Case Study

DST Tax Engineers Help You Build Your Technical Study

Client Background: 

An electronics and communications manufacturing company with $400M annual revenue with engineering and technology headquarters and manufacturing locations in the US has been claiming the Research Tax Credit (RTC) since 2010. The company was generating net operating losses (NOLs) and was about to use the last of its NOLs and all carry-forward credits in the next year. As such, the company would start to utilize RTCs generated in 2010 onward. However, the company had not had a technical study conducted, and historically only completed a rough calculation of the federal RTC to capture on an F6765 for filing purposes. The new Tax Director was concerned about their potential audit risk without any technical substantiation.

Client Benefit:

DST proposed a full technical study for the 2010 to 2018 years, then a separate study for 2019 and 2020 years. This was primarily due to the change in structure due to acquisitions and the nature of which expenses were subsequently captured on the claim formed. It was mutually decided that DST would not try to identify additional areas of qualification of expenses, but rather build a nexus to the costs captured on the previously claimed returns. DST’s Tax Engineers were able to rely on the documentation and some taxpayer ‘historians’ to build a historical basis of the qualified research activities and substantially link them to the qualified research expenses claimed. Despite the gaps and limited access to data and people, the DST technical team was able to build a strong technical study to back up the previously identified credits, and establish a base period report for the claim years as well. This success was attributed to the use of the DST Tax Engineers, who were able to understand the fundamental technical work and documentation, and fill in the gaps efficiently and accurately.

DST Methodology:

Over the course of 10 years, with a pandemic spanning 2 of those years, there was a high degree of turnover of employees at the taxpayer’s locations. Identifying key personnel who were able to recall specific projects was a challenge. Record-keeping was another obstacle to overcome due to the taxpayer’s document retention policies and general server and laptop upgrades.

However, DST’s Tax Engineers quickly got to work and were able to help fill in the technical and engineering gaps.

DST Tax Engineers reviewed the claims (F6765s) and related work papers and matched the cost centers and expense accounts to the calculation. The goal was to get an understanding of the structure of the claimed QREs, and the current way the company was structured. DST was committed to understanding what cost centers, departments or divisions were still around, which ones were renamed or reorganized if there were any dispositions in that time period, and if there were major changes in personnel or reporting organizational structure. All of this would help DST uncover the targeted individuals to assist with building the narrative and collecting documents or records from that time period.

DST evaluated the base period calculation, ensuring that the correct methodology was selected given the information available (i.e., regular credit or ASC) and if there were any acquisitions in those base period years that also had to be accounted for. It’s important to note that the base period years also have to be substantiated both from a financial aspect and from a technical aspect. DST also looked to identify any employees who were still employed from these years, or anyone who could assist with gathering project lists and engineering documentation to support these qualifying activities during these years. A robust and comprehensive base period memo that memorializes the QRAs and QREs during this time period, along with the methodology used, is always prepared to capture as much information as possible.


Finally, DST proceeded with technical interviews and documentation gathering for the claim years and aligning the records with the QREs used to calculate the credits on the F6765s. This included:

  • drafting narratives to describe the processes that were in place in the claim years for the development of the business components,
  • describing how the statutory 4-part test was met for the qualified research activities identified, and
  • memorializing the record-keeping practices followed by the divisions.

Throughout this process, DST was able to help the taxpayer not only provide training and education to the taxpayer’s engineering and qualified operations teams, but DST was also able to integrate best practices and processes to ensure that record-keeping and documentation are kept in real time. This helps with better tracking and compliance, and will ultimately lead to increased identification of qualified research activities and corresponding qualified research expenses.

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