We’ve all been taught not to raise certain topics at work, among them religion and politics, to name just two. They are polarizing and could even be career-ending, depending on whom you engage with or how the conversation goes. What about water-cooler topics like traffic, Mondays, audits, or R&D tax credits? Any of those alone are bound to spur debate, but it’s not likely you’ll find people defending traffic, Mondays, or audits. What about the R&D tax credit? More than 16,000 taxpayers claim the research credit each year to the tune of over $11 billion in benefit.1
With tax reform and the elimination of other corporate incentives, the research credit (officially the Research and Experimentation Tax Credit) is now one of the largest federally funded programs out there, and most states have followed suit. As tax professionals, we should be thrilled to have the research credit in our toolbox, one of the many values we bring to our companies. It’s complex, cumbersome, and complicated, and as tax people we are ideally suited to lead this process. So why is it also hated? That dislike is grounded in the process of calculating, documenting, and supporting the credit on audit. It seems nobody has figured out the best way to accomplish these things. But when the innovators at your company can design rocket ships to Mars or do cancer research, how crazy does it sound to say we struggle with putting a few numbers annually on a tax form?2 How can we ease the pain of the credit we love to hate?
The Research Credit Challenge
The challenge here is to claim and sustain the largest R&D tax credit possible with the least amount of work. Easier said than done, and very complicated for us tax professionals, because the research credit is driven by innovative activities that are not under our control. You can’t pull a report out of your system to generate the numbers that go on the form. Documentation to support activities is not easily found or may not even exist. Your phone calls or emails to others seem to go into some black hole, never to be returned. Some of you also travel around the country, sitting in conference-room interviews taking notes, and you dread this exercise every year. And let’s not get started on how much the IRS loves to examine this credit, or at least loves to make tax departments suffer through rounds of information requests or months of follow-up.
We believe the challenge comes down to how effective you can be as a lateral leader.
Lateral Leadership Challenges
“Lateral leadership” at its core occurs when you as a tax professional lead others in a process even though you have no organizational authority over them. You don’t sign their paychecks, approve their vacations, or fill out their evaluations. Plenty has been written about the dynamics of how to deal with your boss or your direct reports, but what about others outside tax? This relationship is what makes the research credit process extra challenging.
Lateral leadership, if you have chosen this mission, is more of an art than a science. Chances are you were never formally trained in its techniques. However, your role as lateral leader now requires you to motivate and influence others to do things they don’t necessarily want to do. You are the official cheerleader for the group, too. You must keep things organized and moving.
Most tax professionals do have peers they work with and trust in other similar functions. It’s not a stretch to put a tax person in a group with finance, accounting, payroll, HR, and legal, and everybody gets along. This is largely because these professionals are rule-followers, deal with compliance and regulations, and understand the importance of deadlines and process. Those professionals are generally conservative and risk-averse. When you are a tax person leading a group of like-minded professionals, organization is key to gaining the respect of these peers.
Complexity arises, however, when you throw innovative thinkers into the mix. You likely already appreciate that your CFO and CIO/CTO are very different types of people. Your CFO is generally a numbers-oriented person, deep in the weeds of finance and counting costs. Then you have the CIO or VP of R&D, who is likely a big-picture thinker who prefers outside-the-box solutions that can be risky and expensive. It’s easy to see the conflict.
The CFO wants to establish financial policy around spending and budgets for innovative projects, whereas the CTO wants to move projects ahead without stifling his or her creative team with
budgetary constraints. As the tax person, you are often caught in the middle, and engineers think of you as “just another bean counter.” Thus, the struggle: How can you change their perceptions about you while moving the ball forward related to the research credit project?
Here are three approaches you can use during your mission as lateral leader.
Approach #1: Ask Questions, Listen Well, Develop Rapport and Trust, Communicate Clearly
Architects are typically imaginative and creative. They have unique abilities to analyze and critically assess problems. They can see the big picture and pay attention to the smallest detail. They must communicate effectively with a diverse group of interested stakeholders from owners to contractors to government officials. During the design phase of any architecture project, they have learned to ask questions, listen well, develop rapport and trust, and communicate clearly.
We think tax professionals can learn a lot about lateral leadership from architects, which is why we recommend that all lateral leaders dealing with R&D tax credits to start the project process with an “architecture phase.”
Pull data, interview subject-matter experts (SMEs), draft project write-ups, repeat. This is the typical cycle for an R&D tax credit study for most companies. Lateral leaders, however, will question whether there is a better way. Have you ever asked your SMEs how you could improve the process or make the experience better for them? Just as architects do with owners, listening to SMEs is a big part of making your project a success.
The great thing about tax professionals is we want to roll up our sleeves and jump right in. We love a project plan, details, and deadlines. Just give us data, and our spreadsheets will make everything clear. No puzzle will go unsolved. But in the context of the research credit, part of the battle is figuring out the pieces of the puzzle. We don’t own those, which is why our first recommendation is to start the architecture phase by asking questions. Ask questions before you design your process for this year. Ask questions before you set up an interview schedule (or even ask whether you need interviews). Ask questions from enough people so that you feel comfortable about where to start.
As tax professionals we like answers, not questions. We might even think that questions slow down the process. Our DNA is wired to determine what happened and when and then to decide how to report it. We want to understand the facts, do our research and document it. We like figuring out solutions. The biggest way to derail your R&D tax credit process, however, is to falsely assume that you know all the answers (as to how to start this year’s study) without asking questions. Don’t assume your process from last year is where you need to start off this year. We recommend taking a different approach. By stepping back and asking questions of your key stakeholders about the process, you begin the year fresh. Use the architecture phase to evaluate your existing design, bring new design ideas to the surface, and move forward with an improved system.
The first thing you can do is assess last year in terms of the steps that were followed, and whether those went well or not. While you might have thought everything went smoothly, the lateral leader will seek out others, outside of tax, and ask for their opinions and listen to their concerns. One way to do this is to approach those innovative leaders under the premise (or promise) of improving the overall experience for the SMEs. If you look around at almost anything these days, improving user experience is a hot topic. Why not focus on improving user experience for your SMEs during your architecture phase?
Have you ever wondered why some engineers didn’t show up at their designated times for those interviews, or failed to prepare for your questions, or avoided your email requests for follow-up? It’s likely that you didn’t engage them upfront, never told them how important this was, didn’t share information about the size of the credit, and weren’t clear on how long this process would take. Ask them the critical questions.
Remember, these people don’t report to you; they are busy and often dislike the research credit based on prior experience. Therefore, developing rapport and trust with them is key. Most people don’t voluntarily comply with requests for help unless they have some sort of relationship with the person asking for assistance or they can see what’s in it for them. Have you spent time meeting engineers outside of the study period or do you engage with them only once a year? Have you ever asked them how you could learn more about what they do throughout the year to help them (help me to help you)? Developing a relationship with somebody so that someday you can rely on them for help means that you must be purposeful in your actions well before assistance is needed. If you are new to leading the research credit for your company, then it might take some time before those engineers trust you and are helpful. Lateral leaders see the big picture and are willing to take on the challenge, because they know over time the process will improve, resulting in efficiencies for everybody.
Approach #2: Develop Tools
The architecture phase of your project is not over after you’ve asked questions of key innovation leaders and SMEs. Now you must explore the great ideas that were generated and address documented concerns. For the lateral leader, sometimes asking the questions is the easy part, but now that you have the answers, which typically come in the form of suggestions and complaints, you need to do more homework. The architecture phase needs to move further into design, and you owe it to the group to facilitate this process.
We recently worked with some tax professionals who were told during the questioning phase that SMEs couldn’t understand why time records didn’t satisfy the tax requirements for the research credit. This was a perfectly legitimate question, but knowing that SMEs didn’t fully understand the tax rules meant we had to start at the beginning and pull out the tax code. Remember, these are very smart people. If you explain what this is all about, they will get it. In this case, SMEs said they were frustrated having to sit with tax people every year going over hundreds of projects to determine if hours charged to the project were for qualified or nonqualified activities. Meeting together during the architecture phase, the lateral leader from the tax department explained how project descriptions were not detailed enough to assist with the qualification. Together during this phase, the combined team worked on generating ideas to improve the time reporting. After a series of meetings, they agreed that when new projects are created, a new flagging system in the time tracking would be added. Innovative projects would be flagged from the start, making the identification easier for the tax people and eliminating the need to sit with SMEs and run through projects. This was a win-win for both sides.
It would have been easy for the taxpayer above to simply start the current year’s process the way it ended last year. But by asking SMEs questions and listening to concerns, the lateral leader identified the new opportunity for making this process easier for SMEs and ultimately easier for the tax team as well. The homework process consisted of several meetings with the SMEs over a period of weeks, but the value proposition was created by the lateral leader and embraced by the SMEs. In the end, the lateral leader had taken the architecture phase just a bit deeper, which will pay rewards for many years to come.
We have also seen the architecture phase as a great time to develop new tools for the research credit process. For example, SMEs will often complain about how they hate conference-room interviews because they take place after year-end, and it is difficult for them to recall facts from projects that ended months ago. We universally hear this from SMEs, which is why we encourage taxpayers to move to more real-time reporting. In many cases for a calendar-year taxpayer, shifting the time when an SME might complete a questionnaire from the summer after year-end to the fourth quarter of the current year means that information is being gathered promptly and SMEs don’t have to recall things that happened many months or quarters ago. Better yet, some taxpayers have designed procedures where SMEs provide information quarterly throughout the year or even monthly. Obviously talking with innovation leaders and SMEs about new processes they will embrace and appreciate is crucial but part of the role of the lateral leader.
When we talk of tool development and how that fits into the architecture phase, companies that use questionnaires might want to focus on improving that process. See if SMEs still feel like that is the best method for gathering project-level details. We’ve worked with some taxpayers who never realized that their innovation teams kept project charters that would eliminate the need for questionnaires. The tax team was surprised to learn that SMEs were copying and pasting text from existing charters into the questionnaires to make tax professionals happy. In that situation, not having to do the questionnaires in the future was a huge improvement. The tax professionals were also glad they didn’t have to follow up with SMEs in the future about filling out the questionnaires. Ask questions, listen, generate ideas and tools, and you will improve your research credit process every year.
Approach #3: Implementation/Execution: Ask Questions, Be Prepared, and Follow Through
Let’s recap to this point. You’ve learned what a “lateral leader” is and how it’s a big part of the complexity of this tax credit (people don’t report to you and are very busy). We’ve discussed having an architecture phase and the power of seeking feedback through one-on-one meetings with SMEs and innovation leaders (where you ask great questions and listen for ways to make improvements or address complaints). We’ve suggested that to build trust with SMEs you need to get to know them outside the study time and plan how to communicate clearly to them what this is all about and why it is important. We’ve encouraged you to have a larger team meeting to talk about some great ideas for new tools you’d like to try out to get the SMEs excited about the improvements.
Now as lateral leader you need to move into the execution phase. This is where you will kick off the project, outline who does what and when, and clearly state the goals, scope, and duties of everybody involved. Here is when you need to think about how to implement your new improvements and then follow through.
Don’t forget, the hard part is yet to come. The architecture phase will be new to your process. In the past, you jumped right into the execution phase and started engaging SMEs for their time or materials. Now you will have a great start to a new process because your architecture phase is done. As lateral leader, the real pressure will be on you because everybody you engaged to this point will have all eyes on you. They will want to know what kind of project leader you are going to be.
We recommend that you schedule an official project kickoff for the team and you center this meeting around food, either breakfast or lunch. SMEs are always busy, as are people in finance, payroll, legal, and accounting, but they all eat sometime. By bringing in food for everybody, the message you send the team is that the subject matter is important, and you appreciate their spending time out of their busy day to attend the meeting. It’s harder for people to reject coming to your meeting when it takes place during their lunch hour. Plus, we’ve found that engineers love free things. Let’s face it, most of us do. If you shamelessly bribe them to come to your kickoff with pizza, sandwiches, or wings, so be it. What’s more, we’ve found most SMEs have great company pride, and if you tell them their efforts are saving the company tax dollars, they will come to your kickoff meeting anyway. Free food helps, and your team members are smart enough anyway to understand that there are no free lunches. If they were invited to attend, it’s likely because you want something from them.
At the kickoff meeting, present a project charter to the group and walk them through it. A “charter” document will be familiar to many engineers anyway, because it seems to be common in the software development world. Your charter will contain a listing of team members and contact information, the goal of the project and scope, deadlines and deliverables, and initial assignments. This is a great chance for you as lateral leader to establish your own leadership style, and team members will understand during this meeting that you are committed due to the clear goals and scope you have communicated.
For those of you who like football, the architecture phase is the off-season where all the players get together to learn new plays or figure out how the team is going to work well during the season. The kickoff meeting is like the pregame coaching session before everyone runs out to the field. It’s a great time to talk about the game plan and make sure people understand their assignments. The meeting needs to be less than one hour, start to finish. The lateral leader needs to take charge from the start, and it’s still OK for the lateral leader to ask for questions during the meeting. Remember, you have everybody assembled, so we always outline the goals and the process, but ask if somebody has any other suggestions which would make this process easier. You hope they would have brought up revolutionary ideas during the architecture phase, but every now and then we will find somebody who was on vacation or not particularly engaged during that phase come out during the kickoff with a fantastic idea. As lateral leader, you must remain flexible and adaptable, so be prepared for everything. If you alter plans to incorporate somebody’s great idea, then the team will embrace a new and improved charter or process.
When somebody asks you to do something you don’t want to, but you agree to do it anyway, then nothing is more frustrating than disorganization. A disorganized leader costs people time they can never get back. If you want your process to run smoothly from the beginning, keep a keen eye open toward organization and follow through.
We have found that good project managers are patient but also hold others accountable. If you set deadlines for the team, then make sure you follow up so that deadlines are met. Some may drift from their own deadlines if they notice you allow others to slip. Holding weekly meetings or at the very least sending out weekly communications as to who did what, or who needs to do what the following week, should keep everybody honest and working together toward the deadline. Nobody wants to let down the entire team. Use smart tactics to keep firm pressure on those not pulling their weight, but be flexible and build time into the schedule so that those who are struggling won’t put the team goal in jeopardy.
The last thing to consider as lateral leader is to stay positive as you serve as the team cheerleader. Remaining upbeat throughout the process might be hard to do if deadlines slip or team members disappear. Remember that most people need only a gentle prod to move. You might want to consider this when talking to leadership, as it never hurts to have them follow up with a delinquent SME after your attempts have failed.
Now that you have worked through the architecture and kickoff phases, the rest of your project is sure to run more smoothly than in the past.
For many of you in charge of the research credit at your company, once the calculations are done and on the tax return, and your documentation has been gathered, you can gladly put the credit aside until next year. Remember, though, to build rapport and trust with team members. Thus, we have a few more recommendations as to how to make that happen.
First, consider drafting a letter to the leaders of your company to recognize team members. Put the size of the credit in the letter, send it out to people’s bosses, and make sure everybody gets a copy. At some companies, kudos letters such as these go into permanent personnel files. We even know of companies where participating in the research credit is mandatory or part of the bonus structure.
Second, seek feedback on the current process that just ended. This is the best time to ask people what they liked or disliked. We don’t recommend another meeting to discuss this unless SMEs demand it. In general, a brief email or survey sent to them is all that is needed to learn more about your process. Ask what they liked or didn’t and be sure to ask for suggestions on how to improve the process next year.
Last, don’t go into hiding until the following year. At many companies the innovation groups will have poster events and presentations and will produce white papers, and these are great things to attend and collect for next time. If you have a special group of SMEs, ask them how you can stay better informed. Building relationships is a year-round task.
Remember, lateral leadership is all about leading others. The better leader you become, the more questions you will ask before, during, and after the project to make sure your process is always improving. Keep in mind that the challenge is to claim and sustain the largest R&D tax credit possible with the least amount of work. If you strive to make this process easier on everybody, you will be headed in the right direction, and you never know, the topic of R&D credits just might spark one of those positive water cooler discussions in the future.
Jason Massie, CPA, Esquire, is founder and president of MASSIE R&D Tax Credits.
- After polling more than 300 taxpayers and working on projects for decades, we have determined that when given the choice, only about ten percent of SMEs ask for the conference-room interview versus the eighty percent who would prefer providing activity information and documentation via another method (and the remaining ten percent don’t care). Technology has made it much easier to avoid or eliminate conference-room interviews.
- Schedule one-on-one meetings with some of the most important SMEs from last year. Be sure to include the CIO, CTO, VP of R&D, or somebody else in charge of the group as your first contact. Ask plenty of questions to gather feedback about the R&D tax credit process itself, not about innovative activities or expenditures. Make sure to listen well, use follow-up questions, and summarize and distribute what you learned. If these innovative people are willing to take the time to provide you with their opinions, you need to acknowledge that what they told you was valuable and will be used to improve the process.
- Don’t fail to inform higher-level innovation leaders about what you are doing. We recently learned about a VP of R&D who told his people not to fill out research credit questionnaires distributed by a finance lead because “that’s just for some internal finance project.” Turns out finance had gone directly to SMEs from a prior year, and the new VP was not pulled into the loop. Don’t be a lone ranger. Involving leadership is the first step, not the last.
- People naturally wonder “What’s in it for me?” when you ask them to join a team or be part of a process. The lateral leader will think further as to how to answer the question before asking for assistance. We recommend having a “team meeting” with SMEs at this part of the project as a great way to brainstorm together, generate ideas, and consider new ways or tools to improve the process.
- We see the “if it ain’t broke, don’t fix it” attitude, either in the tax department or with the SME group, but the lateral leader’s job is to question everything and think big. It’s not an easy job, but this isn’t an easy credit, either. Figuring out ways to improve the process will pay dividends. If the challenge is to claim and sustain the largest credit possible with the least amount of time, then creating process improvements to drive efficiency will help reduce the overall time commitment to the credit.
- There is something called the “reciprocity” theory. It stands that if you do something for others, they feel like they owe you. Most people want to repay debts as soon as possible. If you have a kickoff, be prepared to immediately execute the project requests while the topic is fresh. For example, if our team walks SMEs through a questionnaire during lunch, then we send out the link to the questionnaire during the meeting. That way, when they return to their desks, we have a greater chance that they will complete the task so they can check it off their to-do list.
- We recommend also using the kickoff session to provide technical requirements for the credit and more process details as well. These don’t need to be part of the charter but could be flashed onto the screen or passed out. We like to call our handouts “placemats.” We print them on both sides of card stock and pass them out while people are eating so nobody must take notes. Plus, then they have a hardcopy summary of the important things to take back to their offices.
- We like to find “power emailers” and others in leadership who can support the project mainly from afar and represent somebody you can count on to rally the troops. We like leadership to attend the kickoff lunch. This shows everybody else the importance of the event. In fact, if leadership, or the leader’s admin, is willing to send out the invite, then you can drum up a good turnout from the start.
- SOI Tax Stats—Corporation Research Credit, Internal Revenue Service, www.irs.gov/statistics/soi-tax-stats-corporation-research-credit, updated May 18, 2018.
- Cue Alanis Morissette’s “Ironic” or C+C Music Factory’s “Things That Make You Go Hmmm.”