R&D Tax Talk – Intellectual Property Rights

R&D Tax Talk

In this episode of R&D Tax Talk, we dive into a topic that’s particularly relevant for companies engaged in research and development, which is intellectual property (IP) rights and funding for third-party research contractors.

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Detailed Description of R&D Tax Talk, Intellectual Property Rights and Funding for Third-Party Research Contractors

00:00:00
Nancy: Welcome back to R&D Tax Talk. Today we’re diving into a topic that’s particularly relevant for companies engaged in research and development (R&D), which is intellectual property (IP) rights and funding for third-party research contractors. Joining us to shed light on this topic today is Ryan Coleman and Monique Pham. So, let’s start with the basics, Ryan. Why is it crucial to understand IP rights and funding when working with third-party research contractors?

00:00:25
Ryan: Thanks, Nancy. I think it’s crucial because these factors can significantly impact a company’s eligibility to claim the research tax credit under Section 41 of the Internal Revenue Code. This is an area that the service routinely challenges with respect to credit claims, particularly where the contracts may be silent or even vague on the issue. And this is really where a clear understanding of funded research and substantial rights comes to play.

00:00:56
Nancy: Okay. Well, Monique, can you elaborate on those concepts a little bit more? What are funded research and substantial rights?

00:01:05
Monique: Sure, Nancy. So, for funded research, the IRS considers a research funded if the contractor essentially gets paid, regardless of whether the research itself is successful or not. The key here is whether the contractor bears the financial risk if the research fails. For substantial rights, this relates to the contractor’s ability to use whatever results of that research, even after the project is complete. So, it’s not just about owning the final product, but also the valuable data and knowledge generated during the research process.

00:01:47
Nancy: Yeah, I can see how understanding those concepts is going to be particularly difficult, or challenging, for companies and taxpayers to apply that to the R&D tax credit. Ryan, do you have any kind of key takeaways or anything that might help taxpayers navigate that?

00:02:09
Ryan: Sure. I think there’s a few items that taxpayers can focus on to try to mitigate some of these issues. One, I think is contract clarity, right? Really try to carefully define the IP ownership and the usage rights in the contracts. Try to ensure that the language doesn’t inadvertently create a situation where the service could view the research as funded, or the kind where the contractor may lack substantial rights.

I think an overriding theme in everything that we talk about these days is documentation, document everything. Try to maintain as thorough of a record keeping process as possible with respect to your R&D activities, expenditures and the results. And then again, when in doubt, seek advice. Right? We have a great team here at Weaver and there’s other, knowledgeable tax professionals out there in the marketplace as well. But the main thing to do is seek advice when in doubt.

00:03:14
Nancy: Awesome. And thank you for joining us today. We really appreciate your insights. And thanks for everyone joining us and learning a little bit about third-party contractors and IP rights. And we’ll see you next time on R&D Tax Talk.