In 2011, as part of our tax filings for fiscal year 2010, we evaluated the federal and Minnesota R&D Tax Credit. In 2010 the State of Minnesota significantly enhanced the state R&D tax credit, effectively doubling the size of the credit while also providing coverage for more types of businesses, including S corps and LLC’s. We didn’t know what we were in for, but figured we’d give it a try.
Kathy Laney, who serves as the operations director at Arthur Ventures, recommended me to Scott Schmidt at Black Line Group. Black Line specializes in helping companies understand the qualification and procedural process to file for the R&D tax credit program, and calculates and documents the R&D tax credits being claimed. After a few phone calls and emails, we hired Black Line Group as our vendor for the filing.
The Pre-Filing Process
The first thing we accomplished was an internal audit of our research and development processes and resources. We took inventory of our R&D team, the work they had performed in research and development, and the amount of time spent working in areas that qualified under the definitions of R&D. This was in preparation for the 4-part tax credit test. We loaded all of this in a format for evaluation by Black Line Group.
Next, Black Line Group helped us by coordinating our documentation, the necessary filing paperwork, and the filing plan. This came back to us in the form of a well-organized filing book which could be used as a resource for audits. There were man-hours invested in getting prepared, but the offset was that it did help us with internal organization which benefited the company above and beyond the filing.
The Filing Processes and Claiming the R&D Credit
After we had all the necessary documentation together, we filed for the state and federal credits. Minnesota’s R&D credits are refundable, which means that if the tax credits exceed the tax liability, or if there is no tax liability at all, the state will issue a refund payment. In short, we were excited by the idea of having credits, but equally as excited about the idea that we might get a refund back for our R&D expenditures.
Speaking on behalf of our company only, getting resources back meant we could apply additional resources to further R&D efforts within the company. In addition, a refundable credit meant that we could reabsorb dollars back into the business. This had us excited because it could provide value lift for our stakeholders.
The Downside of Filing
Several things didn’t go as planned during the credit application process. First, we thought there would be a fast turnaround from the state. That didn’t happen because of the state shutdown. Second, after the shutdown our key contact at the State of Minnesota left, which meant there was a period of time without anyone assessing our credit filing. Third, when we did get a new contact, we did have an audit on our filing. The audit wasn’t a big surprise because of the nature of the new program, but it did push off the time horizon on recognizing the credit.
Working with Black Line Group
Black Line Group was punctual, professional and thorough with all their dealings with our company. They helped us understand the filing requirements and process which would have been otherwise impossible if we would have decided to pursue a filing on our own. We found their pricing fair, and the value we received for the cost more than justifiable.
Outcome of the Filing
We benefit from both state and federal tax credits which can be applied as an offset to future taxes. The refundable credit was deposited into our business bank account by the State of Minnesota Department of Revenue, which is already being put to work in growing our business. We were very pleased with the outcome, and will certainly work with Black Line Group and the State of Minnesota again on subsequent filings.
How to file for your business:
Lief Larson, CEO of Workface®, has been a career entrepreneur, technologist and futurist. He has founded and grown several companies. In 2004 he was given the Lifetime Achievement Award by the Kiosk & Self-Service industry association and was inducted into their Hall of Fame. Mr. Larson was named #8 on Entrepreneur Magazine’s “Top 10 American Entrepreneurs Under 30” list and was a back-to-back semi-finalist for the Minnesota Cup in 2005 & 2006. In 2010 his efforts with Workface resulted in the company winning the Social Business Innovation award and the OnDemand 100 award.