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Permanent + Research Credit = Competitive Advantage

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Corporate Tax Advisors breakout session from the 2018 Hot Firm conference.

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Permanent + Research Credit = Competitive Advantage

  1. 1. Permanent + Research Credit = Competitive Advantage Presented by: Dawson Fercho, IRS Enrolled Agent Partner Corporate Tax Advisors
  2. 2. 2 Dawson Fercho, Founder-Partner  IRS Enrolled Agent- Admitted to practice before the Internal Revenue service  20 years of consulting experience Small and Mid- size businesses.  14 Years exclusively focused on the Federal Research Tax Credit & 179D Energy Efficiency Deduction.  Co-Founder of Corporate Tax Advisors, Inc.  Responsible for all areas of client service and overseeing CTA’s marketing and business development.
  3. 3. 3 Agenda  An overview of current rules and legislation governing the R&D tax credit.  A clear understanding of exactly how this tax credit applies to the A/E/C industry.  Important details on recent law changes and the types of activities and expenses that qualify for the tax credit.  Actual examples of how the mechanics of the calculation and statutory exclusions have benefited A/E/C firms.  And more!
  4. 4. 4 Be Aware The Research and Development (R&D) tax credit is one of the most substantial incentives under current U.S. tax law for the A/E industry. Unlike a standard deduction, it is a dollar-for-dollar credit against your tax liability. Design Life Magazine 2015 -Innovation begins with a design - Designers are by nature and profession, innovators - Innovation is seeing what is not working and initiating change I.E. How many designers does it take to change a light bulb? Does it have to be a light bulb?
  5. 5. 5 Top of MIND
  6. 6. 6 What Does this Actually Mean? At10% At20% At30% Pretax margin Pretax margin Pretax margin Cash flow from R&D TaxCredit 50,000 50,000 50,000 Estimated taxrate 40%(federal & state) 40% 40% 40% Revenue required to generate Similar Cash Flow 833,333 416,667 277,778
  7. 7. 7 Section 41: Credit for Increasing Research Related Activities • Permanently Codified January 1, 2016. • Initially established 1981- Reagan Administration. • General Business Credit. • $1 for $1 tax credit- usability to pay down Federal Tax Liabilities, *State Tax Liabilities • Congressional Intent: Reducing the high-cost of U.S. Labor. • 4 Year Look. I.e. 2015-2018. • Open to All Tax payer entities- Sole, S. Corp, C. Corp, PSC, Partnerships etc. • Except non-tax paying entities. I.e. Fully owned ESOP (S. Corps), Non-Profit. • Primarily Direct Labor Expense Drive.
  8. 8. 8 Qualifying Research Expenses- IRC 41  QUALIFYING WAGES  Typically largest component  Calculate & estimate % of employees’ qualifying time  Multiply % by annual wages  CONTRACTOR COSTS  Same pro-rata rules as above  65% of qualifying costs eligible Salaries and Wages Supplies Contract Costs
  9. 9. 9 The “Four Part” Test Part 1: Development of a New or Improved Design Package Six categories:  Products (design packages),  Process,  Software,  Techniques,  Formulas,  Inventions Attempting New/Improve d Business Component
  10. 10. 10 The “Four Part” Test Appropria te and final design Part 2: Elimination of a Technical Uncertainty Endeavori ng to discover Informatio n uncertain at outset
  11. 11. 11 The “Four Part” Test Principals of engineering, physics, chemistry, biology, or computer sciences must be applied Relying on Principles of! Part 3: Technological in Nature
  12. 12. 12 The “Four Part” Test Part 4: Process of Experimentation Evolution of Design, Trial and Error Evaluating one or more alternatives
  13. 13. 13 What is R&D per Congress? The “Quick Test” Question #1 – Did you do anything today that was “neck- up” - I.E. Using your head
  14. 14. 14 What is R&D per Congress? The “Quick Test” Question #2 – Did you attempt the above in an effort to make something better?
  15. 15. 15 Types of Qualifying Activities Design ideas that stretch current engineering expertise;  Use of 3D modeling;  Integrate alternate materials  Improved acoustical qualities;  Alternative water flow/plumbing systems;  Alternative electricity conduction systems;  Improving lighting;  Improved ventilation;  Alternative heating and cooling systems;
  16. 16. 16 Types of Qualifying Activities- Engineering  Alternative structural design;  Waste and toxic waste disposal processes;  Product and material transportation systems;  Integrating environmental impact studies; and  Integration costs related to designing co-dependent features.  Material Strength Testing  USE of CAD/CAM to evaluate various configurations  Reviewing two or more site layouts to identify the best solutions  Performing roadway simulations to determine the effect on traffic patterns
  17. 17. 17 Types of Qualifying Activities: Architecture  Developing unique energy efficient features  Designing master plans  Developing schematic designs  Developing planning and elevation drawings  Designing a functional site plan to incorporate or overcome various environmental concerns  Developing construction documents  Designing and developing building facades
  18. 18. 18 Types of Qualifying Activities: Architecture  LEED certification  Designing building systems  Designing site orientations  Designing building shape and form  Designing or improving HVAC systems  Developing unique lighting details  Brownfield redevelopment  Developing innovative designs for bridges and roadway structures
  19. 19. 19 Types of Qualifying Activities: Architecture  Designing unique water treatment plants to optimize plant capacity or efficiency  Designing innovative sanitary sewer systems for new residential communities  Designing unique water pipeline and ancillary systems  Designing innovative lateral force resistant systems for buildings  Implementing dampening systems for buildings to account for dynamic loads  Designing marinas to meet unique structural and load requirements  Typically designing and developing activities (CAD,CAM)  Typically not surveying or project management activities
  20. 20. 20 Construction and General Contracting  Means and methods construction techniques development  Structure and facility design for constructability  Construction equipment development and improvement  Structural steel detailing  Building Information Modeling  Budgeting and costing  Project Management  Construction management  Construction Implementation  Scheduling Tend to Qualify Tend to NOT Qualify
  21. 21. 21 Regulatory Changes  The requirement to disclose contemporaneous record-keeping (timesheets) was eliminated in December of 2003, along with the Discovery Test.  There is significant case law supporting a taxpayer’s ability to estimate how much time is spent on Research & Development
  22. 22. 22 Funded Research  Fixed Price Contracts  The nature of fixed-price contracts makes them inherently risky to contractors  Pure Time and Materials and Level of Effort  Typically viewed as funded, but there are exceptions  Cost Plus/Time and Materials Contracts  Although not inherently risky, like their Fixed Fee counterpart, the terms comprising Cost Plus and time and Materials Contracts may be balanced amongst the parties to determine which is responsible for incurring the cost, and thus the risk, to complete the final deliverable
  23. 23. 23 1. Free ResearchTax Credit Assessment – Attendees receive a No-Cost Initial Consultation. Includes Research Tax Credit Estimate analysis. • The estimate [24 hours turn-around] is a statistical model giving you, shareholders and accountant a more exacting number as to what your credit benefit could look like. Analysis will help stake-holders understand if further exploration is warranted. • START Assessment HERE http://corporatetaxadvisors.com/digital-form.php 2. AEC Industry White Paper – Included with Assessment: Highlighting with further specificity how AEC firms qualify and benefit from the credit. What To Do Next
  24. 24. 24 Contact Me Dawson L. Fercho Partner/IRS Enrolled Agent 913-461-6179 cell dawsonf@corporatetaxadvisors.com If you have any questions please contact:
  25. 25. 25 Q&A