Our company does R&D work on behalf of other companies (e.g. dev shop, design studio, etc); do I qualify for the R&D credit?
Work that you perform on behalf of a client may qualify for R&D tax credit purposes. When you have situations where one company is performing activities that may qualify as Qualifying Research Expenditures ("QRE") on behalf of another company, we always need to look to which party bears both risk of loss (if the work is unsuccessful) and also if that same party has sufficient rights to the intellectual property ("IP") that is developed as a result of the activity.
When assessing if sufficient rights exist, if a "payor" (the entity paying the other entity to perform R&D work on their behalf) is attempting to claim the R&D credit they would generally only need "a" right to the IP. Whereas if a "payee" (entity performing the work on behalf of the other) is attempting to claim the R&D credit they would generally need to have what is referred to as "substantial rights" to the IP.
Risk is generally assessed by looking at the general terms and conditions of the relevant contracting arrangement and looking specifically at the payment terms. Generally, if you’re the "payee" and you are being paid to perform R&D for your client and that work is being performed under a cost-plus type arrangement (you’re paid for each hour of work completed regardless of the amount of effort), then your client (not you) is generally deemed to bear the financial risk for the project. If you’re being paid on a fixed basis (e.g. given a flat rate for the whole project), then you are generally deemed to bear the financial risk if the work is unsuccessful or takes more effort that anticipated in order to successfully arrive at a technically feasible product or process.
Generally, analysis of the specific terms and conditions surrounding the relevant contracting arrangements would be necessary in order to determine which party, if either, maintains sufficient rights in order to claim the underlying expenses as QRE for the R&D tax credit.