…
In this case, the expenses related to the reproduction of a
previously-developed HVAC unit or an analysis of the blueprints and design of
the previously-developed HVAC unit do not qualify for the research expense
credit. However, the expenses associated with developing new types of units,
with developing different cabinets, and developing other designs for the
purpose of developing a technologically improved product, can be qualified
research expenses. Thus, the duplication of a previously-existing product and
analysis of its design does not qualify for the research expense credit;
however, the design, testing, and analysis of a wholly new product can qualify.
While Taxpayer has not provided specific information, the Department shall
review Taxpayer's projects to determine what portion (if any) of the time and
supplies expended were in fact developing new products. The Department shall
apply the same standards to Taxpayer's new product development that would apply
to a wholly new project (i.e., one that had not existed previously).
Taxpayer asserts that the auditor's denial of the research
expense credit was improper because of the expense substantiation provided. In
particular, the Department noted Taxpayer's use of estimates in determining the
percentage of wages constituting "qualified research." The issue is
whether Taxpayer's substantiation was sufficient.
…
Taxpayer has not provided the type of information used to
determine what constituted a "qualified research expense." However,
based on the federal case law, reasonable estimates (as opposed to exact
figures) can be used to determine what constitutes a qualified research
expense. However, the estimate must provide enough information to review each
activity within a potentially eligible project.
Taxpayer must meet two criteria to substantiate any claimed
research expenses. For employees, Taxpayer must establish the amount of time
spent for each qualifying project and, if the project is partially (as opposed
to wholly) exempt, must break down the time within the project by exempt and
nonexempt activities. For supplies, the expenditures must be broken down by
project and, as necessary, to exempt and non-exempt uses.
…
Taxpayer's protest is sustained subject to audit
verification.
