Tag Archives: R&d Tax Credit

Deb Roth, Managing Director, R&D Tax Consulting

Deb Roth, Managing Director, R&D Tax Consulting

SourceHOV | Tax worked with this $30 million specialty packaging manufacturer to help it claim R&D tax credits for innovative packaging designs. The company performed hundreds of custom design packaging projects each year for a variety of customers.  The scope of this specific project involved the company’s work with a candy manufacturer that wanted a special container designed to hold gumballs. The product (gumball dispenser) was targeted at children, so in addition to having appropriate functionality so that the gumballs released properly, the design also needed to have play value.

Extensive research, experimentation and testing were conducted to ensure product safety and functionality. Research was performed on the materials selected for the packaging and the design of the gumball dispenser itself.  R&D included identifying the right combination of materials that would allow for a design that could be easily manufactured, shipped, stored and withstand the rigors of child play.

Over a five-year period, the company was able to claim R&D tax credits of $155,000 annually. The tax savings generated from these credits were used to conduct R&D to meet additional customer requests.

Deb Roth, Managing Director, R&D Tax Consulting

Deb Roth, Managing Director, R&D Tax Consulting

In 2005, responding to customer requests for a flavorful gluten-free beer, this specialty brewery began experimenting with new formulations that would satisfy beer connoisseurs. Typically, gluten-free beers are generic white lagers that lack the exotic flavor and aroma of popular microbrewery beers. The challenge the company faced was creating a balance of gluten-free ingredients that worked together without creating a bitter brew. After continued experimentation, the company successfully developed a gluten-free beer that lived up to customer expectations.

SourceHOV|Tax began conducting R&D tax credit studies for the company in 2005 when the company’s revenues were $10 million. For nearly a decade, the company has benefitted from R&D credits averaging $65,000 annually. This $65,000 offset in taxes has allowed it to continue investing in the development of additional brews, and in 2013 it reached $70 million in sales. The company’s ability to grow at this pace is, in large part, driven by sales of its new products.

Deb Roth, Managing Director, R&D Tax Consulting

Deb Roth, Managing Director, R&D Tax Consulting

In a late session Tuesday, the California Senate passed proposal AP93 that effectively repeals the California enterprise zone credit and replaces it with significantly scaled back hiring credits. The proposal largely retains the current geographic boundaries eligible for the credits and includes a sales tax exemption for manufacturing and biotech research companies as well as $30 million in the budget for tax credits that can be negotiated on a case-by case basis with the state.

The amendments would extend the carry forward provision for existing enterprise zone hiring credits to 10 years from the current five years, and a sunset provision on other parts of the program would be extended from five years or less to seven years. Additionally, ex-criminals would be eligible for hiring credits.

A priority of Governor Jerry Brown, this legislation is now headed to the Assembly where its future is uncertain.

SourceHOV |Tax is a national provider of specialty tax credit consulting services. If this legislation will cause a significant reduction in your EZ credits, we can help you identify other tax saving strategies such as R&D tax credits to offset the shortfall. For more than 30 years, SourceHOV | Tax has helped companies properly identify and sustain tax incentive strategies including R&D tax credits, cost segregation studies, 179D tax deductions and LIFO inventory accounting.  For more information, please call 800-806-7626 or visit www.sourcehovtax.com.

Michael Warady CFP, National Director, Software R&D Consulting

Michael Warady CFP, National Director, Software R&D Consulting

The year 2010 saw the launch of the iPad, Facebook market share overtake Google, Twitter go commercial and Toy Story 3 finish the year as the top domestic grossing film.  While there are many events and highlights of 2010, there is one that many may have overlooked.

On September 27, 2010, the President signed into law the Small Business Jobs Act. Even today, business owners are learning more about the act and the benefits it provides.

The act included many areas of tax savings.  One such area is the highly publicized R&D tax credit.  The R&D tax credit is one of several general business credits.  The act allowed small businesses better flexibility to utilize general business credits to offset taxes.

Software and manufacturing companies, who often qualify for the R&D tax credit, now have a much greater ability to reap cash rewards from the R&D credit. The bill allows small businesses to offset not only regular tax, which was the standard rule, but also Alternative Minimum Tax.  Companies that had previously not been able to take advantage of the credit because of this limitation are now able to see the full benefit of the credit and are paying less tax.

The second advantage provided by the act was the expansion of the ability to “carry back” the 2010 credits into prior years.  Small businesses can now carry back their 2010 R&D credits to offset the prior five years of taxes paid versus the one-year carry back that is currently and historically been in place.

There are a couple of caveats.  First, it is only available for the credits generated in the 2010 tax year–but this is still good news!  Companies with a December 31 year-end still have at least until March 15, 2014 to claim 2010 tax credits.  These credits will first offset taxes paid in 2010, any remaining 2010 credit can be carried back and used of offset both regular and AMT taxes in 2005-2009. The second caveat is that it is only available for small businesses; companies whose average gross receipts for 2007–2009 are under $50 million.  Keeping the March 15, 2014 date in mind, companies have just less than a year to go back and reclaim cash.

So, if you haven’t revisited your 2010 tax return, now is the time.  I highly recommend taking a look at your tax liability for 2010.  If you did pay tax, there are strategies available that can create tax refunds for qualifying companies.  Even S-Corporations or other flow through entities may benefit.

Michael Warady, CFP, is the National Director of Software R&D Consulting.  He has been working with companies throughout the U.S. to educate business owners and C-level individuals on the benefits and value the Research & Development Tax Credit can bring to their businesses.  He has helped bring over $150 million back to the business community through the R&D Tax Credit strategy.  Please contact Michael at (847) 914-9270 or michael.warady@sourcehovtax.com to learn more about how SourceHOV|Tax can help create additional cash flow for your business.

Deb Roth, Managing Director, R&D Tax Consulting

Deb Roth, Managing Director, R&D Tax Consulting

After a multi-year court battle over R&D tax credits claimed by Union Carbide Corporation, the Supreme Court recently denied Union Carbide’s request for certiorari.  This denial makes the Second Circuit’s affirmation of the Tax Court decision final.  The Tax Court determined that Union Carbide was not entitled to research credits for the entire amount spent for supplies.

In this case, Union Carbide conducted three research projects to improve manufacturing processes. The research was conducted on products that were already in the process of being manufactured and were ultimately sold. Union Carbide claimed research credits for the additional cost of supplies associated with the research in addition to the cost of supplies used in production.

On audit, the IRS challenged the applicability of the credit for production supplies that would have been used regardless of any research performed.

The Tax Court concluded that Union Carbide was entitled to research credits only for the additional supplies used to perform the research. Costs for supplies used for actual production were found not to be research under the tax code. According to the Tax Court, these costs were “raw materials used to make finished goods that would have been purchased regardless of whether UCC was engaged in qualified research,” and that at best, these costs are indirect research costs and therefore excluded from the definition of qualified research expenses.

On appeal, the Second Circuit agreed that the costs at issue were, at best, indirect research costs that were excluded from the definition of qualified research expenses.

The case went to the Supreme Court who on March 18, 2013, declined to review it, making the Second Circuit decision final.

This decision continues to show the importance of identifying and tracking supply costs when performing research associated with new or improved manufacturing processes,  Many of these supply costs are tracked in general “cost of goods sold” or “inventory” accounts and are not readily identifiable, making research credit claims associated with these costs more difficult to support and defend.

Deb Roth, Managing Director, R&D Tax Consulting

Deb Roth, Managing Director, R&D Tax Consulting

Governor Hassan Signs R&D Tax Credit Bill

Bipartisan Bill Doubles Tax Credit, Makes Measure Permanent

CONCORD – Enacting a key provision of her innovation plan to help businesses grow and create jobs, on March 21, 2013, Governor Maggie Hassan signed into law bipartisan legislation doubling funding for the state’s research-and-development tax credit and extending it permanently.

“Expanding the R&D tax credit is a critical component of our innovation agenda,” Governor Hassan said. “By doubling funding for the R&D tax credit, we can help more businesses develop in New Hampshire the new products that can lead to growth and job creation. Making the credit permanent will also help businesses who might need the credit down the road to plan ahead.

“Increasing funding for the research-and-development tax credit also sends a message to entrepreneurs and businesses considering where to locate that the State of New Hampshire will continue to work with them to encourage innovation and invest in our economic future.

Governor Hassan was joined for the signing ceremony by prime sponsor Senator Bob Odell and other members of the legislature, representatives from the economic development community, and New Hampshire businesses that have used the R&D tax credit, including Val Zanachuck, president of Graphicast in Jaffrey, an innovative small business that develops graphite mold casting technology to produce precision metal parts for a variety of industries.

“This legislation is a shining example of the tradition of collaborative, bipartisan problem-solving that the people of New Hampshire expect from their leaders,” Governor Hassan said. “Members of both parties, from both the House and the Senate, came together, shared thoughts and ideas, addressed concerns, and passed by overwhelming margins a common-sense measure to help businesses. By working together, we are sending a strong signal that New Hampshire is a state that welcomes innovation.”

“As a manufacturer, we have to constantly upgrade our manufacturing methods and processes to maintain a competitive business,” Val Zanchuck said. “New product development and process improvements are our R&D. For us, this R&D does not take place in a laboratory, it takes place on the shop floor. The R&D tax credit helps provide resources that we reinvest to improve and accelerate these activities.”

In addition to expanding the R&D tax credit, the Governor’s “Innovate NH” jobs plan focuses on building the best workforce in the country by making higher education more affordable and on providing businesses with technical assistance to help them create jobs.

Governor Hassan’s fiscally responsible, balanced budget substantially restores cuts made to New Hampshire’s public universities and community colleges in exchange for freezing in-state tuition for the next two years. Her budget proposal also will help New Hampshire’s businesses grow and attract new companies with good jobs by supporting economic development efforts, funding business incubators, and providing businesses with support to help them enter new markets around the world.

Deb Crumley, Director of R&D Tax Credit Consulting

Deb Crumley, Director of R&D Tax Credit Consulting

SourceCorp recently worked with a $6 million New York manufacturer to identify, document, calculate and claim the New York State Research & Development Tax Credit formally called the QETC. The company was able to go back and claim the credit for four years and claimed total credits of $328,474.

Subsequently, the owner was notified that state examiners intended to review the claim. SourceCorp met with the examiners and explained the client’s activities and expenses and their validity with regard to claiming the R&D credit. SourceCorp succeeded in sustaining 100% of the  credit for the company.

The QETC is a refundable credit, so this New York manufacturer was able infuse $328,474 into their business by evaluating what was already spent as part of the company’s initiative to stay competitive through research and development spending.

Regarding this article from Bloomberg: Obama May Seek Permanent R&D Tax Credit

Deb Crumley, Director of R&D Tax Credit Consulting

Deb Crumley, Director of R&D Tax Credit Consulting

Given its bipartisan support and the history of R&D tax credit’s extension, arguing that the budget deficit will be increased by making it permanent is misleading.  This article’s author uses the term “longest-running budget gimmicks in town” which couldn’t be more appropriate.  It will have the same budgetary impact if made permanent as it would if Congress keeps approving the temporary extensions.

More importantly would be the effect on businesses if they were certain of the credit’s future.  By understanding and being able to rely on this incentive, behavior related to R&D spending will be positively impacted.  For many companies, compiling the information to compute the R&D tax credit each year is cumbersome and an area that needs process improvement.  However, this is never a priority since the future of the credit is always in question.  With permanency, companies will be incentivized to increase R&D spending and make the internal process changes necessary to create more accuracy within their computations.

While there will be a budget impact to increasing the credit percentage for the Alternative Simplified Credit, it is necessary to keep the U.S. from lagging even further behind in international comparisons of R&D incentives.  Hopefully President Obama is successful,  and the credit is made permanent and more internationally competitive.

This recent court case favored the company claiming the R&D tax credit.

http://www.cbiz.com/page.asp?pid=8761

Laura Kushner, Director of Marketing

Laura Kushner, Director of Marketing

The United States was one of the first countries to enact a federal tax credit for R&D in 1981, and throughout that decade we had the most generous R&D incentive in the world. However, other countries soon realized the benefit of the R&D credit and adopted not only similar but often more lucrative credits.

By 1996, the U.S. ranked only 7th in R&D tax generosity out of the countries that had an R&D credit, and by 2004 we had slipped to 17th place. The key reason — every other country with an R&D tax credit has increased the generosity of those credits. Not only has the U.S. not increased the credit, but to date Congress has not yet extended the credit for 2010. The result – by 2009 the U.S. ranked dead last — leaving the number one position to France.

However, if Congress were to enhance the R&D tax credit and make it permanent as other countries have done instead of simply extending it each year, the result would be an immediate and positive impact on U.S. innovation and job creation.

For example, a study by the Information Technology and Innovation Foundation think tank suggests that raising the Alternative Simplified (ASC) R&D tax credit rate from 14 to 20 percent would create 162,000 jobs in the short-term and an unspecified number of additional jobs in the longer-term. ITIF also estimates that raising the ASC would increase the annual GDP by $90 billion, the number of patents issued by 3,850 and federal tax revenues by $17 billion.

Raising the ASC to 20 percent would bump the U.S. R&D tax generosity rank to number 10. However, we would need to increase the ASC to 31 percent to move to 5th place and to a whopping 47 percent in order to reclaim the number one spot with the most generous R&D credit of the 21 countries that currently offer one.

Fortunately for American businesses, all but about 12 states offer a state R&D credit. Some of these state credits are more lucrative than the federal credit, and some are even fully refundable.

For example, New York has a refundable credit, specifically for companies with revenues under $10 million, that averages between 9-18%. Starting in tax year 2010, the Minnesota state credit will be expanded and made refundable. Louisiana has one of the most lucrative credits of all the states. Depending on the size of the company, the credit can be from 8 to 40 percent, and it is also refundable.

Companies located in states that offer a state R&D credit can realize significant dollars in tax credits, especially when combined with the federal credit. These dollars can be reinvested to fund additional R&D which, in turn, will boost both innovation and job creation in the U.S.

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