LifeBack Tax

R&D Credits Are Available, But Do Fashion Designers Qualify?

R&D Tax Credits For LMI?

In a recent tax court case of Max v. Comm’r, T.C. Memo 2021-47, the court ruled that successful fashion designer Leon Max, of the LMI clothing line, was not qualified to claim R&D tax credits. Max was under the impression that his clothing prototypes and financial documents would deem his company eligible for R&D tax deductions. However, the tax court thought differently.

What Even Are R&D Tax Credits?

Photo by Anna Shvets from Pexels

Before we jump into the legal aspects of the LMI court case, we must first understand THE R&D tax credit. Under Internal Revenue Code (IRC) Sec. 41, Congress announced the federal research and development (R&D) tax credit conception in 1981.

The R&D tax credit is meant to alleviate business owners who have incurred substantial expenses while developing or advancing products and resources for the company. In order to claim the R&D credit, business owners must be creating an innovative new process or service that brings major benefits to the world.

Max v. Comm’r. T.C. Memo 2021-47

Now that you have a better understanding of the R&D tax credit, the tax court case of Max v. Comm’r will help you understand the requirements for this tax credit and the implications of falsely applying for it.

According to the defendant, fashion designer Leon Max of LMI, Mr. Max’s company severely increased their research activities during 2011 and 2012. In his defense, Mr. Max went to great lengths to research quality materials for his manufacturing processes and employed specific designers.

Max additionally retained the services of Alliantgroup (a tax consulting firm). Alliantgroup confirmed 32 out of 35 of LMI’s research and development activities qualified for the R&D tax credit.

Unfortunately, the findings of this court case were not in favor of Mr. Max and LMI. After producing financial documentation and escalating the case to trial, the prosecutor (commissioner) employed Frances Harder as an expert witness. Harder came to the following conclusion:

(1 ) LMI had the necessary information and professional team to design and produce garments; (2) LMI used procedures already in wide use in the fashion industry and did not invent any new procedure to improve function; and (3) fashion professionals make decisions based on the design and construction of the garments. She opined that a design team is not trained in science and engineering but in “the art of creating good looking garments that are also functional and meet the required price point for a particular niche market.”

You May Be Eligible For R&D Tax Credits… Just Make Sure

The R&D Tax Credit is an excellent deduction to take advantage of business owners who have heavily invested in the research and development of their products. However, you must ensure that you meet every requirement for this credit, or you could find yourself in hot water like Mr. Leon Max of LMI!

Rajneet Kaur, EA, MBA, Certified Tax Resolution Specialist is the Company Director of LifeBack Tax. LifeBack Tax is a tax resolution firm based in Chatsworth, CA that specializes in determining structured solutions for clients who owe back taxes to the state or IRS. With over 16 years of experience in the industry, Rajneet and her team have been able to resolve state and IRS debts for countless clients across the nation! To get in contact with Rajneet and the LifeBack team, call (855) 605-1500 or send an e-mail to [email protected]

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