Change Country

Industrial Automation Companies, Tax & Assurance Guidance

Research & Development Funding for Control Groups

Posted on January 2, 2019 by

Sarah Russell

Sarah Russell

Tim Finerty

Tim Finerty

Share This

A common misconception about the Research and Developmentt Tax Credit for Increasing Research Activities (hereinafter the R&D Credit) arises when control group members share expenses related to qualified research activities; and when the ultimate user or decision-maker is not the same entity who conducted the research activities.

Controlled Groups

Question: What is a Controlled Group?

Answer: For purposes of the R&D Credit, a control group is established, most commonly, under one of two scenarios.

  • A parent-subsidiary relationship between two entities, where Company A owns at least 80% of Company B.
  • A brother-sister relationship between two entities, where Individual A owns stock possessing at least 80% of the total voting power or at least 80% of total value of shares outstanding.

For purposes of the R&D Credit, there are no additional requirements to meet the definition of a control group. Most importantly, nationality is not a consideration. Any of the members can be foreign corporations.

Funding R&D Expenses

Question: What does it mean when R&D is funded?

Answer: Generally, in determining if expenses are qualified for the R&DCredit, they cannot be funded by any grants, contracts, a government entity, or by another person. Meaning, that in order to claim R&D expenses for the credit, the company must bear the risks of conducting the research.

However, because of the definition for control groups in place for the R&D Credit, reimbursements for R&D expenses are not considered to be funded research when the entities are determined to be in a controlled group. Meaning, that a parent or subsidiary/brother or sister corporation can reimburse any other member of the group for conducting qualified research. Ultimately, the related entities are considered to be a single taxpayer, regardless of nationality, allowing for all intercompany transfers of assets and liabilities, revenues and expenses, to be disregarded.

Example: Foreign Parent with a US Subsidiary

Facts: Company A is a foreign company that owns 85% of Company B, also a foreign company, who then, in turn, owns 100% of Company C, a US subsidiary, and the relationship meets the definition of a controlled group. Company C conducts qualified research activities within the US. Company A funds all research activities on behalf of Company C and ultimately receives the benefit of the research.

Question: Will Company C be able to receive the benefit of the funded research to apply toward the calculation of the R&D Credit?

Answer: Yes. For purposes of the R&D Credit, control group members are considered to be a single entity. Having the research conducted within the United States and having the expenses incurred domestically, Company C would be able to apply the qualified expenses towards the tax credit.

The above scenario is a common ownership structure and one that provides a tax benefit for conducting qualified research within the US.

To recap, because Company A, B and C form a parent-subsidiary control group, they are considered to be a single taxpayer. Because they are a single taxpayer, the reimbursement of the qualified research costs from Company A does not violate the funding rules of the R&D Credit.

This greater flexibility to finance qualified research expenses is a valuable tool for any corporation increasing research within the United States and offers planning opportunities to maximize an entity’s worldwide taxable benefit. To learn more, contact Clayton & McKervey.

Share This

Sarah Russell


As the leader of the firm's tax group, Sarah supports growth-driven domestic and international businesses with tax planning, consulting and compliance.

Tim Finerty


Tim provides tax, accounting and consulting support to help industrial automation companies maximize profitability.

Related Insights

Foreign Direct Investment Survey Year 2022

Another five years have slipped by and that means it is once again time to complete the BE-12, Benchmark Survey of Foreign Direct Investment in the United States. While the official forms have not been released, final rules amending existing regulations became effective October 31, 2022, describing changes to the information collected.

by Sue Tuson

The Sound of Automation: You’re Not for Sale, but….

by Bryan Powrozek

M&A Trends in the Industrial Automation Space

Staying current in the automation sector can be challenging in a highly active economic climate unless your network includes people like Clint Bundy, a Managing Director at Bundy Group—a boutique advisory firm specializing in business sales, capital raises and acquisitions. 

by Bryan Powrozek

The Sound of Automation Podcast

Industrial automation businesses are the driving force behind Industry 4.0, and Clayton & McKervey is here to help.

Skip to content