TaxOps

Research & Development Credit: Maximizing credits, legislative updates, and audit trends

18-Nov-2020 By TaxOps

Join TaxOps Minimization Managing Partner Mark Dunning as he takes a deep dive into research and development credits, sponsored by CPE4U.

Catch the last Denver date of the year!
December 8
1:00 – 4:30 pm MT
CPE 4 credits
Intermediate course

Veteran instructor Mark Dunning goes beyond the basics to really dig into the details on research and development (R&D) credits in this 4 credit class. The course will review the basic and introduce the intermediary levels of claiming the R&D credit, including how qualified research is defined, the various details of the credit calculations, and properly supporting or documenting such claim. This course will also highlight IRS examination trends and concerns as well as financial statement aspects of claiming the ?credit. Attend live or online.

Learning Objectives

After completing this course the participant will be able to:

Explain the background of the research and development credit and recent legislation
Define qualified research under statutory and case law
Distinguish and recognize the issues pertaining to internal-use software
Calculate regular and alternative simplified credit, including base period, start-up company rules, acquisition and disposition application, and controlled groups
Explain the need for contemporaneous documentation
Recognize the role of the IRS in issue management network/Tier I, examination trends, and pre-filing agreements
Describe financial statement benefit issues

Instructor

Mark Dunning, CPA, is the managing partner of TaxOps Minimization, an affiliate of TaxOps, LLC, which specializes in the R&D credit and other tax minimization project areas, including domestic production activities deduction, tangible property regulations, uniform capitalization rules, and meals and entertainment studies. He served as a tax practitioner for more than two decades, including 15 years with a Big 4 firm where he was a regional and national leader in the research and development credit area. He managed four IRS pre-filing agreement projects that the IRS had granted and closed in the research credit area nationwide.

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Mark Dunning can be reached at mdunning@taxops.com or 720.227.0420.

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FAQs: Getting Started with Research Credits

06-Oct-2020 By TaxOps

By TaxOps Minimization

The federal government, and most states, provide lucrative economic incentives in the form of research and development (R&D) credits to reward companies for fostering innovation and advancing technology on U.S. soil. These credits cover qualified expenses for companies developing new, improved, or technologically advanced products or trade processes, lowering the net cost of investment and keeping technical jobs here in the U.S.

These highly nuanced credits are tied to a stringent set of rules and criteria requiring both qualitative and quantitative analyses in advance of successfully claiming the credits. Taxpayers that design, develop, or improve products, processes, techniques, formulas, and software may be eligible for research credits. Below you?ll find answers to the questions we get asked the most about these underutilized credits.

Who can claim the research credit?

Any taxpayer that is performing qualified research on US soil.

What type of expenses qualify for the credit?

In general, only wages (Box 1 W2), direct supplies and outside contract associated with qualified research. Leased computer costs or cloud computing costs for development platforms can also qualify. Indirect expenses such as rent, travel, education, taxes or utilities are generally not includable. For supplies, it is tangible property that is not land or subject to depreciation.? Typically, these qualified supply expenses are used within twelve months.?

What is ?research??

Technical development to create a new product or process where uncertainty exists at the outset and a process of experimentation is undertaken.

What if I receive money for funding?

If you receive federal funding from a grant program, you must net those proceeds against your expenses. If you receive compensation from a customer, it?s possible that you can claim all the expenses still as a credit. The determining factors are rights and risk. You must maintain rights to the intellectual property and be at risk for the costs.

I heard claiming the research credit triggers an audit. Is that true?

If a taxpayer claims a refund due to research credit on an amended return, there will be a coordinated audit. The audit is conducted by a local agent under supervision of a national team from DC. If it placed on an original return (extended or not), there is not an automatic audit.?

What is the 280C on the credit?

Section 280C was enacted to raise taxes by decreasing the benefit amount for many different credits. A taxpayer must make an M-3 adjustment by adding back the Credit amount as if it were income (a negative deduction) basically taxing the credit amount or elect to make the 280C reduction to the actual credit. The net tax benefit of the credit is the same. We recommend electing the 280C reduction as it is administratively easier by eliminating the M adjustment, causing no change to taxable income. An additional benefit is that if a credit were to change under IRS examination, then there would be no change to taxable income easing the burden of amending state tax returns which typically begin with federal taxable income.

What is ?process? development?

Process development is where you are improving the method in which you make your product. It can be enhancements to your production line that reduces waste. It could be updating your equipment because a new raw material or new technology is being used. The process must be better than the old, you must have uncertainty as to the appropriate design and you must follow of process of experimentation that assists you in determining the best design. Here is an example from the IRS regulations:

Example 3. (i) Facts. X is engaged in the business of manufacturing food products and currently manufactures a large-shred version of a product. X seeks to modify its current production line to permit it to manufacture both a large-shred version and a fine-shred version of one of its food products. A smaller, thinner shredding blade capable of producing a fine-shred version of the food product, however, is not commercially available. Thus, X must develop a new shredding blade that can be fitted onto its current production line. X is uncertain concerning the design of the new shredding blade, because the material used in its existing blade breaks when machined into smaller, thinner blades. X engages in a systematic trial and error process of analyzing various blade designs and materials to determine whether the new shredding blade must be constructed of a different material from that of its existing shredding blade and, if so, what material will best meet X’s functional requirements.

(ii) Conclusion. X’s activities to modify its current production line by developing the new shredding blade meet the requirements of qualified research as set forth in paragraph (a)(2) of this section. Substantially all of X’s activities constitute elements of a process of experimentation because X evaluated alternatives to achieve a result where the method of achieving that result, and the appropriate design of that result, were uncertain as of the beginning of the taxpayer’s research activities. X identified uncertainties related to the development of a business component, and identified alternatives intended to eliminate these uncertainties. Furthermore, X’s process of evaluating identified alternatives was technological in nature and was undertaken to eliminate the uncertainties.

For software, do bug fixes count?

Unfortunately, no. The IRS considers bug fixes as postproduction error fixing. They are essentially ?mistakes? from a prior release that you are correcting.

What are some engineering costs that do not qualify?

Research after commercial production or sustaining engineering, reverse engineering, and work performed outside the United States or its territories. Not qualified postproduction work includes preproduction planning for a finished business component; tooling-up for production; trial production runs; trouble shooting involving detecting faults in production equipment or processes; accumulating data relating to production processes; and debugging flaws in a business component.

We are developing an enhancement on our product based on a customer?s request. Does that qualify?

An example is a modification on a filtration system for a particular customer?s needs. If you roll out that modification to other customers, you can include those design efforts and costs if you otherwise followed all the R&D requirements. If it is used only on one customer, you may not include because the work is considered an adaption for only that one customer and not for the benefit of others.

What does ?substantially all? mean?

If eighty percent or more of your research activity measured on a cost or other consistently applied reasonable basis constitute elements of a process of experimentation for a qualified purpose, then you can include 100% of the cost associated with that activity. It also applies to an individual?s wages. If eighty percent or more of an engineer?s time is spent on qualified activities, you can include all of the individual?s wages.

What about research in the pursuit of exploration of raw materials?

If the exploration is solely for the extraction of materials, it is not a qualified activity.?This activity is simply deemed as not qualified in the law. Furthermore, exploration does not meet the process of experimentation test; it is simply a ?technical search? for materials. If you are developing a new method or equipment for exploration, that activity could be included.?

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Mark Dunning, managing partner at TaxOps Minimization, and Jamie Overberg, partner, implement tax saving strategies for dynamic companies. Reach out to Mark at?mdunning@taxops.com and Jamie at joverberg@taxops.com.

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Funded Research: Follow the Money to R&D Credits

29-Sep-2020 By TaxOps

Vague contractual language puts lucrative R&D credits at risk. Find out how to protect your claims to federal research credits.

By Mark Dunning

The federal research & development (R&D) credit is an income tax credit used to reward innovation and research in the United States. The federal tax credit is not a deduction; it is a dollar-for-dollar credit against tax liabilities for qualified wages, supplies, or outside contractor expenses. Many states have R&D credits available as well, but rules and requirements vary and need to be considered separately.

There are rules to qualifying an expense for R&D credits, including a four-part test and nexus requirements. Funded research, the focus of this article, adds another layer of analysis to determine who has the rightful claim to these lucrative credits.

Funding limitations under Section 41 restrict research credit benefits to taxpayers who bear the financial risk and retain the rights?although not exclusive–to the research. Whoever retains BOTH the financial risk and substantial rights to the research is eligible for the credit.

A company that makes a product and pays wages related to the development of that project generally has clear claim to research credits. It is when research is funded by others, “either by grant, contract, or otherwise” (Section 41(d)(4)(H)), where eligibility to claim the credit comes into question.

Funded research is often contractually assigned between a taxpayer and a third-party performing research such as a laboratory, university, or commercial enterprise. When an agreement between a taxpayer and a research firm is vague, incomplete, or there is no contract, it can be unclear who bears the risk and holds the rights to the intellectual property derived from the research. This uncertainty puts credit eligibility into question and could lead both companies to erroneously claim the same qualifying dollar when only one is eligible or possibly invalidate either taxpayer?s claim.

Financial risk

The taxpayer who bears the cost of failed research is the one who bears the financial risk. This funding issue was settled by the United States Court of Appeals for the Federal Circuit in Fairchild Industries v. United States, 71 F.3d 868 (1995).

In this case, the court interpreted the rules under Section 41 to provide that when retention payments to a researcher are contingent on performance, the researcher bears the risk; if the research were to fail, the researcher wouldn?t be entitled to payment. The court found that research costs are not funded when a contractor/researcher taxpayer (Fairchild) bears the risk, thereby qualifying Fairchild?s own qualifying wages for the R&D credit, while Fairchild?s revenue was generated being a contractor to the Air Force.

This determination is made based on an examination of agreements between the parties and contract law governing those agreements.

Substantial rights

A taxpayer that obtains a patent has the exclusive right to use such intellectual property as it deems fit. Exclusive rights are not required to generate the R&D credit; however, a taxpayer must hold the substantial rights to the research to be “qualified” for R&D credits. Court precedent on this issue was set in Lockheed Martin v. United States, 210 F.3d 1366 (2000). Lockheed Martin performed research for the government, who was given unlimited right to use the data. The government also retained certain rights to use the development.

The Federal Court of Appeals ruled in favor of Lockheed Martin, holding that as long as exclusive rights are not vested in another person, the taxpayer may retain substantial rights to the research, thereby setting a standard for determining rights for research performed under contract.

Taxpayers can share substantial rights just as they can share in the use of research results in trade or business. Taxpayers that, however, pay a royalty to secure a license to use the research results do not retain substantial rights in the research. Absent substantial right, expenses are disqualified from research credits.

Funding analysis

A funding analysis can shed light on which taxpayer holds risk and substantial right to the research and a rightful claim to the qualified research expenses (QREs) that are the basis of any R&D claim. Both risk and rights need to be evaluated based on the funding scenario, for example:

If a taxpayer performing research for another unrelated entity retains no substantial rights in the research under contract, the research to the taxpayer is treated as fully funded and expenses paid or incurred by the taxpayer in performing the research are not eligible for the research credit.
If a taxpayer under contract commits to making payment ?contingent on the success of the research?, the taxpayer has passed the risk on to the contractor and is not eligible for research credits. The contractor, however, may be qualified for R&D credit for those research expenses themselves.
If a taxpayer pays for the research to be performed by a contractor regardless of the success of the project, then the taxpayer bears the risk of failure. If a taxpayer also has at least substantial rights to the research, the taxpayer?s qualified research expenses are eligible for a research credit.

Follow the money

As with most economic issues, follow the money to assess qualified expenses where grants, contracts or third-party agreements are present. Expenses that underwrite risk and rights to a research project are eligible for research credits. Expenses paid for a finished product are not.

In assessing qualified expenses, keep these practitioner points in mind:

A taxpayer must have rights and risk in research expenses. While rights can be either exclusive or shared, the taxpayer must also bear the risk of research failures to be eligible for the credit.
A taxpayer may be eligible for an R&D credit when research expenses and experimentation are contracted out under the taxpayer?s order and at the taxpayer?s own risk (i.e. qualified research ?performed on behalf of the taxpayer?). Expenses do not qualify for the credit when a research agreement is contingent upon the success of the research. In this case, the expense is payment for the project result and not for the performance of the research itself.
Grants do not make a project entirely ineligible for R&D credits. A taxpayer can include the project expenses in a research claim if the grant funding amount is appropriately excluded from the research expenses. This can be crucial to some taxpayers as many governmental grants rarely completely cover the investment of the research project.

Funded research can be a complicated area, with traps for the unwary. Protect your right to lucrative R&D credits with clear and concise contractual language instead of giving away R&D credit to another.

INFORMATION FOR EDUCATIONAL PURPOSES ONLY. SEEK PROFESSIONAL TAX ADVICE BEFORE ACTING.?

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Mark Dunning, managing partner at TaxOps Minimization, and his team implement tax saving strategies for dynamic companies. Reach out to Mark at ?mdunning@taxops.com.

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Will American innovation come in a post-pandemic environment?

04-Sep-2020 By TaxOps

Research and development in the United States never fails to amaze, and neither will the innovation to come in response to COVID-19.

By Jamie Overberg, as featured in the ColoradoBiz

There?s nothing like a pandemic to spur on discoveries that lead to the types of ?high-impact, novel innovations? that Sudip Parikh, CEO of the American Association for the Advancement of Science, referred to in his testimony before the House Budget Committee on July 8, 2020.

?Science and engineering will be critical to ending the COVID-19 crisis,? he went on to say. ?Federal research and development (R&D) investments contribute value to the nation? in new discoveries, technologies, knowledge, and collaboration for near-term uses and next-generation technologies.

Indeed, R&D delivers value to all of us in our economic, societal, personal and professional lives. In the United States, industry contributes the bulk of R&D investment, about 78% to the government?s 22% in 2017, according to the 2020 Science and Engineering Indicators report (Indicators). The U.S. leads the world in funding for research and development, with annual average spending of 4.3% per year from 2000 to 2017.

In my work qualifying and quantifying R&D for research credits, I?ve seen first-hand how federal investments in R&D have helped companies make our lives better, different, and more fun. I speak with smart people who spend every day immersed in clever, unusual?and often unique?work at truly inspiring companies.

These engineers and scientists are solving tough problems in the world of hard sciences that include energy, bioscience, manufacturing, software, transportation, and so much more. In the process, I get a fascinating view into some of the research going on in the United States. The companies nurturing these projects are on the cutting edge, combining different manufacturing, medical, and coding disciplines in developing and improving tools, workflows, processes, and testing protocols that bring R&D alive.

What does this federal investment in R&D look like? Years ago, a co-worker and I visited a test track for a well-known motorcycle manufacturer on a day when the engineering team was testing air forks. Clad in blue jeans, we arrived at the track to watch engineers run motorcycle trials on a ?whoops? track of short, successive bumps.

By driving the motorcycle at a constant speed and at a certain RPM, the riders tested the air fork compression, strength, and other variables at high speeds without bottoming out. The test trials also assessed weight, stiffness, and overall performance. While standing in the middle of the track, the engineers running the trials explained what they were looking for and how the microsensors attached in key spots to the motorcycle were collecting the data the engineers needed to fine tune the design, and ultimately, create a better, faster ride. We even got muddy!

Biomed engineers created a process using a laser to treat blood in situ with different types of chemotherapies, identifying the most effective chemotherapies for specific types of cancer. The company?s research in this area has meaningfully moved the needle forward in cancer research; fewer cancer patients endure fruitless rounds of chemotherapy because of this company?s work in identifying oncology treatments that lead to better cancer patient outcomes.

In another R&D biomed project, I saw the design for a UV light treatment to decontaminate blood unfold. This treatment was a game changer in countries where blood supply is in short demand and where a high percentage of the population is infected with blood-borne diseases such as malaria. Now instead of rejecting tainted donor blood, technicians can clean all blood and place it in the blood bank for general use. Among other treatments, this company was also developing immunotherapy to train white blood cells to attack cancer cells as well as designing the devices needed to inject and infuse cell therapies.

Not all projects are on inanimate objects. Holsteins today are responsible for the majority of milk and dairy products consumed in the U.S. The bloodline of Holsteins in the U.S. can be traced to 10 breeds that generate the most productive traits. Dairy farmers need two things, female cows and a good production line: the greater the availability of female cows, the greater the production.

Roughly ninety percent of dairy breeding is through artificial insemination. During the semen collection process, scientists at Colorado State University (CSU) in Fort Collins, Colo., used a laser to separate semen so that 70% of the semen collected contained X, or female, chromosomes. After proving the concept, the technology was used by a company in Texas, where in visiting the facility, I witnessed cattle breeding. The lucky bulls were breeding naturally while the unlucky bulls (the vast majority) were subjected to?well, let?s say, less natural?semen collection procedures before the technology was used in isolating and storing female semen. That?s education on the job.

A great deal of U.S. research comes from software companies, where deploying effective technologies that change how we live and what we see in the digital space happens at hyper-speed. One company I worked with built a marketplace for online advertising. They were able to boil down market economics and efficiencies into algorithms that drive sales for some of the nation?s largest companies. I learned their secret sauce of how targeting ads show up on my browser when I search for, say, blenders.

In few other fields would I have the chance to work with so many innovative companies, engineering firms, and government entities using ?off-label? designs and workflows to create new and improved products, services, and processes. While I can only share stories of products that have been in the market for some time, there are so many U.S. companies working on proprietary R&D that will help us live better, fight disease, and do all manner of things that we as bystanders can only dream about.

In upcoming years, as the pace of innovation increases and dynamic companies sidelined by COVID-19 ramp back up, we will see companies spring forward with a pipeline of innovation. It will be an inspiring world to see, first-hand.

Jamie Overberg, a partner at TaxOps Minimization, has been observing the hard sciences at work on U.S. soil at innovative companies, engineering firms, and government entities for over 20 years as she executes, manages, and writes about all aspects of R&D credits. She can be reached at joverberg@taxops.com.

Instant Read at ColoradoBiz

Will American innovation come in a post-pandemic environment?

Get in Touch with the author, Jamie Overberg, by clicking below, or reach out to your TaxOps Advisor to discuss how R&D credits can help fund your innovation.

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Will American innovation come in a post-pandemic environment?

01-Sep-2020 By TaxOps

By Jamie Overberg, as featured in ColoradoBiz

Research and development in the United States never fails to amaze, and neither will the innovation to come in response to COVID-19. There’s a tax credit for that!

Indeed, R&D delivers value to all of us in our economic, societal, personal and professional lives. In the United States, industry contributes the bulk of R&D investment, about 78% to the government?s 22% in 2017, according to the 2020 Science and Engineering Indicators report. The U.S. leads the world in funding for research and development, with annual average spending of 4.3% per year from 2000 to 2017.

Listening to engineers and scientists explain what they are doing and why never gets old. I worked with a biomedical company who was pioneering next generation cancer treatments. I learned each type of chemotherapy treats different cancers and that there are twenty-something different types of cancer of the blood. Biomed engineers created a process using a laser to treat blood in situ with different types of chemotherapies, identifying the most effective chemotherapies for specific types of cancer. The company?s research in this area has meaningfully moved the needle forward in cancer research; fewer cancer patients endure fruitless rounds of chemotherapy because of this company?s work in identifying oncology treatments that lead to better cancer patient outcomes.

Roughly ninety percent of dairy breeding is through artificial insemination. During the semen collection process, scientists at Colorado State University (CSU) in Fort Collins, Colo., used a laser to separate semen so that 70% of the semen collected contained X, or female, chromosomes. After proving the concept, the technology was used by a company in Texas, where in visiting the facility, I witnessed cattle breeding. The lucky bulls were breeding naturally while the unlucky bulls (the vast majority) were subjected to?well, let?s say, less natural–semen collection procedures before the technology was used in isolating and storing female semen. That?s education on the job.

About the Author

Jamie Overberg, a partner at?TaxOps Minimization, has been observing the hard sciences at work on U.S. soil at innovative companies, engineering firms, and government entities for over 20 years as she executes, manages, and writes about all aspects of R&D credits. She can be reached at?joverberg@taxops.com.

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Jamie Overberg can be reached at joverberg@taxops.com or 720.227.0421. Follow Jamie on LinkedIn.

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Orphan Drug Credits: Encouraging Research in Rare Diseases

05-Aug-2020 By TaxOps

Researching a rare disease? Get tax credit for that with the federal Orphan Drug Credit.

By Jamie Overberg

The orphan drug credit (ODC) is a federal tax credit available to companies working to find cures to rare diseases. It is not widely known but when claimed, provides taxpayers an opportunity to reduce the cost of R&D. The research must meet R&D criteria that address technical uncertainty through a process of experimentation.

The ODC allows a 50 percent credit of the qualified clinical testing expenses (CTE) for a taxable year.?Clinical testing expenses that qualify include clinical trial costs, in house wages, supplies, outside contract and payments made to research or university organizations.

The ODC only applies to pharmaceutical discoveries for a rare disease or condition.?Specifically, ?rare? means any disease or condition which affects less than 200,000 persons in the United States, or affects more than 200,000 persons in the U.S., but for which there is no reasonable expectation that the cost of developing and making available a drug for such a disease will be recovered through sales in the U.S. This a great applicability to pediatric drug therapies.

Orphan drug status is determined by Federal Food, Drug, and Cosmetic Act (FDA) based on facts and circumstances. Taxpayers can begin tallying expenses the date the FDA designates ODC status.

R&D and ODC credits are calculated separately to avoid double dipping. As such, a taxpayer may not include ODC expenditures with another claim for research tax credits.?Since the research tax is only 20 percent, the potential savings from ODC is greater at 50 percent, when available. Taxpayers can claim both R&D and ODC in the same year, provided there is no overlap in type of qualifying expenses.

Another distinction between ODC and R&D credits is the amount of qualified contractor spend allowed. The ODC allows for 100 percent of qualified contractor spend to be included as CTE, while the R&D credit taps the amount of the costs of eligible QRE at 65 percent. ?

Both the ODC and R&D credit can be taken in the same year but claiming the ODC credit is simpler. Taxpayers claim the ODC credit in their federal tax filings. Documentation used in support of a taxpayer?s FDA submissions can be used as audit support for their credit claim.

Get in touch with us if you think you have R&D activities that might qualify for orphan drug or R&D credits.

To find out how to take full advantage of research tax credits that could cut your federal and state tax liability, download “Pay less tax, invest more with R&D credits“. Or, request a complimentary analysis of potential credits.

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Jamie Overberg can be reached at joverberg@taxops.com or 720.227.0421.

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TaxOps named a 2020 Best Firms to Work For by Accounting Today

31-Jul-2020 By TaxOps

TaxOps earns Accounting Today’s top workplace award, confirming there’s something special going on here.

TaxOps is a great place to work! Accounting Today has recognized TaxOps in its 2020 list of Best Firms to Work For. 2020 is the fourth time TaxOps has been named to the list.

The annual survey and awards program identifies and honors the best 100 employers in the accounting industry. Companies from across the United States entered the survey process, which is heavily reliant on employee feedback, giving the very people who benefit from a quality culture and commitment to workplace excellence the opportunity to voice their opinion about where they work. Firms are also evaluated on their workplace policies, practices, philosophy, benefits, systems and demographics. For more information about the awards program, visit Best Firms To Work For.

?We are proud to be recognized by Accounting Today for our distinctive workplace and culture. With this recognition, our employees confirm that there is something special about TaxOps. We work hard and have fun,? said TaxOps? Partner Mark Dunning.

TaxOps? results-only focus is a catalyst for the high quality of life that our employees enjoy. Employees can work anytime, anywhere with secure access to our cloud-based teaming and tax processing platforms. Staff is encouraged to work from home or any office; multiple office locations enhance workplace flexibility. Stocked kitchens and a casual office atmosphere, with no set office hours, provides the ultimate flexibility and work-life balance. When employees choose to work within our offices, “clothes required, shoes optional” means staff can wear casual clothing and get comfortable as they dig into complex tax issues and complete quality work.

Our pricing structure and workplace environment inspires staff to rally around more efficient ways to do business in the accounting industry. We hire top talent from prestigious accounting firms and add specialty solutions as our middle-market target demands. Responsible and self-directed, our people are organized in teams around tax specialties. In working with one team, clients have access to the full complement of tax specialists across disciplines on-demand to lend collaborative insights to solving tax matters. Our strong results and a collaborative working environment benefits clients, staff and partners.

About TaxOps

TaxOps is a leading tax specialty and consulting firm helping growth-oriented businesses worldwide. Tax is all we do, allowing us to dig into complex issues and deliver tax insights for more comprehensive business strategies. Seasoned professionals with significant Big Four experience lead our teams, providing the strength, experience, and resources of a national tax brand with the hands-on client engagement of a boutique firm. From one-off studies to full-service tax outsourcing, TaxOps delivers federal, international, state and local, and minimization solutions that drive better tax outcomes. Visit TaxOps for tax business consulting, compliance and advocacy; SALTovation for strategies and tools in state and local tax compliance; and, TaxOpsMin for large project tax saving solutions.

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?That?s not R&D?: Changing how engineers view R&D can increase tax credits

25-May-2020 By TaxOps

By Jamie Overberg, as featured in Accounting Today

?That?s not R&D? is a common phrase we hear from engineers at companies engaged in product development and improvements. Engineers typically don?t view a large part of their day-to-day activities as worthy of the lofty moniker of research and development. It?s this exacting nature and detailed focus that makes an engineer good at his or her work, not how well they interpret the Internal Revenue Service definition of R&D.

This is good news for businesses that may be underclaiming R&D credits because these frontline personnel aren’t aware of the breadth of eligible activities. Teaching in-house engineers what ?qualifies? for R&D credits puts more boots on the ground looking for R&D credit opportunities for the company.

The most common question we get from clients is, what qualifies for R&D credits? The working definition engineers tend to apply to R&D is much more stringent than the definition the IRS uses for eligible R&D credits.

The congressional intent behind R&D credits is to motivate companies to hire engineers and perform research in the United States. As such, the IRS has implemented a lower standard than the average engineer thinks, which is perhaps made clearer by what R&D isn?t in the eyes of our nation’s tax authority. The IRS doesn?t use the word ?discover? or the phrase ?never been done before? in describing what constitutes R&D. Instead, the agency focuses on technical uncertainty and what process of experimentation is performed to eliminate that uncertainty.

For R&D credit purposes, when a company is coming up with a solution, performing modeling on projects, and defining what makes their project different from any other road or building, the focus isn?t on what is novel but rather the technical uncertainties that the engineers are looking at to prove the project will work.

Technical uncertainties must be identified, measured and tested in a technical evaluation. While under construction, the Florida International University pedestrian bridge collapsed, killing six people in 2018. The bridge had a fatal design error in the load and capacity calculations, according to an examination by the Federal Highway Administration. Were there uncertainties that engineers on that project could have tested and modeled in a technical evaluation to ensure carrying load and capacity prior to build?

The Big Dig through downtown Boston demonstrates another set of technical uncertainties. When sections of the highway sprung water leaks less than a year after opening, the all-encompassing question became, what went wrong? The engineering firm hired to expand transportation to Logan International Airport borrowed equipment used in building the Chunnel between England and France. Problems with that machinery led the firm to replace the equipment midway through the project, demonstrating uncertainty. Within the year, the Big Dig started springing leaks and fingers were pointed at the engineering firm, who had to fix the issues at a huge financial cost. Here again, there was technical uncertainty where the engineering firm?s design came into question.

Each of these projects demonstrates the nature of technical uncertainty. Until you dig into the ground and see what?s there, you just don?t know. That?s why most bridge, building and real property projects involve uncertainty and testing, thereby qualifying for R&D credits. When you do not know what is there and what will happen and need a technical evaluation to proceed, it is likely eligible for R&D credits, regardless of whether the project ultimately succeeds or fails.

Recognizing technical uncertainties

Technical uncertainties apply across all industries. A company moving small engines for lawn mowers from a carburetor to a fuel injection design won?t know what is going to happen before the build. It may not see a filter problem with grass stalling out the engine until the failure happens. Once a product fails, the company must go back to the drawing board and change the design.

This process of trial and error around technical uncertainties is what the law upholds as R&D, and it covers a lot of ground. This process has many components that take place day in and day out under the watchful eyes of detail-oriented engineers. Teaching engineers to recognize each element of the process that is eligible for R&D will help businesses maximize their claim to available R&D credits.

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Jamie Overberg can be reached at joverberg@taxops.com or 720.227.0093. Follow Jamie on LinkedIn.

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Individual State Deadlines Vary in Response to COVID-19

30-Mar-2020 By TaxOps

Check closely, and often, when state returns are due. It’s a moving target.

By Alexander Korzhen

While state taxes are unaffected by federal changes in tax deadlines (Notice 2020-18 ), many states are moving forward with tax relief of their own (see New Federal Tax Filing Deadline).

Individual state responses vary. California pushed out its date for filing and payment of state taxes to June 15. Minnesota granted a 30-day sales and use tax grace period for businesses that had a monthly sales and use tax payment due March 20, 2020. Colorado, New York, Connecticut, and Massachusetts have said at the time of this writing that they will adopt the federal relief rules and not require filing or payment until July 15.

State and community filing deadlines are changing quickly, and are not taking the same approach. So, check closely, and often, as dates, penalties and interest parameters are in motion.

The AICPA is updating a chart as states provide additional guidance on changes to traditional tax deadlines and provisions. Visit AICPA for current State tax filing guidance for the coronavirus pandemic.

Avalara is updating a tracker as sales tax filing requirements change at How COVID-19 is impacting sales tax filing.

Confirm with your state tax authority to see about any changes to due dates, penalties and interest.

Contact your State and Local Tax Advisor with questions during this fluid situation.

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Contact Alexander Korzhen at akorzhen@taxops.com or 763.703.5713.

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TaxOps

New Federal Tax Filing Deadline is July 15

24-Mar-2020 By TaxOps

By Allen Gregory

The U.S. government extended the tax-filing deadline to July 15, giving taxpayers 90 extra days to file and pay their taxes.
The filing deadline is automatically postponed until July 15; no additional filing is necessary to take advantage of the extension.
The extension applies to both 2019 federal income taxes and estimated taxes for the first quarter of 2020.
No guidance has been provided for taxpayers that need an extension of time past July 15, 2020, at the time of this writing.
Many states are adjusting their tax deadlines as well; check your individual state for any movement on these deadlines or contact us with questions.

The IRS issued several notices last week, including Notice 2020-18 on March 20, spelling out the formal guidance on the Tax Day delay and amending the previous Notice 2020-17 issued on March 19. The 90-day delay is part of an emergency relief plan for Americans who have been adversely affected by the COVID-19 emergency (see Individual State Return filing deadlines vary).

Filing deadline postponed to July 15, 2020

Under the administrative rules, federal income tax filing and payment relief until July 15 is extended to all taxpayers and businesses who have federal income tax returns and federal income tax payments due on April 15, 2020 (including tax on self-employment income). This includes 2019 tax returns as well as estimated taxes for the first quarter of 2020.

No documentation is required to take advantage of the delay, and there is no cap on the amount of taxes that can be deferred. Related interest, tax additions, and penalties for late filing or late payment are also suspended until July 15, 2020. However, the change does not affect payroll taxes, estate taxes, excise taxes or estimated taxes due on June 15.

The federal filing extension also does not apply to individual state income tax deadlines (see below). No doubt we will all be hearing more details from the IRS and lawmakers as further decisions are made in tax areas where more details are needed for compliance. The IRS continues to process returns and send out refunds. Visit the IRS website for more details.

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Contact Allen Gregory at agregory@taxops.com or 303.393.2320.

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