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Acquiring another company isn’t just a strategic move that grows market share or expands a portfolio of products. Acquisitions can also unlock significant tax advantages. One area that companies often overlook is the Research and Development (R&D) Tax Credit, which can help them gain significant value after a transaction.
When two companies merge, their R&D activities, expenditures, and opportunities also merge. However, in order to maximize the benefit, businesses must be proactive and strategic in identifying, documenting, and consolidating qualified research efforts following acquisition.
Assessing R&D Activities of the Acquired Company
One of the first steps after an acquisition is to conduct a thorough review of the acquired company’s R&D projects, both past and present. Even if the acquired entity hasn’t previously claimed the R&D credit, its activities may still qualify.
Look for technical development efforts, product design iterations, engineering or software development teams, and ongoing innovation initiatives. If these efforts aim to improve functionality, performance, reliability, or quality and involve experimentation, they may qualify as research.
Importantly, newly acquired projects may contribute to the current year’s credit, especially if the R&D continues after the acquisition. These can add immediate value to the current year’s return if evaluated and documented correctly.
Consolidate Documentation Across Entities
Documentation is the cornerstone of any successful R&D credit claim, and that challenge only grows more complex after an acquisition. Different systems, formats, and standards can make it difficult to track who did what, when, and why.
To avoid losing credits or exposure during an audit, companies should prioritize the integration and consolidation of R&D documentation. That means collecting the following:
- Engineering or development logs
- Payroll records and time tracking
- Technical specifications or revision histories
- Experimentation notes or test data
If the acquired company used different systems or lacked formal documentation procedures, it’s still possible to recreate traces of qualified activity from employee interviews, email threads, and project management tools. The goal is to build a unified record that links R&D expenditures to specific business components across both legacy and acquired teams.
Leverage Carryforward Provisions
Another hidden opportunity lies in R&D credit carryforwards. If the acquired business earned R&D credits in previous years but was unable to use them, they may still be available. This depends on how the parties structure the deal.
Under the right circumstances, taxpayers may apply these carryforwards against current or future tax liability. However, this area is highly nuanced and depends on whether the acquisition was structured as a stock or asset purchase, as well as the continuity of business operations.
Working closely with tax credit experts and M&A advisors can help determine whether these carryforwards can be retained or used in some limited way. They can also show the best way to claim them. In some cases, these legacy credits can offset current taxes or even generate refunds.
Conclusion
Overlooking R&D credit opportunities during or after an acquisition can result in valuable dollars left behind. By taking the time to assess inherited R&D activity, consolidate documentation, and evaluate potential carryforward credits, an acquiring company can turn a strategic acquisition into a significant tax advantage.
Now is the time for companies that have recently completed an acquisition or are planning one to review their post-transaction R&D strategies. KBKG’s team specializes as an R&D provider, helping companies uncover hidden value in research activities. Contact a KBKG expert today to see how to maximize benefits from acquisitions.