How One VP of Tax Turned 20 Years of R&D Tax Credit Uncertainty Into a Defensible Strategic Asset
By Tyler Harken, BSE
Director, DST Advisory Group
At many large companies, R&D tax credits quietly build up over time in the background. Year after year, credits are calculated, filed, and carried forward with the expectation that one day they will reduce cash taxes and create real value for the business.
But what happens when nobody remembers how those credits were calculated in the first place?
That was the situation a newly hired VP of Tax faced when she came to DST Advisory Group for help.
The company was a large technology organization that had been claiming U.S. research tax credits since the early 2000s. While credits had consistently been included on their tax returns, formal R&D tax credit studies had not been performed between 2008 and 2020. Over time, the entire tax department had turned over, and with it went the institutional knowledge behind the company’s historical methodology.
At first glance, the carryforward balance looked like a valuable future tax asset. But as the company recently became profitable, those credits were expected to be utilized within the next three to four years. Suddenly, what had once been a passive balance sheet item became a potential exposure point.
The VP of Tax had important questions to answer. Were the historical credits supportable? What level of reserve should be maintained? And perhaps most importantly, how could the company build a process moving forward that would meet the IRS’s expectations in the event of an examination?
This is where the right advisory team makes all the difference.
At DST, our team is uniquely built for these situations because we combine Tax Engineers, CPAs, and former IRS professionals who understand both the technical side of research activities and the regulatory side of tax controversy. That combination allowed us to approach the engagement from multiple perspectives at once — technical, financial, procedural, and audit defense.
We started by gathering every piece of historical information we could find, including prior calculations and documentation dating back more than 20 years. From there, we reconstructed the company’s historical approach and created a clear framework explaining how credits had been determined over time.
However, there was a major challenge. For many of the years in question, there was little to no contemporaneous substantiation supporting the qualifying research activities themselves.
Rather than ignore the issue, we addressed it directly.
Our team worked closely with the taxpayer to analyze historical financial statement R&D expenditures and estimate what supportable credit figures may have looked like under the ASC 730 Directive framework. Those figures became a defensible baseline for evaluating historical positions and updating the company’s financial statement reserves.
At the same time, we completely transformed the company’s future process.
For the open tax year, DST performed a comprehensive study using a business component-level methodology. Detailed technical documentation packages were prepared for each qualifying activity, creating the type of substantiation the IRS considers the gold standard during examination.
By the end of the eight-month engagement, the company had gone from uncertainty and exposure to clarity and confidence. Historical credit calculations were documented, reserve positions were updated, and a sustainable framework was established for future claims.
For tax executives, this story is becoming increasingly common. Teams change. Processes evolve. Documentation gaps emerge over time. But when large carryforward balances are expected to be utilized, unresolved issues can quickly become significant risks.
The good news is that these situations can be fixed with the right technical approach and the right team behind you.
If your company has historical R&D tax credit carryforwards and you are unsure about your level of substantiation or exposure, contact DST Advisory Group for a complimentary scope-out or review of your claim. Our team of Tax Engineers, CPAs, and former IRS professionals can help you identify risk areas, strengthen your documentation, build a defensible path forward, and reduce uncertainty.