tax-strategy
Use this skill when planning corporate tax strategy, claiming R&D credits, managing transfer pricing, or ensuring tax compliance. Triggers on corporate tax, R&D tax credits, transfer pricing, tax compliance, sales tax, VAT, international tax, and any task requiring tax planning or compliance strategy.
operations taxr-and-d-creditstransfer-pricingcompliancecorporate-taxWhat is tax-strategy?
Use this skill when planning corporate tax strategy, claiming R&D credits, managing transfer pricing, or ensuring tax compliance. Triggers on corporate tax, R&D tax credits, transfer pricing, tax compliance, sales tax, VAT, international tax, and any task requiring tax planning or compliance strategy.
Quick Start
- Open your terminal or command prompt
- Run:
npx skills add AbsolutelySkilled/AbsolutelySkilled --skill tax-strategy - Start your AI coding agent (Claude Code, Cursor, Gemini CLI, or any supported agent)
- The tax-strategy skill is now active and ready to use
tax-strategy
tax-strategy is a production-ready AI agent skill for claude-code, gemini-cli, openai-codex. Planning corporate tax strategy, claiming R&D credits, managing transfer pricing, or ensuring tax compliance.
Quick Facts
| Field | Value |
|---|---|
| Category | operations |
| Version | 0.1.0 |
| Platforms | claude-code, gemini-cli, openai-codex |
| License | MIT |
How to Install
- Make sure you have Node.js installed on your machine.
- Run the following command in your terminal:
npx skills add AbsolutelySkilled/AbsolutelySkilled --skill tax-strategy- The tax-strategy skill is now available in your AI coding agent (Claude Code, Gemini CLI, OpenAI Codex, etc.).
Overview
A practical framework for corporate tax planning, compliance, and optimization. Tax is one of the largest and most controllable operating expenses for a growing company - yet most founders and operators treat it reactively, filing returns after the year closes and leaving significant credits and deductions unclaimed. This skill covers the full tax lifecycle: entity structuring, R&D credit identification, sales tax and VAT nexus management, transfer pricing for international operations, quarterly estimated tax management, and audit preparation.
Disclaimer: This skill provides general educational information about tax concepts and common strategies. It is NOT legal or tax advice. Tax law is jurisdiction-specific, changes frequently, and depends on facts unique to each business. Always consult a qualified tax attorney or CPA before making tax decisions. Nothing in this skill should be relied upon as legal, accounting, or tax advice.
Tags
tax r-and-d-credits transfer-pricing compliance corporate-tax
Platforms
- claude-code
- gemini-cli
- openai-codex
Related Skills
Pair tax-strategy with these complementary skills:
Frequently Asked Questions
What is tax-strategy?
Use this skill when planning corporate tax strategy, claiming R&D credits, managing transfer pricing, or ensuring tax compliance. Triggers on corporate tax, R&D tax credits, transfer pricing, tax compliance, sales tax, VAT, international tax, and any task requiring tax planning or compliance strategy.
How do I install tax-strategy?
Run npx skills add AbsolutelySkilled/AbsolutelySkilled --skill tax-strategy in your terminal. The skill will be immediately available in your AI coding agent.
What AI agents support tax-strategy?
This skill works with claude-code, gemini-cli, openai-codex. Install it once and use it across any supported AI coding agent.
Maintainers
Generated from AbsolutelySkilled
SKILL.md
Tax Strategy
A practical framework for corporate tax planning, compliance, and optimization. Tax is one of the largest and most controllable operating expenses for a growing company - yet most founders and operators treat it reactively, filing returns after the year closes and leaving significant credits and deductions unclaimed. This skill covers the full tax lifecycle: entity structuring, R&D credit identification, sales tax and VAT nexus management, transfer pricing for international operations, quarterly estimated tax management, and audit preparation.
Disclaimer: This skill provides general educational information about tax concepts and common strategies. It is NOT legal or tax advice. Tax law is jurisdiction-specific, changes frequently, and depends on facts unique to each business. Always consult a qualified tax attorney or CPA before making tax decisions. Nothing in this skill should be relied upon as legal, accounting, or tax advice.
When to use this skill
Trigger this skill when the user:
- Asks about R&D tax credits, Section 41 credits, or qualifying R&D activities
- Needs to determine sales tax or VAT nexus for a new state or country
- Is structuring a subsidiary, IP holding entity, or international expansion
- Asks about transfer pricing policies between related entities
- Needs to prepare for a tax audit or respond to a tax authority inquiry
- Wants to optimize quarterly estimated tax payments to avoid underpayment penalties
- Asks about corporate income tax rates, deductions, or timing strategies
- Is evaluating entity type (C-Corp, S-Corp, LLC, pass-through) for tax impact
Do NOT trigger this skill for:
- Personal income tax filing or individual tax returns - use a personal finance skill
- GAAP revenue recognition or financial statement accounting - use an accounting skill
Key principles
Plan proactively, not reactively - Tax strategy executed before a transaction or year-end is worth 10x more than cleanup after the fact. Entity elections, R&D credit documentation, and transfer pricing policies must be in place before the relevant period ends - they cannot be backdated.
Document everything - The IRS and most tax authorities shift the burden of proof to the taxpayer. No documentation means no deduction or credit. R&D activities, business purpose for expenses, and intercompany agreements must be contemporaneously recorded, not reconstructed during an audit.
R&D credits are systematically underutilized - Fewer than 30% of eligible companies claim the federal R&D credit. Most qualifying activities are ordinary engineering work - debugging, prototyping, iterating on algorithms, designing new features - not just lab research. The credit can offset payroll taxes for early-stage companies.
Nexus determines obligation - You owe sales tax or VAT only where you have nexus (a sufficient connection to that jurisdiction). Physical presence used to be the only trigger; economic nexus rules (typically $100K in sales or 200 transactions per state) now apply in every US state. Map your nexus before collection obligations snowball into back-tax liability.
Transfer pricing must be arm's length - When related entities transact (parent charges subsidiary for IP, services, or goods), the price must be what unrelated parties would agree to. Failure to document arm's-length pricing is one of the most common triggers for international tax audits and can result in double taxation.
Core concepts
Corporate income tax is levied on a corporation's net taxable income. The US federal corporate rate is 21% (post-2017 Tax Cuts and Jobs Act). State rates vary from 0% (Wyoming, South Dakota) to over 11% (New Jersey). Taxable income differs from book income due to depreciation methods, timing of deduction recognition, and credits that directly reduce tax liability (not just taxable income).
Nexus and permanent establishment (PE) are the thresholds that create a tax collection or income tax obligation. For US sales tax: physical nexus (office, employee, warehouse) or economic nexus (revenue or transaction thresholds). For international income tax: a permanent establishment typically arises when a company has a fixed place of business or a dependent agent in a foreign country - triggering that country's corporate income tax.
R&D credit qualification under IRC Section 41 requires four-part test: (1) qualified purpose - developing a new or improved business component; (2) technological in nature - relies on hard sciences, engineering, or computer science; (3) elimination of uncertainty - attempts to eliminate technical uncertainty; (4) process of experimentation - evaluates alternatives through modeling, simulation, testing, or trial and error. Qualifying expenditures include wages, contract research (65% of amounts paid to US contractors), and supplies consumed in research.
Transfer pricing methods are the IRS/OECD-approved approaches for pricing intercompany transactions: Comparable Uncontrolled Price (CUP) - compare to identical third-party transactions; Cost Plus - cost of production plus arm's length markup; Resale Price - resale price minus appropriate gross margin; Comparable Profits Method (CPM) / Transactional Net Margin Method (TNMM) - compare operating margin to comparable companies; Profit Split - allocate combined profit based on relative contribution. Most mid-market companies use CPM/TNMM because comparable third-party transactions are hard to find.
Common tasks
Identify R&D credit opportunities
Qualification criteria checklist:
| Test | Question to ask | Examples that qualify |
|---|---|---|
| Qualified purpose | Are you developing or improving a product, process, software, or formula? | New feature, performance optimization, new algorithm |
| Technological in nature | Does the work rely on engineering, computer science, or physical sciences? | Backend architecture, ML model design, circuit design |
| Elimination of uncertainty | Is there technical uncertainty about how to achieve the result? | "We don't know if this approach will scale to 10M requests" |
| Process of experimentation | Are you testing alternatives, iterating, or running experiments? | A/B testing architecture choices, profiling and tuning |
Qualifying expenditures:
- Wages - W-2 wages for employees whose time is spent on qualified research. Track time by project. Even partial time qualifies (e.g., 40% of a developer's time on a qualifying project = 40% of their wages).
- Contract research - 65% of amounts paid to US-based third-party contractors performing qualified research on your behalf.
- Supplies - Materials and supplies consumed in the research process (not capital equipment, which is depreciated separately).
Startup benefit: Companies with less than $5M in gross receipts and fewer than 5 years of revenue can apply up to $500K/year of R&D credits against employer payroll taxes (FICA) - even with no income tax liability. This is often the most valuable tax benefit available to early-stage tech companies.
Documentation to maintain contemporaneously:
- Project descriptions explaining the technical uncertainty and experimentation
- Time logs or percentage estimates tied to individual employees and projects
- Payroll records cross-referenced to project time
- Meeting notes, design docs, code commits, and test records as evidence of experimentation
Load
references/r-and-d-credits.mdfor full qualification examples, the four-part test applied to common software development activities, and credit calculation walkthrough.
Plan for sales tax and VAT compliance
US sales tax nexus checklist:
Physical nexus triggers (any one creates nexus):
- Office, store, or warehouse in the state
- Employee, contractor, or sales rep working in the state
- Inventory stored in a fulfillment center (including Amazon FBA) in the state
- Attending trade shows or conducting in-person sales activities
Economic nexus triggers (post-South Dakota v. Wayfair, 2018):
- More than $100,000 in sales to that state in the current or prior year
- More than 200 separate transactions to that state in the current or prior year
- Note: Alaska, Montana, New Hampshire, Oregon, Delaware have no state sales tax
Action steps once nexus is determined:
- Register for a sales tax permit in the state before collecting (collecting without registration is a separate violation)
- Determine taxability - software-as-a-service is taxable in some states, exempt in others; consult a tax advisor for your product category
- Configure your billing system to collect and remit by state (Stripe Tax, Avalara, TaxJar)
- File returns on the schedule required by each state (monthly, quarterly, or annually based on volume)
VAT considerations for EU/UK:
- EU VAT OSS (One Stop Shop) allows a single EU registration to cover all 27 EU member states for B2C digital services
- UK requires separate VAT registration (threshold: £90,000 in UK sales)
- B2B sales within the EU typically use the reverse charge mechanism - buyer accounts for VAT
- Digital services sold to EU consumers are taxable at the buyer's country rate, regardless of where the seller is located
Design a transfer pricing strategy
Transfer pricing applies when your company has multiple legal entities transacting with each other (e.g., a US parent licensing IP to an Irish subsidiary, or a US entity receiving management services from a Singapore holding company).
Step 1 - Map intercompany transactions: List every transaction between related entities: IP licenses, management fees, cost sharing, intercompany loans, goods sales, shared services.
Step 2 - Select a method:
| Transaction type | Recommended method |
|---|---|
| IP licenses / royalties | CUP (if third-party royalty data available) or Profit Split |
| Services (routine) | Cost Plus with a standard markup (typically 5-15%) |
| Distribution / resale | Resale Price Method or TNMM |
| Manufacturing | Cost Plus or TNMM |
| Loans | Applicable Federal Rate (AFR) as minimum arm's-length rate |
Step 3 - Benchmark: Use databases like Bureau van Dijk Orbis, RoyaltyStat, or ktMINE to find comparable uncontrolled transactions or comparable companies to support your pricing.
Step 4 - Document in a transfer pricing study: Most countries with transfer pricing rules require contemporaneous documentation. The OECD BEPS framework requires a Master File (group-wide overview) and Local File (entity-specific) for large multinationals.
Common pitfall: Do not set intercompany prices to minimize tax without economic substance. A subsidiary must perform real functions and bear real risks to justify a low-tax allocation of profits. Substance requirements include local employees, decision-making authority, and actual risk management.
Structure international operations tax-efficiently
IP holding structure: Holding IP in a low-tax jurisdiction (Ireland, Netherlands, Singapore) is legitimate when the entity has genuine substance - employees who manage the IP, make licensing decisions, and bear economic risk. The OECD BEPS Action 5 "nexus approach" requires that tax benefits track to the jurisdiction where R&D is actually performed.
Structuring checklist before expanding internationally:
- Determine if a foreign subsidiary or branch is appropriate (subsidiaries limit liability and separate tax; branches flow through to parent)
- Assess permanent establishment risk - does a traveling employee or a local contractor create PE in the new country?
- Review applicable tax treaty between home country and target country
- Determine withholding tax rates on dividends, interest, and royalties between the two jurisdictions
- Consult a local tax advisor in the target jurisdiction before entity formation
US-specific: Subpart F and GILTI US corporations with foreign subsidiaries must include certain categories of passive or easily-shifted income (Subpart F income) in US taxable income currently. The Global Intangible Low-Taxed Income (GILTI) regime taxes US multinationals on excess foreign profits. These rules significantly limit the benefit of parking income in low-tax foreign entities without genuine substance.
Prepare for a tax audit
Types of audits:
- Correspondence audit - IRS requests documentation by mail; most common; respond in writing with supporting documents
- Office audit - Scheduled meeting at an IRS office; bring all requested records
- Field audit - IRS agent comes to your place of business; most serious; retain a tax attorney or CPA immediately
Audit readiness checklist:
- Maintain organized records for at least 3 years from filing date (6 years if substantial understatement is possible; indefinitely if fraud is alleged)
- Keep a reconciliation between book income and taxable income (M-1 or M-3 schedule)
- Retain all source documents: bank statements, invoices, contracts, payroll records, mileage logs
- Document business purpose for all deducted expenses
- Keep transfer pricing documentation current
- Maintain contemporaneous R&D documentation
If selected for audit:
- Do not respond to the IRS directly without a tax professional for anything beyond simple correspondence audits
- Respond only to what is asked - do not volunteer additional information
- Request a 30-day extension if needed to gather documentation
- Understand the statute of limitations: IRS generally has 3 years to audit; 6 years if income is understated by >25%; no limit for fraud
Manage quarterly estimated taxes
Corporations and pass-through entities with expected annual tax liability above $500 (individuals) or $500 (corporations) must make quarterly estimated payments or face an underpayment penalty.
Corporate estimated tax schedule (US):
| Quarter | Due date |
|---|---|
| Q1 (Jan-Mar) | April 15 |
| Q2 (Apr-Jun) | June 15 |
| Q3 (Jul-Sep) | September 15 |
| Q4 (Oct-Dec) | December 15 |
Safe harbor rules to avoid underpayment penalty:
- Pay 100% of prior year's tax liability (25% per quarter), OR
- Pay 100% of current year's actual liability as you go (annualized income method)
For C-Corps: The safe harbor is 100% of prior year tax. Large corporations (taxable income >$1M in any of the prior 3 years) must use 100% of current year estimates.
Cash flow tip: Use the prior-year safe harbor when this year is expected to be a high-income year. Use the annualized income method when income is weighted toward early quarters and the business slows later in the year.
Optimize entity structure
Entity comparison for US businesses:
| Entity | Tax treatment | Key advantage | Key disadvantage |
|---|---|---|---|
| C-Corporation | Double taxation (21% corp + 15-20% dividend) | QSB stock exclusion (QSBS), no income limit for deductions, investor-friendly | Dividends taxed twice; distributions not deductible |
| S-Corporation | Pass-through (no entity tax) | Avoid self-employment tax on distributions | Limits: 100 shareholders max, US citizens/residents only, one class of stock |
| LLC (single/multi) | Pass-through by default | Flexible profit allocation, no formality requirements | Self-employment tax on all active income unless S-Corp election made |
| Partnership | Pass-through | Flexible allocations, step-up in basis on contribution | SE tax, complexity of Schedule K-1 |
QSBS (Qualified Small Business Stock) - Section 1202: Shareholders of a C-Corp can exclude up to $10M (or 10x basis, whichever is greater) of gain from federal capital gains tax if the stock was issued when the company had less than $50M in assets and held for more than 5 years. This is the single largest potential tax benefit available to startup founders and early investors. Entity must be a C-Corp at time of issuance - S-Corps and LLCs do not qualify.
Anti-patterns / common mistakes
| Mistake | Why it's wrong | What to do instead |
|---|---|---|
| Filing taxes without reviewing prior-year elections | Elections like accounting methods, depreciation, or R&D credit elections must often be made with the original return; missed elections are hard to fix | Review all available elections with your CPA before filing; use an extension if needed |
| Treating R&D as all-or-nothing | Companies assume only dedicated "R&D teams" qualify, leaving substantial payroll credits unclaimed | Audit all engineering, product, and QA wages; partial-time allocation qualifies |
| Collecting sales tax without registration | Collecting without a permit is a separate violation; states can assess penalties beyond the tax itself | Register before collecting; consider a VDA (Voluntary Disclosure Agreement) for past exposure |
| Setting intercompany prices to a round number without benchmarking | Round numbers signal that pricing was set without economic analysis; automatic audit red flag | Support all intercompany prices with a contemporaneous benchmarking study |
| Missing the S-Corp reasonable salary requirement | S-Corp owners who take no salary to avoid payroll tax face IRS reclassification of distributions as wages | Pay a reasonable salary (market rate for the services performed) before taking distributions |
| Waiting until December to do tax planning | Year-end planning has limited options; most high-impact strategies (retirement plan setup, equipment purchases, entity elections) require action before December 31 | Review tax position quarterly; engage a CPA in Q3 for year-end planning |
Gotchas
R&D credits require contemporaneous documentation, not retroactive reconstruction - The IRS can and does reject R&D credit claims where time logs were created after the fact. Time-tracking systems must be running before the tax year you intend to claim. Reconstructed records from Jira or git history alone are not sufficient.
Economic nexus thresholds are based on prior-year activity, not current-year - Many states look at the prior calendar year to determine if the current year creates nexus. A company that crossed $100K in sales to California in 2023 has nexus there starting January 1, 2024 - not the day they crossed the threshold.
QSBS exclusion requires the company to be a C-Corp at issuance - Converting from LLC to C-Corp after investors receive units does not retroactively qualify. The shares must be original-issue C-Corp stock when issued. Advise on entity type before any equity grants.
S-Corp reasonable compensation is not optional - The IRS actively audits S-Corp owner-operators who pay themselves below-market salaries. The standard is what the company would pay a third party to do the same job, not what feels tax-efficient.
Sales tax registration must precede collection - Collecting sales tax before obtaining a state permit is a separate violation from failure to collect. Some states treat collection without registration as fraud. Register before enabling tax collection in billing systems.
References
For detailed content on specific sub-domains, read the relevant file from
references/:
references/r-and-d-credits.md- Full R&D credit qualification guide with examples mapped to common software development activities, the four-part test applied to real scenarios, credit calculation methodology, and the startup payroll tax offset procedure. Load when evaluating or claiming R&D credits.
Only load a references file if the current task requires deep detail on that topic.
References
r-and-d-credits.md
R&D Tax Credit Qualification Guide
The federal R&D tax credit (IRC Section 41) is one of the most valuable and least-claimed tax benefits available to US businesses. This guide covers the four-part qualification test in detail, maps common software and engineering activities to that test, explains how to calculate the credit, and outlines the startup payroll tax offset procedure.
Disclaimer: This guide is educational only and is not legal or tax advice. R&D credit claims are frequently audited. Always work with a qualified tax professional or R&D credit specialist to prepare and defend your claim.
The Four-Part Qualification Test
Every activity claimed for the R&D credit must pass all four parts of IRC Section 41(d). Failing any one part disqualifies the activity.
Part 1: Qualified Purpose
The activity must be undertaken to develop or improve a business component - defined as a product, process, computer software, technique, formula, or invention intended to be held for sale, lease, or license, or used in a trade or business.
Passes:
- Developing new SaaS features or products
- Improving the performance, reliability, or scalability of existing software
- Designing and building internal tools that improve business processes
- Developing proprietary algorithms, data models, or ML models
Fails:
- Market research or consumer surveys
- Style, taste, or cosmetic changes without functional improvement
- Reproducing an existing product by reverse engineering (copying)
- Research conducted outside the US (foreign research is not qualifying)
Part 2: Technological in Nature
The activity must rely on principles of engineering, physical science, biological science, or computer science. Most software development qualifies because computer science is explicitly included.
Passes:
- Writing code, designing algorithms, or architecting systems
- Electrical or mechanical engineering design work
- Data science and machine learning model development
- Database schema design for performance or new capability
Fails:
- Pure business process design without a technical component
- Financial modeling or actuarial analysis
- Social science research or behavioral economics studies
- Management consulting or organizational design
Part 3: Elimination of Technical Uncertainty
At the start of the activity, there must be genuine uncertainty about the capability, methodology, or appropriate design of the business component. The uncertainty does not need to be at the frontier of science - it just needs to be uncertain to the taxpayer given their current knowledge.
Key principle: "Is there a technically unknown answer to be discovered?" is the test - not "is this cutting-edge research?"
Passes:
- "We don't know if this microservices architecture will handle 10M concurrent users without degradation."
- "We are uncertain whether graph-based or embedding-based approaches will achieve acceptable accuracy for our recommendation system."
- "We do not know if our proposed compression algorithm will meet latency requirements at scale."
- "We are unsure which database technology will support our required query patterns at this data volume."
Fails:
- Copying a known working solution from documentation
- Routine maintenance, bug fixes for known issues using established methods
- Activities where the methodology and outcome are known in advance
- Training employees on established technologies
Common misconception: Uncertainty does not require that the activity ultimately succeed or that the approach be novel to the industry - only that it was uncertain to the company at the time.
Part 4: Process of Experimentation
The taxpayer must evaluate one or more alternatives through a process of experimentation - which includes modeling, simulation, systematic trial and error, testing hypotheses, or evaluating design alternatives.
This is the broadest and most misunderstood part. It does not require a formal scientific method; iterative software development and architecture evaluation qualify.
Passes:
- Writing prototype code and evaluating its behavior against requirements
- Benchmarking multiple database configurations to find the optimal approach
- A/B testing two algorithm implementations against performance criteria
- Running load tests to identify bottlenecks and iterating on architecture
- Reviewing code, profiling performance, and making targeted improvements
- Building and evaluating ML model variants with different hyperparameters
Fails:
- Deploying a known, documented solution without adaptation
- Routine data entry or administrative activities
- Post-development quality assurance testing (testing known behavior)
- Production monitoring without associated development activity
Applying the Four-Part Test: Software Examples
Example 1: Building a new search feature
| Part | Analysis | Result |
|---|---|---|
| Qualified purpose | Improving a business component (software product) | Pass |
| Technological in nature | Relies on computer science, information retrieval algorithms | Pass |
| Technical uncertainty | Team is uncertain whether full-text, vector, or hybrid search will meet latency and relevance requirements | Pass |
| Process of experimentation | Team prototypes Elasticsearch vs. pgvector vs. Typesense, benchmarks each, and iterates | Pass |
Result: Qualifying activity. Engineer wages and contractor costs on this project are eligible.
Example 2: Migrating to a microservices architecture
| Part | Analysis | Result |
|---|---|---|
| Qualified purpose | Improving existing software for scalability and maintainability | Pass |
| Technological in nature | Software architecture, distributed systems design | Pass |
| Technical uncertainty | Uncertain whether service boundaries, inter-service communication patterns, and data consistency strategies will achieve the target reliability | Pass |
| Process of experimentation | Team designs multiple decomposition strategies, builds proof-of-concepts, evaluates trade-offs before committing | Pass |
Result: Qualifying activity. Note: routine lift-and-shift migration of known architecture would not qualify.
Example 3: Routine bug fixes
| Part | Analysis | Result |
|---|---|---|
| Qualified purpose | Improving existing product | Pass |
| Technological in nature | Software development | Pass |
| Technical uncertainty | The cause and fix are either known or deterministic to find | Likely Fail |
| Process of experimentation | Standard debugging using known tools and methods | Likely Fail |
Result: Generally not qualifying. Exception: if the bug reveals a fundamental architectural issue requiring novel investigation, that investigation component may qualify.
Example 4: Machine learning model development
| Part | Analysis | Result |
|---|---|---|
| Qualified purpose | Developing new ML capability for a product or process | Pass |
| Technological in nature | Computer science, statistics, applied mathematics | Pass |
| Technical uncertainty | Uncertain which model architecture, features, and training approach will achieve target accuracy | Pass |
| Process of experimentation | Iterative training runs, hyperparameter tuning, architecture evaluation, error analysis | Pass |
Result: Strong qualifying activity. ML development is among the clearest R&D credit opportunities for software companies.
Example 5: Redesigning a UI/UX
| Part | Analysis | Result |
|---|---|---|
| Qualified purpose | Product improvement | Pass |
| Technological in nature | Pure design changes are not technological; if new frontend rendering techniques are involved, may partially qualify | Conditional |
| Technical uncertainty | Visual design choices are not technical uncertainty | Fail |
| Process of experimentation | User testing is not scientific experimentation under Sec. 41 | Fail |
Result: Not qualifying. Exception: if the redesign requires developing new rendering techniques, accessibility technology, or novel frontend architecture, the technical development component may qualify separately.
Calculating the R&D Credit
Method 1: Regular Credit (20%)
Regular Credit = 20% x (QREs - Base Amount)
Where:
QREs = Qualified Research Expenditures for the current year
Base Amount = Fixed-base percentage x Average gross receipts (prior 4 years)
Fixed-base = Historical QREs / Historical gross receipts (capped at 16%)
Minimum = Base Amount cannot be less than 50% of current year QREsThe Regular Credit is more complex to calculate but often yields a larger credit for companies with a long history and growing R&D spend relative to revenue.
Method 2: Alternative Simplified Credit (ASC) - 14%
The ASC is simpler and more commonly used by growth companies:
ASC = 14% x (Current Year QREs - 50% of Average QREs for prior 3 years)
If the company has no QREs in any of the prior 3 years:
ASC = 6% x Current Year QREsExample calculation:
Current year QREs: $2,000,000
Average QREs (prior 3 yrs): $1,200,000
ASC = 14% x ($2,000,000 - 50% x $1,200,000)
= 14% x ($2,000,000 - $600,000)
= 14% x $1,400,000
= $196,000 federal R&D creditChoice: You must elect ASC on an original timely filed return. You cannot switch between methods year-over-year without restriction. Most CPAs recommend ASC for companies without extensive historical records or those experiencing rapid QRE growth.
State R&D Credits
Most US states offer their own R&D credits on top of the federal credit:
| State | Credit rate | Notes |
|---|---|---|
| California | 15% (in-house), 24% (basic) | Refundable for qualified small businesses |
| New York | 9% (qualified emerging technology) | For QETC companies only |
| Texas | No state income tax, but franchise tax credit | Limited application |
| Massachusetts | 10% | Carryforward up to 15 years |
| Georgia | 10% | Jobs creation requirements may apply |
State credits vary significantly in rates, carryforward periods, and whether they are refundable. A state-by-state analysis is required for multi-state businesses.
Startup Payroll Tax Offset (Form 6765 Election)
For qualified small businesses (QSBs) with no income tax liability, the R&D credit can be applied against employer payroll taxes (FICA - Social Security and Medicare taxes).
Eligibility requirements:
- Gross receipts of less than $5 million in the current tax year
- No gross receipts for any period before the 5-year period ending with the current tax year (i.e., the company is 5 years old or younger)
Maximum offset: Up to $500,000 per year against employer FICA taxes (the employer's 6.2% Social Security portion only - not the 1.45% Medicare portion for regular offset; Medicare offset was added in 2023 up to $250K additional).
How it works:
- Calculate R&D credit on Form 6765 as normal
- Make the payroll tax offset election on Form 6765 (Part III)
- The elected amount is claimed on Form 941 (quarterly payroll tax return) starting the first quarter after the income tax return is filed
- The credit reduces the employer's FICA liability for each payroll period until the elected amount is exhausted
Example:
Startup founded 2022, no revenue until 2023
2024 QREs: $800,000
ASC credit: 6% x $800,000 = $48,000 (no prior 3-year QREs)
Payroll tax offset election: $48,000
If annual employer FICA is $120,000:
Q1 2025: Offset $12,000 of the $30,000 quarterly FICA deposit
Q2 2025: Offset $12,000
Q3 2025: Offset $12,000
Q4 2025: Offset $12,000
Credit exhausted after 4 quartersDocumentation Best Practices
The IRS can disallow R&D credits entirely if documentation is inadequate. The Cohan rule (allowing estimates for ordinary business deductions) does not apply to R&D credits - the taxpayer bears the burden of substantiation.
Contemporaneous documentation (created during the activity, not reconstructed):
| Document type | What to capture | Retention |
|---|---|---|
| Project descriptions | Technical uncertainty, hypotheses being tested, experimentation approach | Indefinitely |
| Time records | Employee name, project name, hours or percentage, date | 7 years minimum |
| Payroll records | W-2 wages cross-referenced to qualified projects | 7 years minimum |
| Technical artifacts | Design docs, architecture diagrams, code commits, test results, PR descriptions | 7 years minimum |
| Contractor agreements | Contracts specifying that research is performed in the US and IP belongs to the company | 7 years minimum |
| Meeting notes | Sprint planning, architecture reviews, technical discussions showing experimentation | 7 years minimum |
Common audit red flags:
- Time percentages that are round numbers (50%, 25%) without supporting records
- All employees claiming the same R&D percentage
- No technical documentation linking activities to the four-part test
- R&D credit claims that suddenly appear or spike without corresponding increase in headcount or technical complexity
- Contractor costs claimed without a written contract specifying US-based performance
Practical approach for small teams: If formal time tracking is not in place, a "contemporaneous estimate" approach is acceptable - have each qualified employee complete a project allocation survey at the end of each quarter, allocating their time to specific projects. Pair with technical artifacts (Jira tickets, GitHub commit history, design docs) to substantiate the allocation.
Common Disallowed Activities
These activities are explicitly excluded from the R&D credit regardless of how technical they appear:
- Funded research - Research where another party (grant, contract) funds the activity and bears the financial risk; the funded party cannot claim the credit
- Foreign research - Any research conducted outside the United States
- Social sciences, arts, or humanities - Not eligible regardless of methodology
- Commercial production - Quality control testing on existing production processes
- Surveys and studies - Market research, efficiency surveys, management studies
- Computer software developed for internal use - With narrow exceptions for software that meets the high threshold of innovation and significant economic risk tests (internal-use software rules are more restrictive than general software)
- Pre-qualified research - Funded research where the contractor does not own the results and bears no financial risk
Filing and Claiming the Credit
- Calculate on Form 6765 - "Credit for Increasing Research Activities"
- Pass through to Form 3800 - "General Business Credit" if individual or pass-through entity
- Elect payroll offset on Form 6765 if applicable (startup election)
- Carryforward - Unused credits carry forward 20 years; carry back 1 year
- AMT interaction - C-Corps may face Alternative Minimum Tax limitations; individual owners of pass-throughs may have AMT implications - review annually
Amended returns: R&D credits can be claimed on amended returns for open tax years (generally 3 years from original filing). This means companies that failed to claim credits in prior years can potentially recover them retroactively.
Frequently Asked Questions
What is tax-strategy?
Use this skill when planning corporate tax strategy, claiming R&D credits, managing transfer pricing, or ensuring tax compliance. Triggers on corporate tax, R&D tax credits, transfer pricing, tax compliance, sales tax, VAT, international tax, and any task requiring tax planning or compliance strategy.
How do I install tax-strategy?
Run npx skills add AbsolutelySkilled/AbsolutelySkilled --skill tax-strategy in your terminal. The skill will be immediately available in your AI coding agent.
What AI agents support tax-strategy?
tax-strategy works with claude-code, gemini-cli, openai-codex. Install it once and use it across any supported AI coding agent.
Is tax-strategy free?
Yes, tax-strategy is completely free and open source under the MIT license. Install it with a single command and start using it immediately.
What is the difference between tax-strategy and similar tools?
tax-strategy is an AI agent skill that teaches your coding agent specialized operations knowledge. Unlike standalone tools, it integrates directly into claude-code, gemini-cli, openai-codex and other AI agents.
Can I use tax-strategy with Cursor or Windsurf?
tax-strategy works with any AI coding agent that supports the skills protocol, including Claude Code, Cursor, Windsurf, GitHub Copilot, Gemini CLI, and 40+ more.