R&D Tax Credit allowed to offset payroll taxes for qualifying small businesses and start-ups
It is estimated that more than 70% of eligible small businesses and start-up companies failed to claim start-up R&D tax credits and small business R&D tax credits to which they were entitled for the 2016 tax year resulting in overpayment of taxes. By failing to claim R&D tax credits to which they were entitled, they also failed to make a new election that was first available for the 2016 tax year, to apply the federal R&D tax credit against their federal payroll tax liability.
The Protecting Americans from Tax Hikes Act (PATH Act) of 2015 created this new election allowing “qualified small businesses” to apply R&D tax credits generated beginning with the 2016 tax year, to their federal payroll tax liability instead of their federal income tax liability. Congress recognized that many small businesses and startups weren’t claiming R&D tax credits due to insufficient, or no federal income tax liability. However, most startups and small businesses have payroll tax liabilities. Therefore, the PATH Act created a new election that was first available for the 2016 tax year, to allow a qualified small business claiming the federal R&D tax credit, to elect to apply the credit against their federal payroll tax liability instead of their federal income tax liability.
Many eligible small businesses and startups failed to claim the federal R&D tax credit for the 2016 tax year. Therefore, they were unable to make this election. Fortunately, the IRS issued interim guidance in Notice 2017-23 allowing qualified small businesses to amend their 2016 tax returns by December 31, 2017, to claim the R&D tax credit which would then allow them to make this election.
To qualify to make this election, the following requirements must be met:
- Be a qualified small business which is a business entity (excluding tax-exempt organizations) whose gross receipts for the current taxable year are less than $5 million and who did not have gross receipts for more than five taxable years, ending with the current taxable year. Gross receipts must be aggregated with related persons and among members of a controlled group of corporations.
- Elect to apply R&D tax credits generated for the 2016 tax year against the employer’s portion of the social security tax. The election does not affect the payroll tax deduction amount. In the case of a pass-through entity, the election is made at the entity level.
The payroll tax credit is allowed for the first calendar quarter that begins after the filing date of the original or amended tax return that includes the election. The amount elected may not exceed the lesser of 1) the current year R&D tax credit generated, 2) $250,000, or 3) the amount of the R&D tax credit carryover or carryback to the taxable year. If the payroll tax credit exceeds the employer’s portion of social security tax for the calendar quarter, the excess is applied to succeeding calendar quarters.
Freed Maxick CPAs, P.C. is one of Western and Upstate New York’s largest public accounting firms and a Top 100 firm in the United States. The start-up R&D tax credit and small busines R&D tax credit experts at Freed Maxick can assist you to determine if your business is eligible for R&D tax credits, whether your business or its owners could benefit from claiming R&D tax credits, and eligibility for the payroll tax election. Please contact us for assistance.View full article
For taxable years beginning on or after January 1, 2014, all taxpayers with tangible property such as materials and supplies, furniture and fixtures, equipment, and buildings, are required to adopt new accounting methods under the final tangible property regulations. These regulations address every phase of an asset’s life cycle—from acquisition or construction, to repair or improvement, to disposition.
To comply, taxpayers filed Forms 3115 with their 2014 tax returns and the IRS National Office or, in the case of a small taxpayer, followed the procedures outlined in Rev. Proc. 2015-20. Rev. Proc. 2015-20 was only applicable for the 2014 tax year. In addition, certain automatic changes in accounting methods were only available for the 2014 tax year.
In May 2016, the IRS issued Rev. Proc. 2016-29, providing a new comprehensive list of automatic method changes which all taxpayer must now use to file method changes for tangible property.
In September 2016, the IRS released its Audit Techniques Guide on Capitalization of Tangible Property, which provides instructions to IRS agents on the examination of taxpayer compliance with the tangible property regulations.
In December 2016, the IRS issued Notice 2017-6 waiving the five-year eligibility rule that would otherwise prevent a taxpayer from using the automatic method change procedures when they filed the same method change within the preceding five-year period.
The waiver of the five-year eligibility rule creates an opportunity for taxpayers to re-visit the work that was performed for the 2014 tax year to comply with the tangible property regulations. Any missed or corrective method changes should be filed with the 2016 tax return in advance of an IRS audit.
The IRS will request the following documentation during a tangible property regulation compliance audit:
- All Forms 3115 filed in prior years (n/a in the case of a small taxpayer following Reg. Proc. 2015-20)
- Work papers supporting any Section 481(a) adjustments (n/a in the case of a small taxpayer following Rev. Proc. 2015-20)
- Documentation supporting changes in accounting methods
- Confirmation that accounting methods were in fact changed in 2014 and consistently followed in subsequent tax years
Now is the time to make sure documentation is in place and to file Forms 3115 for any missed or corrective method changes.
Freed Maxick’s Tax Experts Can Assist with New Tangible Property Regulation Compliance
Our tax team is well versed in the Tangible Property Regulations and implementing procedures, and the method changes that can result in significant tax savings.
If you have any questions or concerns regarding compliance with the new Tangible Property Regulations or any other tax issue, you can schedule a complimentary Tax Situation Review with a member of our Tax Team here.View full article
Here in New York State, the federal and state governments offer certain types of programs that can incentivize companies as they start and grow their business. Our team recently presented this topic to the Genesee County (N.Y.) Chamber of Commerce.
You can see the video of the full presentation here.
10 Programs and Tax Credits for New York Start-ups to Consider:
While there are many programs and credits available to start-ups, here is our list of the top 10 to consider:
1. The U.S. government provides the federal research tax credit for companies that are innovative and are creating something new to their business or industry, or that are expanding a business into a new area.
2. NYS has designated 10 Innovation Hot Spots in each of the state’s economic development regions. This a tax credit program whereby your company can potentially avoid income taxes and sales taxes for five years.
3. START-UP NY offers new and expanding businesses the opportunity to operate tax-free for 10 years on or near eligible university or college campuses in the state.
4. The Excelsior Jobs program, which provides tax credits for such strategic businesses as high tech, bio-tech, clean-tech and manufacturing that create jobs or make significant capital investments, also applies to innovative companies.
5. The Investment Tax Credit applies if you or your business placed qualified property into service during the tax year. If your application is properly structured, as a new business you can potentially get cash back from NYS for up to five years.
6. The Qualified Emerging Technology Company (QETC) credit is for innovative companies looking to fulfill a key need: investment capital. This particular credit is for the investor who puts money into your company.
7. Companies starting up that are also doing R&D activities can realize a break in paying sales tax.
8. Grants for NYS start-ups come in many varieties: research, educational, energy-efficient improvements to your manufacturing facilities, capital investments. Grants can also come from many sources, such as Empire State Development.
9. With employment-based tax credits, if you’re looking to hire employees, you should be screening those employees for qualification for potential tax credits.
10. If you’re a manufacturer in NYS, you now pay 0% tax. That brings home the importance of looking for tax credits that give you cash back.View full article
The incoming administration in Washington and the majority in Congress—both from the same political party for the first time in years—indicate that massive tax reform will be a topic of discussion, if not a reality, in 2017. What does this mean for the commercial real estate industry?
Stage is Set for Tax Reform
Members of both parties in Congress have recently highlighted tax reform plans, even working overtime into the legislative break. Many lawmakers have long held that reform is overdue—a badly needed simplification and redesign of the U.S. Tax Code.
U.S. House Ways and Means Committee chief tax counsel, Barbara Angus, has gone on record saying that tax reform legislation is being crafted to be ready in early 2017, a bill expected to be derived from the House GOP “Better Way” tax reform blueprint released last summer.
Senate Majority Leader Mitch McConnell (R-KY) has said that Republican lawmakers anticipate two budget resolutions in 2017: the first concerning repeal of the Patient Protection Affordable Care Act, the second addressing tax reform.
The Current (December 2016) Tax Reform Agenda
At this point, no one can say how tax reform will shake out and what details of various aspects of any reform will affect different taxpaying individuals and entities. In terms of overall effect, the looming reform has been likened to the tax reform of 1986—which was a bit of a nightmare.
Some general points of any likely reform:
- Simplified total number of tax brackets, from the current seven to about three
- Increase in standard individual deduction
- Elimination or capping of most individual tax deductions
- Repeal of estate and gift taxes
Possible reform measures that would impact the commercial real estate industry:
- Full and immediate expensing on the purchase price of a building, instead of taking depreciation deductions on a building’s cost over many years
- Limitation or elimination of the business interest expense deduction
- Section 1031 may not be preserved
- A single tax rate for business pass-through income
Tax Change Intensifies Need for 2016 Cost Segregation Study
Given that reform items under discussion include changes to depreciation and expensing for building purchases, there’s a chance that the tax year 2016 may be the best year for commercial property owners to take advantage of doing a cost segregation study.
The upshot: tax savings accruing from accelerating depreciation may be taken off the table as a tax minimization strategy in future years.
We stress again: All speculation about specifics of the coming tax reform is just that, speculation. It does seem that the commercial real estate industry and other businesses will see some more generous tax rates—but, when they factor in the proposed broadening of the tax base and loss of deductions, certain businesses and their owners may realize limited tax savings or possibly a tax increase.
It also seems that cost recovery might soon become an even more highly complicated process, especially when you factor in how each individual state will seek to either conform or decouple from the federal rules.
(One note: Tax reform discussion also has yet to engage the commercial real estate industry and professionals who serve that industry.)
Though specifics remain unclear right now, looming tax reform only intensifies the importance of performing a cost segregation study for the 2016 tax year, or for prior tax years, and recognize the tax savings now.
Contact us or call Don Warrant, CPA at 716.847.2651 to discuss the tax savings opportunities that are available for commercial real estate owners for the 2016 tax year.View full article
After years of being temporarily extended, the Research and Development (R&D) Tax Credit has been made permanent, a policy change that might suggest wider IRS acceptance of true R&D credit claims.
Improving your business often has underpinnings in potential R&D credible activities. Every company wants to grow and differentiate itself – and one of the common denominators for differentiation is improvement in technology, whether it is to create a new or improved product or process. If you rely on the hard sciences or use technology in your business to create or improve products or processes, you might be able to reduce your federal taxes by a portion of the related costs incurred.
How to See if You Qualify for the R&D Credit
First, it’s very helpful to take a critical look at activities that anyone in your company is undertaking to pursue an idea that would make a process more efficient, more streamlined, greener, and so on. Or perhaps you’re testing the feasibility of a new or improved product, looking at overhauling an outdated software, or exploring how to communicate more effectively with your client base through the internet.
Another helpful step is to identify and review those documents that address/substantiate project initiatives and their progress (or even lack of progress—setbacks can actually be a sign that you probably have some credible R&D activity). These documents can include project reports, engineer reports, data updates, feasibility studies, outside contracts, project aspiration memos, or memos that show your company had to change the course of the project or even abandon the project altogether.
From our experience, accumulating the data and information required to support R&D activities can be fairly easy using, for instance, such readily available financial data as payroll records and supply usage compilations that went into any department or project undertaken for an R&D initiative. It might also be wise to investigate the entire history of the project. It's not unusual to discover there are unclaimed R&D credits for prior years as well.
Don’t assume that your potential credit would be too small to be worth your research time.
Even if your company has only one engineer working on a project, that engineer might need two support staffers and a supervisor. (Experienced advisers can help you determine if your applying for the credit is worthwhile.)
Keep your data and documentation simple by focusing on criteria the IRS is looking for when claiming the R&D credit. If the documentation is not there, your R&D credit team can still vet those business improvement ideas for credibility and potential by talking to project leaders or those who have been involved with the ideas on improvement.
Another key to exploring and securing the R&D credit is efficiency and finding the right advisers to guide you through claiming the credit, both when filing the refund claim and in the unlikely event of an IRS audit. Our firm has had remarkable success in retaining the R&D credits claimed if initially challenged by the IRS. We do our homework up front. For example, we have conversations early on that explore succinctly our clients’ potential for claiming and supporting their R&D credible activity.
We also look at a company’s ability to actually generate cash refunds when claiming the credit. In a limited number of cases, the R&D credit may not generate a cash refund upon filing an amended return to claim such credits. In those cases we explore the amount of benefit and when it is expected to be realized before undertaking an R&D credit study. This rarely occurs and the IRS, beginning in 2016, has further expanded the group of companies eligible for receiving a cash benefit from the credit. Beginning this year, certain small businesses with annual revenues under $50 million may qualify to claim the credit against its alternative minimum tax liability. Prior to this companies paying AMT had to carry forward the credits for use in future years. In addition, certain small business with less than $5 million in gross receipts may offset payroll taxes by the R&D credit.
We can help you explore the potential of the R&D credit for current and prior open tax years and talk about how your efforts to grow your business could generate cash savings on your federal (and state) tax returns via the R&D credit. Contact our R&D credit experts today.View full article
IRS proposed regs indicate that more costs may qualify for the credit than many people realized.
Rules proposed by the IRS suggest that costs a business incurs to develop software for internal use might be more likely to qualify for the Research and Development Credit than many taxpayers had previously understood. Internal use software (IUS) has always been held to a higher standard when it comes to qualifying for the R&D credit. The IRS guidance clearly suggests some software development costs that were previously thought to be IUS were in fact likely to be exempt, and it eases some requirements on software that is IUS when it comes to qualifying for the credit.
The new rules don’t change the four criteria that qualify an activity for the R&D credit:
- It must be intended to discover information that would eliminate uncertainty concerning the development, improvement, or design of a product or business component.
- It must be undertaken to discover information that is technological in nature.
- The intended result must be useful in the development of a new or improved business component.
- Substantially all of the activities must relate to a process of experimentation.
Once an activity meets these criteria, the business needs to determine if the activity relates to IUS. If it does, it must meet three additional criteria to qualify for the credit:
- The activity must involve significant economic risk.
- It must meet a high threshold of innovation.
- No comparable third-party software is available for purchase.
Non-Internal Use Software
On one hand, the new rules clarify that some types of internally developed software are not IUS. Software that is developed to interact with third parties or to enable third parties to initiate functions or review data on a business’ systems likely no longer need to meet the additional criteria to qualify for the R&D credit. Examples of software that no longer needs to meet the three-part IUS test include bank transaction software, delivery tracking sites, and programs that allow a customer to search a business’ inventory.
Lowering the Bar for IUS
On the other hand, the IRS made it easier to comply with the three criteria that IUS must meet in order to qualify for the credit. The new rules allow that IUS meets the innovation test if the development “is or would have been successful,” a significant relaxation on the previous requirement that the development must be successful in order to meet the innovation standard.
On the whole, these new rules represent a significant easing of requirements on businesses that would like to claim the R&D credit for software that they develop themselves or pay outside contractors to develop. If your business incurs costs for software development, this is a great time to take a closer look at those costs in light of the new rules to find out if you may be eligible for additional credits.View full article
On March 31, 2014, New York State enacted comprehensive corporate franchise tax reform with the passage of the 2014-2015 NY budget legislation. This legislation includes new rate structures, new rules for banks, changes the economic nexus rules, changes the rules on combined reporting, revises the net operating loss provisions, and changes sourcing of income and apportionment.
The changes take effect over multiple years and this legislation will result in planning for the most advantageous entity structure for N.Y. State purposes for both existing and new businesses.
Unfortunately, these changes will negatively impact utilization of non-refundable N.Y. State income tax credits by qualified NY manufacturers.
Check out our educational alert, providing an overview of the corporate franchise tax reform.
If you have additional questions, or need assistance with N.Y. State entity structuring to maximize utilization of tax incentives under the new corporate tax regime, CONTACT US today.
The Start Up NY Program, per the legislation, is ready for its long awaited unveiling. The program will help foster entrepreneurialism and job creation on a large scale through tax free communities across New York State; with concentrated focus in Upstate NY.
The goal of this program is to bring businesses and jobs to the New York State region, helping to foster growth and innovation. Participating tax free communities include college campuses and Universities.
SUNY community college and 4-year college/University can establish a tax-free community using:
Vacant land on the SUNY campus (for every campus outside of New York City)
Vacant space in buildings on the SUNY campus (for every campus outside of NYC)
Any business incubator with a bona fide affiliation to the campus, university or college, and
Up to 200,000 square feet within one mile of a campus (for every campus north or west of Westchester County).
Private Colleges/Universities: The program also provides 3 million square feet of tax-free areas primarily dedicated to private colleges and universities on land north of Westchester County, to be allocated by the START-UP NY Program Board (consisting of three members with significant academic based entrepreneurship experience) in a manner that ensures regional balance and balance among eligible rural, urban and suburban areas in the State.
For private colleges and Universities north of Westchester County, the tax-free areas can include vacant land and vacant space on- or off-campus, as well as any business incubator with a bona fide affiliation to the campus, university or college.
Of these 3 million square feet, 75,000 square feet will be allocated for each of the following: Nassau County, Suffolk County, Westchester County, and the boroughs of Brooklyn, the Bronx, Manhattan, Queens and Staten Island. Private colleges and universities in New York City and Westchester, Suffolk and Nassau Counties, as well as SUNY and CUNY campuses not specifically designated, may apply to sponsor these tax-free areas. Once the 75,000 square foot cap is reached in these counties and boroughs, the board may designate up to an additional 75,000 square feet in each. Therefore, a potential of 150,000 square feet of space will be available in these counties and boroughs.
20 State Properties: In addition, the 3-member board can also designate up to 20 strategic State assets as tax-free communities. These must be State-owned vacant land, State-owned vacant facilities or State-owned facilities that are in the process of closing and becoming vacant. Each will be affiliated with a SUNY, CUNY or independent college or university to attract new employers and new jobs and transform the site into a regional economic engine.
In order for a business to be eligible and locate within a START-UP NY tax-free community, a business will need to be aligned with or further the academic mission of the campus, college or university sponsoring the tax-free community. Businesses participating in the program will need to have positive community and economic benefits; create and maintain net new jobs in order to participate, be a company from out of state that is relocating to NYS, or the expansion of an already existing NYS company- as long as it can demonstrate that it is creating new jobs and not simply moving “existing” jobs.
In addition, New York State start-ups "created" from New York State incubators will be eligible to enter tax-free communities and be eligible for the benefits under the program
Participating companies in this program will not pay any business, corporate, sales and/or property taxes for 10 years. Employees with participating companies will not pay income taxes for the first five years, after which they will pay partial income tax based on wage income for the remaining five years.
This program will also impact the Excelsior Jobs Program, a state initiative that provides tax credits to businesses. Changes to the program include reducing, by half, the job creation requirements for businesses receiving tax credits through the Excelsior Jobs program; amended as follows:
Manufacturing – 10 net new jobs (originally 25)
Agriculture – 5 net new jobs (originally 10)
Financial service data center or financial services customer back office operation – 50 net new jobs (originally 100)
Scientific research and development – 5 net new jobs (originally 10)
Software development – 5 net new jobs (originally 10)
Back office operations – 50 net new jobs (originally 150)
Distribution center – 75 net new jobs (originally 150) - this category was previously combined with back office
Targeted industry that retains 25 full-time jobs (originally 50) or a manufacturer retaining at least 10 full-time jobs (new provision) with a cost benefit ratio of 10:1.
In addition, a pro-rated reduction in the tax credit was created in the event that the minimum job threshold is achieved and new job creation is within 75% of the net new job creation goal.
For more information on the Excelsior Jobs Program, please visit our Excelsior Jobs page.
When it comes to taxes, Freed Maxick CPAs is different than most accounting firms in Western New York. What matters to you matters to us; giving you the most up to date information and legislative changes that may affect you and help you respond in a timely way. We serve all 50 states. Contact us today.
As the first legislative quarter for 2013 comes to an end and the second quarter begins, elected officials across the country are considering a large number of state income and franchise tax law changes. Some proposals have been audacious, recommending significant tax reform (e.g., eliminating the corporate and individual income taxes), while others stay true to the current tax policies and play around the edges (e.g., eliminating tax breaks).
One of the amendments to the current tax policies in New York State applies to corporate franchise tax, bank franchise tax, tax on unrelated business income, personal income, and insurance tax. Royalty income (sometimes called running royalties) are usage-based payments made by one party (the "licensee") to another (the "licensor") for the right to ongoing use of an asset, sometimes an intellectual property. Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset or a fixed price per unit sold of an item of such, but there are also other modes and metrics of compensation. A royalty interest is the right to collect a stream of future royalty payments.
Changes to New York’s royalty income add-back and exclusion provisions, which apply to taxable years beginning on or after January 1st 2013, eliminate the exclusion of royalty income received, if the related member that made the royalty payment was required to add back the payment to its income. Further, the bill creates new exceptions:
The royalty payment was paid, accrued or incurred by a taxpayer that is organized under the laws of a foreign country that has a tax treaty with the US. The taxpayer was subject to tax in the foreign country on a tax base that included the royalty payment paid, accrued or incurred by the taxpayer; the effective tax rate equals that imposed by New York; and the royalty payment was paid, accrued or incurred pursuant to a transaction that was undertaken for a valid business purpose and using terms that reflect an arm’s length relationship.
If the taxpayer was subject to tax on or measured by its net income in New York or another state; the tax base for the tax included the royalty payment paid, accrued or incurred by the taxpayer; and the aggregate effective tax rate (a nominal rate multiplied by the recipients apportionment percentage) applied to the related member in those jurisdictions is not less than 80% of the applicable New York statutory rate.
If the taxpayer was subject to tax in New York, another state or foreign nation on a tax base that included the royalty payment paid, accrued or incurred by the taxpayer; the related member during that same taxable year directly or indirectly paid, accrued or incurred such portion to an unrelated third party; and the transaction giving rise to the royalty payment between the taxpayer and related member was undertaken for a valid business purpose.
The new legislation is forth coming, applying to tax years beginning January 1st, 2013 and all applicable taxes related to this, filed thereafter.
When it comes to taxes, Freed Maxick CPAs is different than most accounting firms in Western New York. What matters to you, matters to us; giving you the most up to date alerts to any changes that may affect you and help you respond in a timely way. We serve all 50 states. Contact us to today.
It’s always a benefit to business and real estate owners to uncover ways to save money. Did you know that the tax depreciation records of golf course owners likely contain a tax deduction that can be claimed for the 2012 tax year?
The tax deduction is claimed by adopting specific sections of the temporary repair regulations that were issued in December 2011. The IRS is allowing taxpayers to adopt specific sections of these regulations for their 2012 tax year and to defer other sections that may result in income until the 2014 tax year. Specific sections of these regulations allow taxpayers to claim a deduction for assets that are now reclassified as repairs, routine maintenance, or were disposed of before 2012.
It’s a lot of information to wade through, but CSP 360 and their affiliate Freed Maxick CPAs can help country clubs and golf course owners navigate through the complex regulations.
Get the Tangible Property Q&A now to learn more!
Check out a few examples of how we can help:
1) Tax Deductions: Golf course owners that capitalized improvements to buildings and the course since 1987, likely removed or abandoned assets as a result. The remaining tax basis in these assets and perhaps, the costs of removal, can be claimed as a tax deduction for 2012 tax year.
For another example, let’s assume during 2008 that $1 Million of structural improvements were made to a club house facility and $1 Million of land improvements were made to the golf course bringing the total investment to $8 Million. A cost segregation specialist identifies $1 Million of tax basis remaining in the real and personal property disposed of in conjunction with the improvements.
Result? The golf club owner is entitled to claim a $1 Million tax deduction for the 2012 tax year.
2) Regulation Changes: All golf course owners should prepare for other changes under these regulations which may affect current accounting policies and procedures. For example, a golf course owner that has historically expensed assets for tax purposes based on their book capitalization policy may need to act before 2014 to be able to continue to deduct assets under this policy beginning in 2014. In addition, all golf course owners will be required to review their treatment of materials and supplies and repairs in order to comply with the new repair regulations.
3) Uncovering Cash Flow: For example, let’s assume a club house was constructed and placed in service during 2004 with an original cost of $2 Million and the golf course was constructed with an original cost of $4 Million for a total capitalized cost of $6 Million. A cost segregation study reclassified $2.4 Million of the capitalized cost as land improvements and tangible personal property.
Result? This reclassification results in a $1.5 Million tax deduction for 2012 providing additional cash flow from the federal and state income tax savings.
CSP 360 is affiliated with Freed Maxick CPAs and is one of the nation's leading providers of cost segregation and consulting services to real estate owners. CSP 360 is the national leader in providing cost segregation services to the golf and hospitality industries. Our experienced team of Construction Engineers and CPAs work in the cost segregation service niche with no outsourcing.
Allow us to show you how our Cost Segregation and CapX services could result in a substantial income tax savings for the 2012 tax year. Contact Us today to learn more about how we can assist.