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The Tax Court weighs risk and the R&D credit in two cases

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If research is considered to be “funded research” within the meaning of Section 41(d)(4)(H), then it is not eligible for the research credit. Research is considered to be funded if payment is not contingent on the success of the research. 

Two recent cases before the Tax Court — Systems Technologies Inc. and Smith, et al. — flesh out the meaning of funded research by turning to local law in their analysis of whether the research was funded or not. 

In both cases, the Tax Court denied the Internal Revenue Service’s motion for summary judgment.

The U.S. Tax Court

The U.S. Tax Court

System Technologies, located in Indiana, engineers and manufactures industrial finishing systems, primarily for use in the automotive industry. The purchase agreements for these systems generally require payments as the projects are underway. Those agreements are also subject to a choice-of-law provision requiring that they be construed under and governed by Indiana law. 

The Tax Court said that Indiana law would require Systems Technologies to refund payments to a customer “if Systems Technologies fails to deliver the product. Accordingly, ultimate payment to Systems Technologies is contingent on the success of the research and is not funded,” the court found. Therefore the motion for partial summary judgment was denied.

In the Smith case, Adrian Smith, Carlisle Gill, and Robert Forest were shareholders of Adrian Smith + Gordon Gill Architecture LLP, a company that provides innovative architectural design services to clients worldwide. AS+GG claimed research credits based on a number of projects for tax years 2008, 2009 and 2010 of roughly $3,000,000, $550,000 and $500,000, respectively. The projects included several buildings that were, at the time of their design, intended to be the tallest in the world. Of the research projects at issue, each contract contained choice-of-law provisions that supported their contention that the funding exclusion did not apply to the research projects. 

To determine whether the research is funded, Reg. Section 1.41-4A(d) provides that amounts payable under any agreement that are contingent on the success of the research are not treated as funded. In such circumstances the party performing the research is entitled to the credit because it bears the risk of failure. The regulations also provide that a taxpayer is entitled to the credit only if it “retains substantial rights in the research.” 

“The taxpayer argued that the contracts were each incorporated under the laws of various foreign countries such as Dubai, Saudi Arabia, and the U.K., so the governing foreign laws in those countries is relevant in the court’s funding analysis,” said Dean Zerbe, national managing director at Alliant and former senior counsel to the Senate Finance Committee. 

“We find [taxpayer’s] arguments to be somewhat compelling with respect to the rights retained under the [Masdar HQ] agreement and [the IRS] does not rebut these arguments in its reply. Accordingly, we do not find summary judgment … to be appropriate to whether AS+GG performed funded research related to the Masdar HQ project,” the Court stated, denying summary judgment regarding one of the projects. 

“Ultmately, the decisions in Smith, et al. and System Technologies, Inc. are a positive result for taxpayers going forward, with the 

Tax Court continuing to give significant weight to the choice of law provisions within contracts,” said Zerbe. “Contractual funding analysis has now been shifted back towards a traditional contract analysis.”

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Accounting

HSA limits will get a modest bump from IRS in 2026

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Inflation-adjusted amounts for health savings accounts are headed up in 2026, according to the Internal Revenue Service, though not at levels seen in recent years.

The agency said for calendar year 2026, the annual limitation on deductions for an individual with self-only coverage under a high deductible health plan will be $4,400, up from $4,300 this year.

Among other increases for 2026:

  • The annual limitation on deductions for an individual with family coverage under a high deductible health plan is $8,750, up from $8,550 in 2023. 
  • A “high deductible health plan” will be a plan with an annual deductible that is not less than $1,700 for self-only coverage (up $50 from 2025) or $3,400 for family coverage (from $3,300 in 2025), and for which annual out-of-pocket expenses (but not premiums) are less than $8,500 for self-only coverage (up $100 from this year) or $17,000 for family coverage (up from this year’s $16,600).
  • The maximum amount that may be made newly available for the plan year for an excepted-benefit health reimbursement arrangement is $2,200, up $2,150 from 2025.

These increases are smaller than those in recent years, which were fueled by high inflation.

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Accounting

Women more likely in upper management at small businesses

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Women working at small businesses have a higher likelihood of making it into upper management than women at larger employers, a new study shows.

The disparity grows the longer women stay with one company. ADP Research found that 20% of women with eight years on the job who were employed at small businesses with fewer than 50 employees reported having upper management positions, compared to 8% of women at larger businesses.

“We see two possible explanations for this finding,” the report said. “First, large employers have many layers of leadership, while smaller ones are flatter. Upper management at a small employer might be defined as just two levels of leadership rather than the eight levels that larger companies average.”

“A second reason could be that the scope of management roles at smaller companies is often broader for economic reasons, in contrast to the deeper but narrower scope of responsibilities of roles at larger companies. Either way, women could gain greater and broader management experience at small companies than large ones.”

ADP

Patrick T. Fallon/Bloomberg

Twenty-eight percent of respondents, both men and women, said they feel strongly connected to their organizations. Similarly, 28% of women in their first year on the job, at any sized business, said the same. But that share rises significantly over time for women at small businesses and remains higher than 40% by their eighth year. At larger employers, women who say they’re strongly connected doesn’t pass 30%.”Some small business owners and managers might be more intentional and assertive in their efforts to build connections with workers,” the report said. “But the relatively large share of connected workers also could be a natural advantage of their smaller size, which might make it easier for employees to communicate, build relationships, collaborate and feel valued.” 

Moreover, 37% of women, at any sized business, in their first year report they’re thriving. The figure remains steady for women who stay at small businesses long term, while the figure declines for women at larger businesses in the first four years and never fully recovers after that. 

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Accounting

AvidXchange to be bought by Corpay, TPG for $2.2 billion

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AP automation solutions provider AvidXchange has agreed to be bought for $2.2 billion by TPG, a global asset management firm, and Corpay, a payment solutions company. TPG will acquire a majority interest while Corpay will acquire a minority interest.

The two companies will acquire AvidXchange for $10 per share in a cash transaction. The purchase price represents a 22% premium over the company’s closing price of $8.20 on May 6, 2025, a 16% premium over the 90-day volume weighted average price as of the same date, and a 45% premium over the $6.89 closing price as of March 12, 2025, the last trading day before media reports of a potential transaction involving the company. 

Upon completion of the transaction, AvidXchange will become a private company. 

“We are pleased to have reached an agreement that delivers significant value for AvidXchange stockholders and positions our business for long-term growth and success for our valued customers,” said AvidXchange CEO Michael Praeger. “Over the last 25 years, AvidXchange has established itself as a leader in AP automation and payment software by building a differentiated platform primed for growth. With TPG and Corpay, we will have the resources and long-term focus to scale our platform and provide more innovative solutions that help our customers across the country transform their accounts payable processes.”

Certain members of the AvidXchange senior management team have agreed to rollover a significant portion of their equity in support of the transaction. The transaction was unanimously approved by the independent members of the board of directors of AvidXchange.

The transaction is subject to customary closing conditions, including receipt of AvidXchange stockholder approval and required regulatory approvals, and is expected to close in the fourth quarter of 2025. There are no financing conditions to the transaction. Financial Technology Partners and Barclays are serving as financial advisors to AvidXchange. Latham & Watkins LLP is serving as the company’s legal advisor. J.P. Morgan Securities LLC, Moelis & Company and RBC Capital Markets acted as financial advisors to TPG, and Davis Polk & Wardwell LLP and Schulte Roth & Zabel LLP acted as legal counsel to TPG. Goldman Sachs acted as financial advisor to Corpay, and Eversheds Sutherland acted as legal counsel to Corpay.

The announcement comes just a little over a month after the company launched new AI agents and enhancements for invoice and payment automation (see previous story). The first is an AI Approval Agent that analyzes patterns from past decisions to help users assess how likely an invoice is to be approved. Drawing on historical data like invoice amounts and supplier details, the agent provides insights to approvers throughout the AP workflow, as well as transparency into how each recommendation was made. The second is an AI PO Matching Agent that automates the process of matching line item details from invoices to purchase orders. Visual indicators provide insight into where the AI agent is assisting, which supports decision making while keeping customers in control. Finally, AvidXchange has expanded the AI capabilities within its Invoice Capture feature, allowing the software to continuously learn the unique patterns of the data across invoices, delivering approval-ready invoices. As the AI technology learns, it will apply those insights to future invoices.

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