Confusion with the Tax Bill Overhaul and the R&D Tax Credit

***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

Guidance for the R&D Tax Credit

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

Documentation Requirements for the R&D Tax Credit

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

Payroll Tax Credit Timeline

If your business is a Qualified Small Business conducting R&D activities, you can use your R&D tax credit to offset your business’s OASDI tax liability. There are two moving parts in this process to remember. First, you must claim credits on your Federal tax return. If you follow a calendar year end, your taxes are due either March 15th or April 15th. If you extend, then you get an additional 6 months. The IRS states that the payroll tax credit can be used the first calendar quarter beginning after the date on which it files its income tax or information return for the tax year. That means, if you file your Federal tax return on March 15th, you can start … Read More

Payroll Tax Credits for businesses using CPEOs

Many small businesses outsource management tasks such as employee benefits, payroll, and worker’s compensation to Professional Employer Organizations (PEOs). Congress, in 2014, passed the Small Business Efficiency Act (SBEA) allowing voluntary certification by the IRS for PEOs. Now, certified PEOs (CPEOs) are enabled to process R&D tax credits as payroll tax credits for eligible clients. Recall that only qualified small businesses (QSBs) can elect to use their R&D tax credits to offset payroll taxes. A QSB is defined as a corporation, partnership, LLC, or individual with less than $5 million in gross receipts in the current tax year and each of the preceding 4 years and zero gross receipts for year preceding the 5-year period. If you are a QSB … Read More

Internal Use Software Exclusion

The computer software exclusion (not to be confused with the computer software business component) is specific to internal use software (IUS). The intent of this exclusion is to exclude activities related to IUS such as installing or implementing SAP, Oracle, or Windows. Officially, the IRS considers IUS to be software tailored for general and administrative functions including: human resources, finances, and support services. However, as technology advances, many activities related to internal use software appear to qualify as R&D. For instance, a client uses Microsoft SharePoint for their company Intranet. SharePoint is highly customizable and can be tailored to a company’s needs. Thus, the company appoints someone in their IT department to assist in customizing certain functions within SharePoint. Does … Read More

Exclusions to the R&D tax credit

Now that we have a framework for how to qualify projects as R&D, we should take some time to understand what does not qualify. The Internal Revenue Service specifically excludes eight activities from qualifying as R&D. These are: Think of your project on a timeline. Once the project reaches commercial production, and uncertainty is resolved, R&D is effectively complete. Any expense incurred afterwards will not count toward your R&D tax credit. For a manufacturer of widgets, the expenses that go into the design, modeling, and prototyping of the widget qualify. As do pilot and trial manufacturing runs. However, once the widget is ready for mass production, R&D stops. If quality decreases during production, the efforts in quality control to resolve … Read More

Using the Four-Part Test to Qualify R&D

Many tax advisors use a framework call the Four-Part Test to identify and qualify projects undertaken by your company in a given tax year. As long as your project passes all four parts, the project is considered R&D and is worth digging deeper into the activities that make up the project. Note that the project does not have to be a success nor does it have to be completed by year end in order to qualify. In the previous blog, we touched briefly described the Four-Part Test. To recap, the qualified research activity must (1) be towards the development of a new or improved business component, (2) eliminate uncertainty, (3) undergo a process of experimentation, and (4) be technical in … Read More

How the IRS defines and treats small businesses conducting R&D

The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) was signed into law by Barack Obama on December 18th, 2015. This event marked a huge win for small businesses that perform R&D activities. Not only did the PATH Act make the R&D tax credit permanent, it also enhanced how small businesses can utilize their tax credits. There are two types of small businesses as defined by the IRS: Qualified Small Businesses and Eligible Small Businesses. A qualified small business (QSB) is an S or C corporation or partnership with (1) gross receipts* of less than $5 million for the taxable year and (2) did not have gross receipts in any tax year preceding the five-tax-year period that … Read More

What is the R&D Tax Credit?

The R&D tax credit is a general business tax credit under Internal Revenue Code (IRC) §41 for companies that incur research and development (R&D) costs in the United States. R&D clearly stands for research and development. However, the IRS’s definition of R&D may differ from what is usually considered R&D. According to IRC §41 (d), R&D has to pass a Four-Part Test. The qualified research activity must (1) be towards the development of a new or improved business component, (2) eliminate uncertainty, (3) undergo a process of experimentation, and (4) be technical in nature. We will dive deeper into the Four-Part Test in another blog. Ultimately, given the IRS’ broader definition of R&D, companies from a variety of industries qualify … Read More