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Presented by Barbara J. Oswalt, CPA/ABV, CVA, CFF Presented by Barbara J. Oswalt, CPA/ABV, CVA, CFF Copyright 2010

Research And Experimentation Tax Credits Final

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Page 1: Research And Experimentation Tax Credits   Final

Presented by Barbara J. Oswalt, CPA/ABV, CVA, CFFPresented by Barbara J. Oswalt, CPA/ABV, CVA, CFF

Copyright 2010

Page 2: Research And Experimentation Tax Credits   Final

The credit is intended to help manufacturingThe credit is intended to help manufacturing and technology companies be globally competitive.competitive.

If a company takes a risk and spends money on p y p ydeveloping a new or improved product or process, the credit can lower a company’s federal taxes!

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Page 3: Research And Experimentation Tax Credits   Final

Credit against federal income taxes for individuals and companies who engage in qualifying researchand companies who engage in qualifying research

You can deduct all of your research expenses AND t k th dit ( t d d t ) t k thtake the credit (at a reduced percentage) or take the full credit and reduce your deduction by the amount of the credit

Individuals & companies who apply for patents (other than design patents) qualify – but that is not required

It is for unfunded research

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Research that is technical in nature is for use in developing a new or improved “business component” of the companynew or improved business component of the company

What is a “business component”?P d tProductProcess TechniqueFormulaFormulaInventionPatentModels or prototypesSoftware

The improvement does not have to be significant

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Technological criteriagMust rely on principles of science including:• Physical

Bi l i l• Biological• Engineering• Chemical • Computer sciences

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Elimination of uncertainty

Information sought must be intended to eliminate uncertaintyuncertainty

Uncertainty exists if, when the research is begun, the available information does not establish the taxpayer’s capability, method or design of the business componentp

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Process of experimentation

Research must substantially relate to new or improved function, performance, reliability, durability or quality, p , y, y q y

Experimentation is the evaluation of multiple alternatives including developing and testingalternatives, including developing and testing hypotheses and including systematic trial and error

Experimentation goes beyond “lab work” it includesExperimentation goes beyond lab work – it includes both conference room and shop floor experimentation time

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Expenditures incident to the development or improvement of a product or process

E i h f ll i iExpenses in the following categories:WagesSuppliesSuppliesContract research

Costs and attorney’s fees associated with obtaining a patent

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Research after beginning commercial production

Research paid for by a customer (or governmental entity)

Duplication of an existing product or process

Quality control testing

Advertising and promotion

Surveys or studies

Research conducted outside of the United States

Research in the social sciences, arts or humanities

The acquisition of another’s patent, model, production or process

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Regular creditUse this if you have proper base period documentationUse this if you have proper base period documentation

20% (or 13% if electing the reduced credit) of the excess of qualified research expenses over a base amount

Use reduced credit if your combined tax bracket is at least 35%

Base is a fixed percentage of taxpayer’s average annual gross i f U S b i f h l 4receipts from U.S. business for the last 4 years

• Not less than 50% of qualified research expenses

• For a company started before 1984, the fixed percentage is the t f h t i t f ‘84 th h ’88percent of research expenses to gross receipts for ‘84 through ’88

(not more than 16%)

• For a newer company, the fixed based percentage ranges from 3% to 16%16%

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Alternative simplified research credit:

14% (formerly 12%) of the excess of the research expenses for the year over 50% of the average

h f h h dresearch expenses for the three preceding years

Multiply by 65% for reduced credit

If no research expenses for any of the preceding three years, 6% is used for the credit percentage

Once this method is used, it applies for all future years unless revoked with the IRS’s consent

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Facts:

Research expenses for each year:• 2009 - $75,000$ ,• 2008 - $40,000• 2007 - $30,000• 2006 - $20,0002006 $20,000

Fixed base percentage – 5%

Average gross receipts for prior 4 years -$1,000,000

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Page 13: Research And Experimentation Tax Credits   Final

Average gross receipts $1,000,000Fixed base percentage 5%

Net $ 50,000Qualified research expenses $ 75 000Qualified research expenses $ 75,000Multiplier 50%

Net $ 37,500,Smaller of these 2 amounts $ 37,500

20% of that amount $ 7,500d d d 3% f h $ 8Reduced credit - 13% of that amount $ 4,875

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Q alified research e penses $ 75 000Qualified research expenses $ 75,000Less ½ of prior 3 year’s average $ 15,000

Difference $ 60,000Applicable percentage 14%

Full credit $ 8,400Reduced credit (65% of full credit) $ 5,460

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Who bears the economic risk?

The research cannot be funded by a third party (your customer or a grant)(y g )

BUT if payment for the research is contingent on success, then the research is not considered fundedsuccess, then the research is not considered funded

Taxpayer must have substantial rights to the researchresearch

Unreimbursed contract overruns may qualify

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Tax rules themselves

Credits only allowable to extent of regular tax over alternative minimum tax (“AMT”)

AMT for passive investors (10 year amortization versus deduction)

N i l (BUT 1 di b k d 20Net operating losses (BUT 1 year credit carryback and 20 year carryover)

Base year computations may be an impossible hurdleBase year computations may be an impossible hurdle AND cannot use alternative simplified method or elect the reduced credit on an amended return

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Audit risk

Tier 1 audit issue

“Hot button” for the IRS

Key to successful defense is appropriate documentationKey to successful defense is appropriate documentation

Patent safe harbor rule: issuance of a patent is l i id h h h di dconclusive evidence that the taxpayer has discovered

information that is technological in nature – NOT required

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Documentation is the absolute key

Create “nexus” between time spent and the specific research activityresearch activity

The credit includes wages for people who support research activities

Management, engineering, plant supervisors, technicians and assembly

Possibly a sale person who is selling because he has a technical background and experience and he uses this knowledge to make design changes and modificationsg

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We can’t afford to properly document our expenses – documentation does not have to be fancy yourdocumentation does not have to be fancy, your accountant can help!

We are not developing new products – the creditWe are not developing new products the credit also applies to improvements to existing products or processes

The credit only applies to large companies – the credit works well for all sizes of companies

It is impossible to get the credit – with proper documentation and/or the use of a specialty firm, you CAN get this credit!y g

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All manufacturers Other businesses

ChemicalPackagingFurniture/household goods

Dental laboratoriesMetal fabricationTool and die

Aerospace/defenseAutomotiveMetallurgyM i /b

Software developersApparel designersEngineering firmsFood/beverage processorsMarine/boat

GlassPrintingElectronics

Food/beverage processorsMiningBiotechnology

ElectronicsRoboticsPlastics

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This credit is one of the only ways to save taxes that does not cost you additional dollars over what you are already spending

The credit is there for you to use

Do NOT leave money on the table!

For more information, contact Barbara J. OswaltPhone: 321-255-0088

Email: [email protected] y

Copyright 2010