Demystifying the R&D Tax Credit

DEMYSTIFYING THE R&D TAX CREDIT

DEMYSTIFYING THE R&D TAX CREDIT

MEET THE AUTHORS:

Mike Woeber, CPA

Dawson L. Fercho, EA

Gary Kucera, CPA

The prevailing perception that the Research & Development (R&D) tax incentive pertains only to projects being developed in a traditional laboratory environment and therefore is not applicable to a wide range of activities is a common misconception in the A/E/C, manufacturing, and pharmaceutical industries. In reality, the R&D tax credit is an incentivized jobs credit created by regulation to keep these vital research and development jobs in the US rather than being sent overseas. The credit, used to classify a research and development activity as a tax asset rather than an expense, is designed to offset the cost of American labor when conducting these crucial R&D activities on American soil.

What constitutes a qualifying R&D activity is rooted in hard science — while it can mean inventing something, it can also be centered on science and development.

Testing processes and products while evaluating results and developing alternatives based upon those findings qualifies as an accepted activity. Science and development generated in the engineering, software, chemical, biological, physics and optics fields are all possible contenders for tax credits.

The R&D tax credit, an incentive for pursuing innovation, is reserved for firms that design, develop, or improve products, processes, and techniques.

QUALIFYING The first step in pursuing the R&D tax credit for your firm is to determine if activities your business engages in qualify by performing an initial analysis of eligibility. The data gathering and analysis process includes: »

Determining how employees are tracking time

»

Evaluating what types of projects are reflected in employees’ time allocations

»

Performing computations of employees’ time on participating tasks

»

Conducting a project sampling to determine what activities are being performed and if they qualify for tax credits

DEMYSTIFYING THE R&D TAX CREDIT

R&D TAX CREDIT PROCESS Step 1: Education Call Step 2: Qualification Assessment Step 3: Project Kickoff Step 4: Field Investigation Step 5: Findings Review/ Form Preparation Step 6: Final Technical Report Delivery The extensive amount of data gathering and the possibility of incorrect or incomplete analysis of any or part of the information has many firms seeking expert advice in gathering and interpreting the resulting data. Corporate Tax Advisors (CTA), a tax advisory firm specializing in the R&D tax credit, recommends that firms consult with a professional experienced in navigating this complex process to save time and ensure that collected data is analyzed correctly and thoroughly and in compliance with federal regulations.

“We’ve developed a specific process that starts with an initial free consultation to educate firms on the process and assess their eligibility,” said Dawson Fercho, Partner with CTA. “A client invests a little time upfront as we review their data and processes, but the tax savings can be significant.”

SHOW ME THE TAX CREDITS Only 20% of A/E/C firms and 40% of manufacturing businesses currently take advantage of the R&D tax credit. The tax credit results in savings on labor costs, generally around 3-3.5% of the total labor cost. For instance, a company with labor costs of $50 million would get a tax credit of up to $1.5 million. Leaving money on the table each year could mean the difference between making substantial reinvestment in your firm regarding purchasing new equipment, investing in technology, or having money available to attract, retain, and incentivize employees.

There are many types of activities that qualify for the federal tax incentive. If your firm designs roads and bridges that involve determining traffic loads, clearances, and distinction in soil types; designs new buildings with sidewalks, walkways, and support systems; or incorporates new technology into a rooftop swimming pool, you may qualify for the credit. Mechanical engineers determining how to deliver HVAC or water throughout a building or design of water and wastewater treatment facilities are also activities that can qualify for the tax credit.

“Many of my peers in A/E/C think the R&D tax credit is too good to be true. In my first year, my tax credit was in the six figures. It allowed me to remodel my entire office, which helped build our culture, boost morale, and become highly competitive and attractive to potential new hires,” said Brian Sielaff, CEO of Tamarack Grove Engineering. These are just some of the design and engineering projects that are covered under the R&D tax credit.

DEMYSTIFYING THE R&D TAX CREDIT

While companies can claim any R&D activities in the year they were incurred, federal regulation allows three years of retroactivity where a company may recoup funds associated with a qualifying activity.

In the manufacturing space, many operators may not realize that the work they do to develop a product can result in a qualifying activity. For instance, a manufacturer of artificial knee components conducts an immense amount of engineering, resolving challenges from the metallurgy and many other issues when developing replacement joints — this work can qualify. Brian Irlbeck, CFO of Parkhill Smith and Cooper, said, “...being a firm with a lot of history and having taken advantage of the federal research credit incentive for close to a decade, we look at the tax credit benefits differently than in the beginning. Understating our people and their roles in the organization and how their activity will be offset

by R&D qualifying activities, we leverage this during the talent acquisition process. Taking advantage of the annual research credit, we understand its use in reducing the realized costs of new talent, using it to become more competitive in attracting talent.”

The biotech/pharmaceutical industry presents opportunities aside from developing a new drug or therapy to treat disease. When serving as an intermediary, a company can qualify by creating a process for patient treatment, investigating a new way to test a cancer drug or even an innovative way to deliver this treatment to a patient.

“Working with CTA, my firstyear tax credits amounted to over six figures,” said Brian Sielaff, CEO of Tamarack Grove Engineering Your CPA Will Thank You Hiring a professional well-versed in the R&D tax credit does not replace your CPA. At CTA, an R&D tax credit expert works with your financial expert to determine whether a firm qualifies for the credit. Acting as an extension of your financial team and as a trusted advisor, much of the time spent upfront with a client is to train employees to enter time correctly in the proper categories. This training takes the burden of computing this complex credit off of your CPA, allowing them to focus on accurately preparing the company’s tax returns. “CTA has a unique model in that we employ actual engineers to gather and interpret a client’s data,” said CTA’s Mike Woeber.

“Efficiencies of the process plus knowing the industry inside and out allows CTA to be highly competitive while providing an accurate assessment of a company’s financial picture and suitability to receive the R&D tax credit.”

DEMYSTIFYING THE R&D TAX CREDIT

The collaborative working relationship between you, your CPA or financial advisor, and an R&D tax credit firm sets up a relationship based upon trust. “I first asked my CPA about the tax credit, and he was unfamiliar with it and whether my firm might qualify. Now, CTA works with my accountant each year, offering guidance that has helped us refine how we gather, track, and categorize data throughout the year. This makes year-end data gathering extremely accurate and fully usable by CTA and my in-house team,” said Sielaff, “Even if you don’t qualify one year, your accounting process is more accurate going forward.”

Getting Your Piece of the R&D Tax Credit

CTA is highly experienced at determining qualifying activities in architectural, engineering, manufacturing and pharmaceutical industries. Working collaboratively with clients, CTA builds long-lasting relationships based on respect, integrity, and commitment to finding the right solution. To set up a complimentary consultation to see if your firm qualifies, please get in touch with Dawson Fercho at 914.461.6179.

Why CTA

Invested in Your Future •

Niche specialization means we focus on what brings you the most value

•

CTA is relational vs transactional – we are with you for the long haul - we understand your business & the impact we have on you achieving your strategic goals

Maximum Credit •

With our streamlined process, we identify eligible expenses and provide all the paperwork you need to submit and support your claim

•

We provide your supporting documentation in a report to back up your claim with the IRS

•

Client manager continuity is key to achieving the highest level of service year over year

•

Report turnaround is 4-6 weeks after completion of the credit form

•

We invest in the right people – our PMs have accounting degrees, and professional engineers on staff who understand the process

•

We monitor tax reform to proactively help you maximize your credits and stay in compliance

Corporate Tax Advisors, Inc. 7501 Memorial Parkway S, Suite 204 Huntsville, AL 35802

At Corporate Tax Advisors, we stand out from the crowd. With our focus on expertise, quality, and relationships we strive to deliver tax credit results you would expect from a large firm, while providing the focused attention you would get from a small one. We provide expert advice, accurate results, and lasting relationships.