In our previous blog, we went over the different types of qualified research expenses that go into the R&D tax credit calculation. While these are just a few of the inputs that go into a complicated formula, how much can you expect to get in R&D tax credits? A reasonable back of the envelop estimate is anywhere between 6% to 11% of the sum of your qualified research expenses (primarily driven by wages, supplies, and contractors). There are two methods of calculating the R&D tax credit: the Regular Credit calculation and the Alternative Simplified Credit calculation. Each method has a different formula, but they both use qualified research expenses as an input. The formula that is ultimately used depends on … Read More
Since R&D “spend” drives the R&D tax credit, we are often asked, “What actually qualifies as an R&D expense?” The taxable wages of employees who conduct R&D, directory supervise or support qualified activities are inputs into the R&D tax credit calculation. Typically, some percentage of the employees W-2 box 1 wage is considered based on the time spent conducting, supervising, or supporting R&D. Often times, but not always, wages will drive the majority of a client’s R&D tax credit. The costs of supplies used in qualified activities are also inputs into the R&D tax credit calculation. These supply costs exclude depreciable capital assets (such as expensive equipment), land, and improvement to land. General administrative supplies are also excluded. Examples of … Read More
We at Tax Credit Hero want to take a moment to wish individuals, businesses small and large, and CPAs a Happy Tax Day! You can expect more useful blogs in the coming months now that the spring tax season has wrapped up. Please let us know if you have a specific question or topic regarding R&D tax credits you’d like us to cover!
With the spring tax season wrapping up soon, we wanted to answer some common questions specific to the payroll tax credit (using R&D tax credits to offset payroll taxes). The payroll tax credit is available to companies that meet both of these criteria: 1. Have less than $5 million in gross receipts in the tax year claiming the credit. 2. Have gross receipts for five years or less. Yes. $250,000 per year up to five years. The payroll tax credit can offset the OASDI (Social Security) portion taxes for all employees (not just your R&D employees). You can start applying your R&D tax credit against payroll taxes the first quarter after claiming your R&D tax credit on your Federal tax … Read More
Now that we are in tax season, you may be thinking about your personal taxes and taking a deduction from all the old junk from your garage you donated last year. How do you determine the value to deduct? One solution is to dig out old receipts, perhaps depreciate certain items, and sum it all up. Obviously that is too cumbersome a task for most people. A realistic solution is to just estimate the value. We often hear concerns from our clients regarding estimating R&D expenses for the R&D tax credit. Similar to the example earlier, you can also estimate the expenses that go into your R&D tax credit calculation. Let’s take a real life example from a Tax Credit … Read More
The Tax Cuts and Jobs Act was signed into law by President Trump on December 22nd, 2017. This sweeping tax overhaul will affect almost every individual and business. CCH Group did a fantastic job summarizing the over 500-page tax bill here. This is a must read for all individuals and business owners to understand how you will be affected. In short, it doesn’t. However, it is important to note the repeal of the corporate alternative minimum tax or AMT in the new tax bill which will affect how companies can use their R&D tax credit. Prior to the passage of the Tax Cuts and Jobs Act, corporations calculated their tax burden using two methodologies: the regular tax method and the … Read More
We at Tax Credit Hero are wishing you, your family, and business a prosperous 2018! Below are important tax year 2017 deadlines.
***Update*** As it turns out, the passage of the GOP’s tax bill, which President Trump signed into law on December 22, 2017, does, in fact, remove the corporate alternative minimum tax. This is a huge benefit for businesses claiming the R&D tax credit as they are no longer limited in using their tax credit due to AMT. We should begin seeing the implications in 2019. ======== Early Saturday (12/2/2017) morning, the Senate passed the new tax plan adjusting the corporate tax rate from 35% to 20%. There were many additional provisions in this bill, but one that stood out, interestingly, was that the Senate preserved the corporate alternative minimum tax (AMT) (instead of repealing it as proposed in the bills … Read More
There are three levels of authority R&D tax credit providers use for identifying, claiming, and substantiating your R&D tax credits. Internal Revenue Code Federal tax law begins with the Internal Revenue Code (IRC). The IRC refers to Title 26 of the U.S. Code, commonly known as the IRS tax code. While the IRC is organized into multiple sections, Sections 41 and 174 provide the official guidance for identifying, claiming and substantiating the R&D tax credit. U.S. Treasury Regulations The U.S. Treasury Regulations provide the official interpretation of the IRC by the U.S. Department of the Treasury. In fact, the organization of the Treasury Regulations and the IRC are similar. For example, Section 41(b) of the IRC is 1.41-2 in the … Read More
In Treasury Decision 9104, the IRS surprisingly decided not to define or require specific documentation to substantiate an R&D tax credit claim. Instead, you’ll often see the IRS refer to § 6001 of the Internal Revenue Code which states that a taxpayer claiming a tax credit shall retain records in a sufficient manner. Needless to say, while documentation is important, guidance regarding documentation is lacking. Tax advisors start by looking at your accounting and financial systems to gather documents such as previous tax returns, payroll records and general ledgers. However, this information alone is not enough to calculate the R&D tax credit. Your tax advisor then begins to delve deeper into your projects while applying the four-part test understand if … Read More