What Is The Benefit Of The R&D Tax Credit?

What Is The Benefit Of The R&D Tax Credit?
What is the Research And Development Tax Credit?

The R&D tax credit, also known as the Research and Development tax credit, was created as a way to incentivize U.S. based research and development activity. The Protecting Americans from Tax Hikes (PATH) Act in 2015 made this a permanent tax credit and extended the benefits to startup companies. The credit enables businesses of all sizes to reduce their federal income tax for qualified research expenses. These expenses must be for qualified research activities.

What Is The Benefit Of R&D Tax Credit?

Claiming the R&D tax credit can potentially result in significant cost savings. The benefits include:

  • Increasing Cash Flow
  • Federal and State Dollar-for-Dollar Income Tax Reduction
  • Claim Credits for Open Tax Years Going Back 3-4 Years
  • Reducing Your Tax Rate

    How To Claim The R&D Tax Credit

    A taxpayer can claim an R&D tax credit, on their timely filed tax return including extensions for a given year and a taxpayer can amend prior returns to claim the credit. For amended tax returns, this can typically be claimed for the previous 3 years.

    The credit is claimed by filing IRS Form 6765, Credit for Increasing Research Activities (for the year in which the qualified expenses were paid or incurred).
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Indiana Economic Nexus Threshold Amended

Indiana Economic Nexus Threshold Amended

On March 13, 2024, Indiana Governor, Eric Holcomb, signed an emergency law amending Sales and Use Tax provisions in the state. The most notable of these provisions was to amend the economic threshold for sales tax nexus by removing the number of annual sales transactions in the state as one of the two triggers that require retail merchants to collect and remit state sales tax.

Background Of Economic Nexus

In a past blog, we discuss the origins of economic nexus and where we were in 2023 – 5 years after the Wayfair case was decided:

https://milesconsultinggroup.com/blog/2023/06/13/on-the-5th-anniversary-of-the-wayfair-decision-the-impact-of-economic-nexus-on-small-and-mid-sized-businesses/

Have questions about economic nexus in Indiana or another state? Click here to schedule a free consultation:

In most states, the threshold began as either a sales limit or a transaction limit. For example, when South Dakota’s economic nexus law was enacted, it established a threshold of 200 transactions or $100,000, which many states later modeled  as they passed their own economic nexus legislations.

Indiana’s original economic nexus law came into effect on October 1, 2018, and before this law change, the threshold was the lesser of $100K of sales OR 200 transactions.

Transaction Threshold Often An Unnecessary Burden

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Avoiding Costly Mistakes: Four Essential Tax Concepts For The Non-Tax Business Attorney Or CPA (Webinar May 16th 2024)

Avoiding Costly Mistakes: Four Essential Tax Concepts For The Non-Tax Business Attorney Or CPA
Even smaller transactions might have big traps and significant tax implications – leading to unexpected tax liabilities for your clients and potential malpractice claims for you.
This webinar covers four essential flow-through tax concepts you need to know to avoid common ‘foot-faults’ or worse and to continue to be the “go to person” for your clients.During this one-hour webinar, the Tax Forum team of Chuck Levun, Michael Cohen and Scott Miller will provide a top-level look at …

  • Converting an existing S corporation to an LLC on a tax-free basis to obtain “charging order” protection
  • Simple business structuring to circumvent the $10k deduction limitation for the portion of state and local income taxes attributable to business income
  • How not to cause your client to be one of the estimated 500k+ LLCs that incorrectly thought it was going to be taxed as an S corporation but, because of certain language contained in its operating agreement, is not an S corporation
  • Personal goodwill and the C corporation business sale – identifying situations in which double tax can be avoided

Any one of these could make the difference between you being a hero or creating a significant problem for your clients.

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How Inflation Drives LIFO

How Inflation Drives LIFO

Understanding LIFO as an effective mitigation strategy for inflation is an economic challenge that significantly impacts a wide range of businesses, from manufacturers and distributors to retailers. Amidst the challenge of rising costs for raw materials and finished goods, the Last-In-First-Out (LIFO) inventory method emerges as a potent strategy to navigate this tricky economic landscape.

How LIFO Contributes To Tax Savings

At its core, LIFO operates by matching the costs of goods sold with the most recent, and typically higher, costs, while the oldest costs remain tied to unsold inventory. This process results in a higher cost of goods sold, which in turn translates into lower taxable income, thereby reducing tax liability. This mechanism helps businesses effectively combat the adverse effects of inflation.

The Criteria For Adopting LIFO

Adoption of the LIFO method isn’t universal. It’s particularly beneficial for businesses experiencing inflation and maintaining an inventory valued at over $2M. The potential for significant tax savings, achieved annually, transforms LIFO into a sustainable method to manage the potential repercussions of inflation.

The Power Of Reinvestment With LIFO

The use of the LIFO method not only provides tax relief but also frees up valuable cash flow for businesses. By lowering tax liabilities, these extra funds can be funneled back into the business, leading to reinvestment opportunities. These might include investing in technological upgrades, expanding the workforce, or scaling operations, thereby further enhancing business growth.

Adopting LIFO

The decision to adopt LIFO requires careful and strategic consideration of the client’s inventory flow and overall financial position. It’s not a one-size-fits-all solution. However, if a client qualifies, LIFO can emerge as a powerful tool to help combat the negative effects of inflation, strengthening their financial resilience.

LIFO represents an effective strategy that can help businesses counteract the impact of inflation, lower tax liabilities, and create opportunities for reinvestment. At Source Advisors, we stand ready to provide expert guidance on navigating this complex yet highly beneficial financial planning tool.

Have a question about LIFO? Contact Us Today

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Crapo On President’s Budget: “Higher Taxes For The Majority To Support Government Subsidies For The Few”

Crapo Blasts President’s Budget: “Higher Taxes For The Majority To Support Government Subsidies For The Few”
At hearing with Treasury Secretary Yellen, Crapo highlights contrast between pro-growth tax policy and proposals that would stifle economic growth

Washington, D.C.–At a U.S. Senate Finance Committee hearing on President Biden’s Fiscal Year 2025 budget, Ranking Member Mike Crapo (R-Idaho) highlighted the nearly $5 trillion in new and increased taxes included in the President’s budget proposal—tax proposals that would slow the economy and be felt by virtually all Americans.  Ranking Member Crapo highlighted the contrast between the President’s tax proposals versus Republicans’ Tax Cuts and Jobs Act (TCJA), which led to one of the strongest economies in generations.  Senator Crapo secured commitments from U.S. Department of the Treasury Secretary Janet Yellen to support extending Republicans’ pro-growth tax proposals.

Click HERE to watch Senator Crapo’s opening statement.

Click HERE to watch Senator Crapo Question Secretary Yellen.

On whether the President would support extending the individual tax provisions in the Tax Cuts and Jobs Acts:

Crapo: According to the White House, under President Biden’s 2025 budget “no one earning less than $400,000 per year will pay a penny in new taxes.” . . . I agree it is a bad idea to raise taxes on Americans suffering from record inflation at this point.  Interestingly, the President’s budget is essentially silent on extending the individual tax provisions of the Tax Cuts and Jobs Act, many of which expire next year.  A simple yes or no question: Are you aware that the Tax Cuts and Jobs Act, which Republicans passed in 2017, reduced taxes for Americans of all income groups, including those earning less than $400,000 per year?

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The Importance Of Maintaining Business License Compliance

The Importance Of Maintaining Business License Compliance

As a business owner, it is essential to remain compliant with state and local laws to ensure smooth operations. One of the most important requirements is obtaining your business license and permits and then registering for sales and use tax in each state, locale, or jurisdiction where you have met nexus. Many business owners tend to forget, however, that reviewing and updating these credentials regularly is just as important as obtaining them.

Conducting an annual business license and registration review will ensure compliance with the laws of each state where you conduct business. It can help you avoid costly penalties and fines and will identify areas where your business may be at risk of non-compliance.

An annual review will help you identify any changes or updates that should be made to your license(s) and permits(s) and will ensure that you are aware of any new requirements that may have been added since your last review. This is particularly important if you have expanded your business operations to include new products or services, as you may need to obtain additional licenses or permits to ensure that you are operating within the law.

At Thompson Tax, we understand that maintaining these requirements can be overwhelming, and we are here to help. Contact us today to learn more.

Have a question? Contact Dan Thompson, Thompson Tax Team.

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Taxes And The Olympics

Taxes And The Olympics

On March 1, the Commission on the State of U.S. Olympics & Paralympics issued a report: Passing the Torch – Modernizing Olympic, Paralympic, & Grassroots Sports in America. Per the announcement, this commission was directed by Congress to study recent reforms of the U.S. Olympic and Paralympic Committee to improve the organization’s “ability to fulfill its mission.”

The word “tax” appears 39 times in the report. Tax law changes suggested:

Page 17 – allow taxpayers to deduct the costs for their children to participate in youth sports.

Page 18 – allow taxpayers serving as volunteer coaches for youth sports to deduct out-of-pocket expenses.

Page 18 – to help support youth and grassroots sports, consider new revenue sources such as from an excise tax on legal sports betting and a voluntary checkbox on income tax forms for donations

The report notes the 2016 tax law change to add an exclusion from income for the value of the metal in gold and silver prize medals and bonuses winners receive (unless the taxpayer has AGI determined with the value of Olympic winnings above $1 million – IRC §74(d))

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California Wants To Reveal Taxpayers Income To Utility Company To Raise Their Tax Rates

California Wants To Reveal Your Income To Your Utility Company To Raise Your Rates
California wants to impose a new “charge” on your utility bill that you have to pay regardless of whether you use any energy that month and the rate will now be based on your income. Reform California opposes the charge and calls it an illegal tax and a violation of privacy. If you make over $180,000 annually you must pay an additional utility fee of $128 per month or $1536 per year more on your utility fees. While those making under $28,000 annually will pay an extra utility fee of $24 per month or $288 annually.

Californians are still suffering under some of the highest utility rates in the country, and many can barely afford to pay their bills.

Now California Democrat politicians want to impose a new “flat fee” on all utility bills based on each household’s income for the year. That means many residents will pay a charge of $128 per month – while low income and other “favored” groups pay just $24 for the SAME SERVICE.

Opponents say California Democrats are just playing class warfare and the “fee” is really an illegal tax on most Californians to subsidize the bills of lower-income residents.

The fixed rates are required under Assembly Bill 205 (AB 205), which was signed by Governor Gavin Newsom (D) in 2022. The bill states that “the commission may authorize fixed charges [for utilities] … The fixed charge shall be established on an income-graduated basis.”

The specific rates in this “flat fee” scheme is now being voted on by the California Public Utilities Commission (CPUC). The proposal would charge customers of Southern California Edison, Pacific Gas & Electric, and San Diego Gas & Electric fixed rates based on income. For San Diego Gas & Electric customers, the rates would be as follows:

  • Income of under $28,000: $24/month
  • Income of $28,000-69,000: $34/month
  • Income of $69,000-180,000: $73/month
  • Income of over $180,000: $128/month

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Preparing For A Sales And Use Tax Audit: A Comprehensive Guide To Protecting Your Business

Preparing For A Sales And Use Tax Audit: A Comprehensive Guide To Protecting Your Business

Navigating a Sales Tax Audit: A Comprehensive Guide to Protecting Your Business

If you’re reading this, you’ve probably received a letter of audit from a government entity. You’ve also likely now gotten over your initial anxiety and are looking for help with the next steps. You’re in the right place – we’re here to tell you that there’s no need to panic.

So, what exactly is a sales tax audit? And what can you expect?

Definition Of A Sales Tax Audit

A sales tax audit is a rigorous examination conducted by state taxing authorities to review a business’s sales tax returns, financial records, and transactions. The primary objective is to ensure compliance with applicable tax laws and regulations regarding the collection, reporting, and remittance of sales tax.

We know, sounds scary. But we can help you navigate the process successfully. In this guide, we’ll unpack various aspects of sales tax audits, including triggers for audits, documentation requirements, strategies for responding to audit findings, the role of tax professionals, and the possible consequences of an unsuccessful audit.

Here’s what you can discover:

  1. Understanding Sales Tax Audits
  • Triggers for a Sales Tax Audit
  • Types of Sales Tax Audits
  • Common Misconceptions about Sales Tax Audits

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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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Canada’s Underused Housing Tax Treats Non-residents Of Canada Differently

Canada's Underused Housing Tax Treats Non-residents Of Canada Differently

Purpose and summary of this post:

Because Canada’s Underused Housing Tax treats nonresidents of Canada differently, based on their citizenship, the tax may violate the non-discrimination Article in many of Canada’s tax treaties (including the Canada U.S. tax treaty). Nonresidents of Canada are treated differently depending on whether or not they are Canadian citizens. For example a Canadian citizen who is a nonresident of Canada is “excluded” from the tax. But, a U.S. citizen who is a nonresident of Canada is “affected” by the tax. This appears to violate paragraph 1 of Article XXV of the Canada U.S. tax treaty (and other Canadian tax treaties).

Paragraph 1 of Article XXV of the Canada U.S. tax treaty:

  1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith that is more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, particularly with respect to taxation on worldwide income, are or may be subjected. This provision shall also apply to individuals who are not residents of one or both of the Contracting States.

The question is what is meant by “in the same circumstances”. Relevant commentary from the OECD and from U.S. Treasury underscores that the words “particularly with respect to taxation on worldwide income” include whether the individual is taxed as a tax resident of the country or as a nonresident of the country.

Arguably all “nonresidents” of Canada are “in the same circumstances” (in relation to Canada’s tax system). Hence, “nonresidents” should not be treated differently depending on their citizenship.

Discussion and analysis follows.

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What Is Estate Tax?

What Is Estate Tax?

The estate tax is a tax on transferring assets from a deceased person to their heirs or beneficiaries. The federal estate tax in the United States is imposed on the transfer of the taxable estate of every decedent who is a US citizen or resident. The taxable estate includes all assets that the decedent owned or controlled at their death, such as real estate, investments, and personal property.

The history of the US estate tax dates back to 1797, when Congress imposed a tax on the value of legacies and inheritances. Since then, the estate tax has undergone numerous changes and revisions. In its current form, the federal estate tax was first enacted in 1916 and has since been subject to many amendments, including a temporary repeal in 2001.

Estate tax planning is an essential part of comprehensive financial planning. Proper estate planning can minimize the impact of estate taxes on an individual’s estate and ensure that their assets are distributed according to their wishes. Estate planning can also help reduce family conflicts and provide financial security for surviving family members.

How Estate Tax Works

To understand how estate tax works, knowing about exemptions and thresholds is essential. The current federal estate tax exemption is $13.61 million per person, meaning any estate worth less than this amount is not subject to estate tax. The estate tax exemption is adjusted annually for inflation, which may increase or decrease depending on the inflation rate.

For estates that exceed the exemption threshold, the estate tax is calculated based on the estate’s taxable value. The taxable value is determined by subtracting any debts, funeral expenses, and estate administration costs from the estate’s total value. The resulting amount is subject to the estate tax rate, which ranges from 18% to 40%, depending on the estate’s value. It’s important to note that the estate tax is a progressive tax, which means that the tax rate increases as the value of the estate increases. For example, if an estate is valued at $15 million, the first $13.61 million is exempt from the estate tax, and the remaining amount million is subject to a rate that increases until it reaches 40% for all amounts in excess of $1 million over the exemption amount.  The progression looks like the following:

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