Archive for Deborah Roth

Is Your Research & Development (R&D) Provider The Right Fit For You?

Is Your Research & Development (R&D) Provider The Right Fit For You?

The Research & Development (R&D) tax credit enables companies of all sizes across various industries to reduce their federal income tax for qualified research expenses. Claiming this credit can potentially result in significant cost savings and an increase in cash flow, making it highly beneficial for startup and existing companies.

Working with an R&D tax credit provider well versed in its nuances is crucial to companies wishing to claim this credit. When seeking credible providers to assist in claiming the credit, keep these questions in mind:

Does Your Provider Assess Their Fee Based on Project Scope or a Percentage of Variable Benefit?

When seeking R&D providers, it is important to understand how their pricing is structured. Most providers expect either a fixed or contingency fee—knowing the difference between the two will assist in selecting the provider that will best suit your budgetary needs.

Fixed Fees: This pricing structure is a predetermined charge that the party receiving the service agrees to pay to the party performing the service, regardless of the time or resources expended. Fixed fees are often scoped out by the provider and provide a clear picture of the costs associated with the service. Fixed fee arrangements simplify budgeting for the agreed-upon work.

Contingency Fees: In this pricing structure, a client is charged a percentage of the outcome of the R&D services performed. Contingent percentages generally range between 25% to 40% of the recovered amount. This structure offers less predictability when it comes to budgeting, as there is no guarantee of the amount that may be recovered after the work has been performed.

The main distinctions between these pricing structures lie in how the payments are organized and the various levels of risk they pose to clients engaging in services. Inquiring about a provider’s payment expectations is crucial in selecting the best provider to align with your company’s budget.

Does Your Firm Defend Its Work During an Audit, and Is It Included in Its Fee?

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Written by | Posted in Research And Development Tax Credit

Section 174 Explained

Section 174 Explained
What is Section 174?

Section 174 of the Internal Revenue Code now defines the treatment of Specified Research or Experimental (SRE) expenditures. Section 174 was amended by the Tax Cuts and Jobs Act of 2017 to require amortization of SRE expenditures paid or incurred for tax years beginning after December 31st, 2021. Section 174 now requires taxpayers to amortize SRE expenditures over five years for domestic research or over fifteen years for foreign research. Both direct and indirect SRE expenditures must be amortized under Section 174.

What is Amortization?

Under Section 174, amortization refers to spreading SRE expenditures over specific periods instead of deducting the entire amount of the expenditures in the year they were incurred. Amortizing the expenditures over several years will cause an immediate increase in a company’s short-term income tax liability. This short-term tax liability increase is something that companies are looking to mitigate.

Is There a Difference Between Section 174 and Section 41 (R&D Tax Credit)?

YES! Section 174 and 41 are NOT the same thing.

Section 174 includes a company’s direct SRE expenditures, which can include payroll, supplies, and patent costs. Section 174 also encompasses a company’s indirect SRE expenditures, such rent, utilities, overhead, and other items in a cause-and-effect relationship with the direct SRE expenditures.

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How To Receive Your R&D Payroll Tax Credit

How To Receive Your R&D Payroll Tax Credit

The Research and Development payroll tax credit, also known as the R&D payroll tax credit is a tax incentive designed for qualified businesses to offset their payroll tax. It is designed for new companies that perform research and technology development activities to be able to apply up to $500,000 of research credit against payroll tax liability. These R&D credits can be carried forward for up to 20 years.

Which Businesses Qualify for the R&D Payroll Tax Credit?

In order to qualify for the tax credit, a business must meet each of the following criteria:

  • Have 5 years or less in revenue
  • Have less than $5 million in revenue in the current year
  • Have conducted qualifying research activities and expenditures
Documentation Needed to Claim the R&D Payroll Tax Credit

Documentation is extremely important to defending any R&D tax credit claims. This includes having a permitted purpose, technological uncertainty, the process of experimentation, and being technological in nature.

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Written by | Posted in R&D Payroll Tax Credit

Offsetting Section 174 R&E Software Development Tax Liability With R&D Tax Credits

Offsetting Section 174 R&E Software Development Tax Liability With R&D Tax Credits
Section 174 Changes Impact R&D Tax Credits for Software

The new changes to Section 174 have a significant impact on software development costs. For tax year 2022, any cost that has been paid or incurred related to software development is now considered a Section 174 R&E expenditure. This means it must be capitalized and amortized over 5 years (15 years for foreign software development).

Many favorable provisions are made temporary due to the budgeting constraints of Congress, making yearly extensions normal and expected. It is important to note that the research expenses being addressed by this provision in the TCJA are not just the same as those provided for in the R&D tax credit rules. These general research costs are much broader.

If the current unfavorable tax treatment of research expenses does not get fixed, companies could see larger tax bills and therefore need the benefits of R&D tax credits even more.

Which Software Development Costs fall under the new Section 174 R&E Amortization rules?

While guidance related to what costs constitute Section 174 Expenditures is still vague, potential expenditures can include:

  • Salaries and wages including employer costs
  • Software licensing
  • Equipment rental costs
  • Occupancy costs, including office rent and research facilities costs
  • Travel expenditures that have been incurred for R&E purposes
  • Heat, light, telephone bills, and similar overhead utility costs
  • Depreciation
  • Dues and publication expenses that have been incurred for R&E purposes
  • Attorney fees or filing fees related to patents

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Written by | Posted in R&D Tax Credits • Section 174

R&D Payroll Tax Credit

R&D Payroll Tax Credit

The Research and Development payroll tax credit, also known as the R&D payroll tax credit is a tax incentive designed for qualified businesses to offset their payroll tax. It is designed for new companies that perform research and technology development activities to be able to apply up to $250,000 of research credit against payroll tax liability. These R&D credits can be carried forward for up to 20 years.

Which Businesses Qualify For The R&D Payroll Tax Credit?

In order to qualify for the tax credit, a business must meet each of the following criteria:

  • Have 5 years or less in revenue
  • Have less than $5 million in revenue in the current year
  • Have conducted qualifying research activities and expenditures
Documentation Needed To Claim The R&D Payroll Tax Credit

Documentation is extremely important to defending any R&D tax credit claims. This includes having a permitted purpose, technological uncertainty, the process of experimentation, and being technological in nature.

Permitted Purpose:

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Written by | Posted in Payroll Tax

Upcoming Changes To Form 6765: What Taxpayers Need To Know For 2024 And Beyond

Upcoming Changes To Form 6765: What Taxpayers Need To Know For 2024 And Beyond

The Internal Revenue Service (IRS) is proposing revisions to Form 6765 which pertains to the Research and Development (R&D) tax credits. These changes, set to be effective for tax year 2024 onwards, aim to capture more qualitative information, thereby potentially impacting how taxpayers approach their filings.

Let’s delve into the specifics of these proposed changes.

New Additions
PRE-SECTION A ADDITIONS
  • The form will introduce two preliminary questions prior to Section A. Of these, one is entirely new and aims to gather details about whether the organization belongs to a controlled group or is under common control.
INTRODUCTION OF SECTION E
  • It will inquire about the number of Business Components (BCs).
  • The section will gather information on officer compensation.
  • It seeks to understand acquisitions and dispositions.
  • It will inquire if there are any new categories of Qualified Research Expenditures (QREs). If the answer is affirmative, the IRS expects taxpayers to update the base to incorporate these categories.
  • It will ask about the use of ASC 730 Directive – but this can only be utilized by taxpayers whose assets are equal to or surpass the $10M mark.
INTRODUCTION OF SECTION F

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Written by | Posted in Form 6765

Offsetting Section 174 R&E Software Development Tax Liability With R&D Tax Credits

Offsetting Section 174 R&E Software Development Tax Liability With R&D Tax Credits

The new changes to Section 174 have a significant impact on software development costs. For tax year 2022, any cost that has been paid or incurred related to software development is now considered a Section 174 R&E expenditure. This means it must be capitalized and amortized over 5 years (15 years for foreign software development).

Many favorable provisions are made temporary due to the budgeting constraints of Congress, making yearly extensions normal and expected. It is important to note that the research expenses being addressed by this provision in the TCJA are not just the same as those provided for in the R&D tax credit rules. These general research costs are much broader.

If the current unfavorable tax treatment of research expenses does not get fixed, companies could see larger tax bills and therefore need the benefits of R&D tax credits even more.

Which Software Development Costs fall under the new Section 174 R&E Amortization rules?

While guidance related to what costs constitute Section 174 Expenditures is still vague, potential expenditures can include:

  • Salaries and wages including employer costs
  • Software licensing
  • Equipment rental costs
  • Occupancy costs, including office rent and research facilities costs
  • Travel expenditures that have been incurred for R&E purposes
  • Heat, light, telephone bills, and similar overhead utility costs
  • Depreciation
  • Dues and publication expenses that have been incurred for R&E purposes
  • Attorney fees or filing fees related to patents Read More
Written by | Posted in R&D Tax Credits

What Does The IRS Extending The R&D Tax Credit Claims Transition Period Mean?

What Does The IRS Extending The R&D Tax Credit Claims Transition Period Mean?

The IRS extended the transition period for taxpayers to perfect their refund claims for R&D Tax Credits through January 10, 2024. Taxpayers are now provided 45 days to perfect a research credit claim for a refund prior to the IRS’s final determination on the claim, according to the IRS.

The transition period was initially listed at 30 days and was set to expire on January 10, 2023.

An R&D tax credit provides businesses with a tax benefit for conducting qualified research activities. When submitting an R&D claim for refund, it’s essential to provide specific details and supporting information.

Information Required for Submitting an R&D Tax Credit Claim
According to the IRS, to claim a Section 41 R&D tax credit refund, taxpayers are required to provide the following information:

Identify all business components to which the R&D credit relates to for that tax year
Identify all qualified research activities performed, name the individuals who performed each activity, and list the information each individual aimed to discover
Provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year
Taxpayers can submit their R&D tax credit claim by attaching IRS Form 6765 Credit for Increasing Research Activities to their amended return and a statement with the above information. The above information may sound like a lot, but with the proper assistance, it is very manageable.

Benefits of Claiming the R&D Tax Credit
Claiming the R&D tax credit provides numerous benefits, including:
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Written by | Posted in R&D Tax Credit Transition Period

Common Misconceptions About R&D Tax Credits

Common Misconceptions About R&D Tax Credits

The Research & Development (R&D) tax credit can enable businesses to increase cash flow and savings, reduce the Federal income tax rate, and receive Federal and State dollar-for-dollar income tax reductions. Specifically, a wide variety of businesses can potentially offset up to $500,000 in payroll tax liability for qualifying activities.

However, there are many misconceptions about the R&D tax credit that prevent businesses from taking advantage of it.
Here are the 6 most common myths:

Myth 1: The R&D Tax Credit is Only For Businesses with a Large Amount of Revenue

Many people falsely believe the R&D tax credit is only for businesses with a large amount of revenue. However, businesses with a revenue of less than $5 million in the current year are able to claim the credit.

Myth 2: Start-Ups Can’t Claim the R&D Tax Credit

Start-ups and small businesses can claim the R&D tax credit. If your business has 5 years or less in revenue, you are eligible for the credit (as long as you meet the additional qualifying criteria, which include having $5 million or less in revenue in the current year and conducting qualifying research activities).

Myth 3: The Business Must Conduct Scientific Research to Claim the Tax Credit

A business does not have to conduct scientific research in order to claim the R&D tax credit. There are a large number of activities that qualify, including (but not limited to) automating or improving internal manufacturing processes, designing tools or fixtures, integrating new equipment, developing financial pricing models, developing data centers, integrating APIs and similar technologies, and many more.

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Written by | Posted in R&D Tax Credits • TaxConnections

Make Your R&D Tax Credit Defensible

How to Make Your R&D Tax Credit Defensible

Claiming the R&D tax credit can potentially help your business offset increased cash flow. However, simply completing IRS Form 6765, Credit For Increasing Research Activities, doesn’t guarantee the IRS will approve your claim. 

Learn a few key things you can do to ensure your R&D tax credit is defensible in the case of an IRS or state audit.

1. Understand Which Activities are Considered Qualified Research Activities

One of the most important things you can do to make your R&D tax credit defensible is understand what qualifies as research activities. Qualified research activities are specific efforts to develop new products, fabrication processes, or software, or improve existing ones. This can include activities such as developing firmware and risk management systems, designing tools and fixtures, automating manufacturing processes, and much more.

To determine if your research activities are eligible under the R&D tax credit claim, you’ll need to ensure each passes the Four-Part Test as outlined in IRC §41(d). Any company that wants to claim the R&D tax credit must satisfy each of the criteria of the Four-Part Test, including the Business Component Test, Technological Uncertainty Test, Process-of-Experimentation Test, and Technological-in-Nature Test. Learn more about the Four-Part Test here.

2. Make Sure You Meet the Additional Qualifications

In order for a taxpayer to claim the R&D tax credit, there are a few minimum qualifications that must be met in addition to the above-mentioned qualified research activities. These additional requirements include having 5 years or less in revenue and having less than $5 million in revenue in the current year. It’s important to note that qualifications can vary by state, so you’ll need to understand these specific qualifying factors within your state when claiming the tax credit.

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Written by | Posted in R&D Tax Credit Study • R&D Tax Credits • TaxConnections