky contracts and careless providers can create more harm than good. If you have doubts about your eligibility, or if your current provider hasn’t asked tough questions, it may be time for a second opinion. Need another set of eyes? Reach out. We’re here to help.

Stephen Whiteaker, CPA

As MASSIE’s Director of Controversy, Stephen specializes in audit risk assessment and quality review. His proficiency in navigating complex tax law makes him an essential resource in addressing tax technical challenges for clients. His exten...