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Summing It Up

Keeping you ahead of the curve with timely news & updates.


Why You Might Want to Wait on an R&D Tax Credit Study… Even if You Pass the 4-part Test

BlogBefore spending, consider these 2 additional R&D tax credit tests from the experts at Freed Maxick

We’ve written a lot about how the Research and Development (R&D) Tax Credit delivers tax savings for businesses with qualifying activities. 

It’s important to know that claiming the Credit involves preparing a detailed study, documentation, and interactions with the IRS. Most firms engage a professional to help them claim the credit and consider the fees they pay as an investment. 

In our work helping businesses identify costs and calculate the credit, we’ve noticed that even though some businesses may have expenses that meet the 4-part test, they may still not benefit from the credit because of circumstances that limit its applicability. 

That’s why our R&D Tax Credit Team does a Situation Assessment prior to an engagement. That includes performing two initial additional “tests” complementing the 4-part test that can identify factors limiting your company’s ability to claim the credit. 

If the company does not pass these tests, we may recommend deferring activities pursuant to claiming the credit until a later date. These include: 

Additional Test 1: Do You Own the Risks and Rewards of the R&D Activity? 

If a business is hired to conduct qualified research activities by another business, the claim for the credit will generally flow to the business that bears the risk of failure and owns the rights to success. Businesses may be hired to develop a product or process by another company. These contracts often call for the researching business to receive a fixed fee for the work regardless of result and it transfers the rights to the results to the hiring business. 

Even though research costs might qualify for the credit, the company that hired the research business would be the one to claim it. 

The determining factor in a situation like this will be the contract between the two companies. If your company performs research on a contract basis for other businesses, it’s important to consider the value of the R&D tax credit when negotiating a contract. 

Your business might still end up in a better position if you are paid regardless of result, but understanding the value of the tax credit foregone can lead to more equitable pricing for both parties. 

Additional Test 2: Do You Owe Taxes? 

In addition to the ownership of risks and rewards, businesses sometimes find that they qualify for a credit but can’t claim it in the current year because they aren’t making money, and therefore have no tax liability.  For individuals, alternative minimum tax (AMT) limitations could prevent one from claiming credit, but recent tax changes significantly increased the AMT exemptions and therefore reduced the likelihood that AMT would limit credit on an individual taxpayer level. 

The R&D Tax Credit is not a refundable credit—it can reduce the balance of taxes that you owe, but if you don’t owe taxes it will not generate a refund. The PATH Act, passed in 2015, allows certain start-up businesses to apply the credit against payroll taxes owed, but if you don’t qualify for that break your business will have to carry the credit forward until a year in which it owes taxes. 

So, it may not make sense to invest in having an expert conduct an R&D study and prepare the documentation for claiming the credit.  However, at the time when you have taxable income, claiming the credit may be a prudent strategy … assuming the tax benefit you’ll receive is greater than the cost of the study that needs to be performed!  Regardless of when you do the study, you will want to maintain good internal documentation.  If you do multiple years of R&D credit claims together it is important to have good R&D tax credit documentation so you aren’t “recreating” records and reduce audit risk. 

Connect with a Freed Maxick R&D Tax Credit Expert

The important thing to remember is that a claim for the R&D Tax Credit requires careful planning. If you’re looking to hire research on a contract basis or to perform research for hire, your agreements should reflect an understanding of the value of the credit and who will have the right to claim it. 

If your business performs R&D activities but isn’t yet profitable enough to claim the credit now, you need to understand how soon you will get the value of those expenditures back on your tax return. 

These can be complicated issues, and it’s our recommendation that before pulling the trigger on a R&D Tax Credit Study, you look at applicability issues in detail. 

We can help. 

In a 30-minute phone call we can identify whether you’re eligible for the credit and if it makes sense to proceed with a claim. 

To discuss your situation contact us by clicking the button or call us at 716.847.2651.

Tax Situation Review

 

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Speaking Out on Tax Reform: 20% Qualified Business Income Deduction & Cash Method Accounting

iStock-644358770 (2)-524403-edited.jpgListen to Tax Director, Don Warrant’ s take on 2 Key Changes impacting Business Owners in the Tax Cuts and Jobs Act

Freed Maxick presents three recorded interviews with Tax Director Don Warrant on issues of importance for business owners related to tax minimization opportunities resulting from the new Tax Cuts and Jobs Act.

 

Listen to: "Listen to "Specified Service Business Eligibility for the New 20% Qualified Business Income Deduction"Specified Service Business Eligibility for the New 20% Qualified Business Income Deduction

If you own a specified service business as either a sole proprietor or as an owner of a pass-through entity, you might not benefit from a new Federal tax deduction and end up paying tax on 100% of qualified business income, instead of 80%. Hear more about this in Don’s recent interview. Listen now.

 

Listen to: "More Businesses are Eligible for the Cash Method of Accounting"More Businesses are Eligible for the Cash Method of Accounting

Under the new tax law, any business that meets a new $25 million gross receipts test is eligible for using the cash method of accounting. Hear Don talk about the benefits and steps you need to take now to capitalize on this opportunity and minimize future taxes. Listen now.

 

Listen to: "Growing Buffalo"Growing Buffalo

For your convenience, listen to Don’s treatment of both issues in this one podcast, presented in association with Entercom/WBEN’s Growing Buffalo campaign. Listen now.

 

Let’s Talk Taxes

Schedule a complimentary Tax Situation Review and we’ll discuss how changes to the Federal and State tax laws can affect your tax situation.

Tax Situation ReviewPlease call us at 716-847-2651. Or, click on the button, give us your contact information, and a member of our staff will connect with you to schedule a discussion.

 

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For more insight, observations and guidance on the new Tax Cuts and Jobs Act, visit our Tax Reform webpage.

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International Tax Accounting: Mandatory Repatriation “Toll Tax” of Income Earned by Controlled Foreign Entities

international-tax-large-583388-edited.jpgThe Tax Cuts and Jobs Act signed into law by President Trump has been at the forefront of the national news since its passage in December. There are sweeping changes to the individual, business, and international taxpayers.

The Act will have an immediate and significant impact on taxpayers involved in business out of the country. For taxpayers with an ownership position in a Specified Foreign Corporations (“SFC”), the new Act requires them to pay an 8% to 15.5% “toll tax” (for individuals it could be up to 17.5%) on all deferred foreign income of these entities as of November 2 or December 31, 2017, whether a distribution has been made or not. Different tax rates are applied based on the SFC liquidity.  

So how does this all work?

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More About Specified Foreign Corporations

An SFC is any controlled foreign corporation (generally meaning greater than 50% US ownership) or any foreign corporation to which one or more domestic corporation(s) is a US Shareholder (generally meaning greater than 10% ownership).

This means that any US Shareholder whether a domestic corporation, partnership, individual, trust, or estate, that meets these requirements as a shareholder will be subject to this toll tax if they have deferred foreign income.

US Shareholders with interests in S Corporations that have an interest in an SFC can defer the mandatory repatriation tax as long as they make the election at the shareholder level. This election can be revoked if certain events occur.

The Basis for the New International Toll Tax: From a Worldwide to a Territorial Perspective

The Toll Tax was created by an overall change in the way international tax requirements are imposed, from a worldwide system to a modified territorial based system.

Prior to the new Act, a US person was required to pay tax on all of its income, regardless of whether it was earned in the US or in a foreign jurisdiction. However, US income tax was paid on the earnings of a foreign corporation when they were repatriated back to the US in the form of a dividend or capital gain.

This created a deferral on US income taxes for earnings of a foreign corporation between when it was earned and when it was distributed. Under this worldwide system, the US person was generally allowed a foreign tax credit to alleviate some or all of this burden.

Under the Act’s new territorial system, a US person will only pay tax on income that is earned within the United States. In most circumstance, dividends from foreign corporations will now be exempt from tax if received by a US corporation and in most other circumstances a foreign tax credit will still be available for other amounts earned in a foreign jurisdiction. In order to bridge the gap between the two international tax systems, this mandatory repatriation or “toll tax” has been put into place.

How to Calculate the Toll Tax

To calculate the “toll tax”, the US shareholders will increase their Subpart F income by the accumulated net earnings and profits of all their specified foreign entities since becoming an SFC as of December 31, 2017 or November 2, 2017, whichever is greater.

Accumulated deficits are included in this calculation to offset any accumulated earnings but not below zero. In order to arrive at the lower tax rates, 15.5% on your aggregate foreign cash position and 8% on the remainder, a deduction will be calculated at the highest corporate rate to reduce the Subpart F income included on the taxpayers’ tax return. The taxpayer is also allowed to utilize a portion of their Foreign Tax Credits to offset the mandatory repatriation tax but must also include a gross-up in its income for the amount of these taxes.

The increase in the subpart F income and correlating deduction is reported during the specified foreign entities last tax year beginning before January 1, 2018. Therefore a US Shareholder that owns a calendar year SFC will report the increase in subpart F income and relating deduction on its 2017 tax return. For fiscal year SFCs, the subpart F income and correlating deduction will be reported in its US Shareholder’s tax return in 2018.

The US Shareholder can elect to pay the “toll tax” over 8 years. The taxpayer will have to pay 8% of the “toll tax” in years one through five, 15% in year 6, 20% in year 7, and 25% in year 8. There are acceleration provision to the payment of the “toll tax” if the taxpayer fails to pay timely, in the case of a liquidation, or the sale of all of its assets.

International Tax Planning: Consequences for Your 2017 Tax Return and Obligations

Since calendar year SFCs will be reported on the US Shareholder’s 2017 tax return, taxpayers must keep this in mind if they plan on extending the due date of their 2017 tax returns. Extending the due date of filing a tax return does not extend the time to pay the tax due with the tax return.

Since one of the accelerated provisions is failure to pay timely, the taxpayer must ensure that they have timely paid 8% of their “toll tax” by the original date of the tax return, not the extended date. If they do not have their tax fully paid in it could cause the taxpayer to have to pay the entirety of the “toll tax” immediately instead of over 8 years.

Connect with a Freed Maxick International Tax Accountant

If you have any questions or concerns about how this mandatory repatriation tax may impact you please reach out to the International Tax Services Team at Freed Maxick for a complementary InternationalTax Situation Review.

If you have any questions or concerns, call the Freed Maxick international tax accountants at 716-847-2651 to discuss your tax situation or start the process of setting an appointment by clicking here and submitting your contact information.

Tax Situation Review

For more insight, observations and guidance on the new Tax Cuts and Jobs Act, visit our Tax Reform webpage.

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Speaking Out on Three Key Changes for Businesses in the Tax Cuts and Jobs Act

new-tax-plan-benefits-for-business-owners-large-629572-edited.jpgListen to a tax director describe the “must know” news for business owners

There are a significant number of new rules and opportunities for business of all kinds and sizes to minimize their Federal taxes in 2018 and beyond. We’re happy to present these recorded interviews with Freed Maxick Tax Director, Bill Iannarelli, on three aspects of the new Tax Cuts and Jobs Act that business owners need to know about tax planning as 2018 heats up.

 

Listen to: "Listen to "New Rules About Depreciation"New Rules About Depreciation

In this recorded interview, Bill talks about how the new Act allows for the full expensing of real property placed in service after 9/27/17, and expanded definitions of qualified real property. Listen now.


Listen to "20% Tax Pass-Through... Are You Eligible?"20% Tax Pass-Through... Are You Eligible?

Bill discusses the 20% tax pass through for domestic qualified income for selected business types in this recording, including eligibility requirements and specific exclusions. Listen now.


Listen to "New Rules and Opportunities for Businesses"New Rules and Opportunities for Businesses

Finally, Bill presents his observations and insights on changes made to entertainment expensing – what’s in, what’s out and what employers need to know about providing meals to employees. Listen now.


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Connect With Us

If you would like to discuss how Federal and State changes to tax codes affect your situation, please call theFreed Maxick tax team at 716.847.2651 to schedule a complimentary Tax Situation Review. Or, click on the button, give us your contact information, and a member of our staff will connect with you to schedule a discussion.

For more insight, observations and guidance on the new Tax Cuts and Jobs Act, visit our Tax Reform webpage.

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Specified Service Trades and Businesses Excluded from Tax Act’s 20% Pass-through Deduction

Specified Service Trades and Businesses Excluded from Tax Act’s 20% Pass-through DeductionFor Many Taxpayers, Uncertainty Still Prevails About Their Eligibility for the Pass-through

The Tax Cuts and Jobs Act introduced a new deduction for pass-through entities equal to 20% of their qualified trade or business income. However, if you are a “specified service trade or business” and your taxable income is over $157,500 ($315,000 in the case of a joint return) your deduction is limited and once your income is over $207,500 ($415,000 in the case of a joint return) you completely lose the deduction.

What is a “Specified Service Trade or Business” Under the Tax Cuts and Jobs Act?

In general, under IRC Section 1202(e)(3)(A), the term “specified service trade or business” is any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.

As the definition is well defined, you should know whether your business is or isn’t a “specified service trade or business,” but taxpayer confusion is high. While section 1202(e)(3)(A) is not new, there is not a lot of additional guidance available to help clarify which types of businesses are and aren’t included in the definition.  

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I am going to briefly discuss what currently is out there, starting with a recommendation that you read our recent post, “Are You Eligible for the New Tax Act’s 20% Deduction?”

John P. Owen v. Commissioner

In 2012 there was a tax court case, John P. Owen v. Commissioner, that raised the issue of whether or not Mr. Owen’s business which sold prepaid legal service policies, including estate planning services,  fell under the definition of section 1202(e)(3)(A).  

The IRS argued that one of the principal assets of Mr. Owen’s business was the skill of Mr. Owen. The tax court disagreed, claiming that the principal asset of the company was the training and organizational structure stating “after all, it was the independent contractors, including Mr. Owen in his commission sales tax hat who sold the policies that earned the premiums, not Mr. Owen in his personal capacity.”  

This is a very taxpayer-friendly ruling and potentially opens the door for other taxpayers who identify a training and organizational structure as the principal asset qualifying them for the new 20% deduction from qualified business income... until further guidance is issued by the IRS.

Private Letter Ruling 2017-17010

In 2017 the IRS issued Private Letter Ruling 2017-17010 where the developer of a tool used to provide complete and timely information to healthcare providers was deemed to not be a trade or business described in section 1202(e)(3)(A). The IRS pointed to a number of factors in making their determination including:

  • The company does not discuss diagnosis or treatment with the healthcare providers.
  • The company’s only contact with patients was billing related when insurers did not cover all of the laboratory costs.
  • The skills the employees brought to the Company were not useful in performing testing as they had to be trained for up to a year to perform such testing and the skills they develop at the Company are not useful to other employers.
  • None of the Company’s revenue is earned in connection with patients’ medical care.  
  • Other than the laboratory director, none of the other employees were classified as healthcare professionals for state licensing requirements.

This was another taxpayer-friendly decision and gives a number of factors to consider when determining whether or not your business falls into this definition.  

Contact Freed Maxick for Updates and Guidance

The situations and circumstances discussed above gives us a handful of factors to consider but leaves numerous businesses and taxpayers without clear guidance. Unless the IRS releases regulations or additional guidance, there will be many businesses who cannot definitively determine whether or not they are a “specified service trade or business.”  

The tax team at Freed Maxick is available to discuss your situation and brainstorm opportunities to help you capitalize on all available Federal and New York State tax credits, incentives and minimization opportunities. Contact Mike VanRemmen at 716-847-265 to schedule a complimentary discussion, or reach us via the form, here, to schedule a Tax Situation Review.

For more insight, observations and guidance on the new Tax Cuts and Jobs Act, visit our Tax Reform webpage.

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IRS Releases 2018 Federal Withholding Tables; Payroll Questions Remain

IRS Releases 2018 Withholding TablesEmployees should still review withholding to make sure they are not surprised by a significant balance due at tax time.

The IRS has issued updated payroll withholding tables designed to reflect changes made to the law by the Tax Cuts and Jobs Act (TCJA) in December 2017. Employers should begin using the new tables as soon as possible, but no later than February 15, 2018. The new withholding schedules will likely increase take-home pay for many employees, but taxpayers should take steps to verify that they will not be significantly underwithheld at year-end.

The new federal withholding tables are designed to work with the existing Form W-4 withholding allowance certificate that employees file when they start a new job or adjust their withholding. However, that form relies on a calculation based on the number of “personal allowances” the employee claims. While those allowances did not correspond exactly to the number of “personal exemptions” the employee could claim on an income tax return, there was some correlation between the two. The TCJA eliminated personal exemptions in favor of a larger standard deduction. This created a potential disconnect between the tax law and the withholding calculation that could result in a significant difference between amounts withheld and income taxes owed at the end of the year.

The IRS does offer a withholding calculator on its website to help employees understand how much money should be withheld from each paycheck. At this time, the calculator is being revised to accurately reflect the new law. The Service “anticipates that this calculator should be available by the end of February.” Employees should be encouraged to double-check their withholding once the new calculator is available. A new Form W-4 is also in the works, and the IRS states that it will “work with the business and payroll community to encourage workers to file new Forms W-4 next year…”

Until then, taxpayers may want to be more active in managing their withholding amounts than they have in the past.

For more information about federal tax payroll withholding and other changes resulting from the TCJA, please contact Freed Maxick.

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Freed Maxick CPAs, P.C. is Western and Upstate New York’s largest public accounting firm and a Top 100 firm in the United States. Freed Maxick’s reputation and experience with business and tax issues has made us a go-to firm for businesses and individuals from all over the U.S. and Canada and around the world.

For more insight, observations and guidance on the new Tax Cuts and Jobs Act, visit our Tax Reform webpage.

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Tax Cuts and Jobs Act 20% Pass-through Tax Deduction: Are You Eligible?

calculator money-643477-edited.jpg

Complex Qualification Rules and Calculations Lie Ahead

The Tax Cuts and Jobs Act has introduced into tax law the opportunity for an individual taxpayer to take a 20% deduction related to their qualified trade or business income from a partnership, S-corporation, or sole proprietorship. Determining this deduction is not as easy as just multiplying your qualified business income by 20% because there are limitations that must be considered when calculating your income deduction.

What’s Not Included in the Act’s Definition of a Qualified Trade or Business?

First, it is important to understand what is not included in the definition of a qualified trade or business.  

Qualified trades or businesses do not involve the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and any trade or business where the principal asset of the business is the reputation or skill of one or more of its employees. The Tax Cuts and Job Act specifically includes engineering and architecture services as qualified trades or businesses.  

However, if your business is excluded under this provision, you still may qualify for benefits if your taxable income is below the thresholds defined below.

Limitations on the 20% Pass-Through Deduction

In general, you can deduct the lesser of: 20% of taxable income or 20% of the qualified business income (QBI), defined as the net amount of qualified items of income, gain, deduction, and loss with respect to the qualified trade or business. Qualifying items are those that were taken into account when determining taxable income for the year and relate to a trade or business within the United States.

Wage limitations on the qualified business income deduction will apply when your taxable income exceeds the threshold amount of $157,500 ($315,000 in the case of a joint return). The limitation is fully phased in when your taxable income is the threshold amount plus $50,000 ($100,000 in the case of the joint return).

The 20% deduction is limited to the greater of: 50% of the W-2 wages related to the qualified business or the sum of 25% of W-2 wages with respect to the qualified business plus 2.5% of the unadjusted basis of all qualified property related to the qualified business. These limitations only affect you if your taxable income is over the threshold amount. When the wage limitation is fully phased in, your qualified business income will be the lesser of: 20% of your qualified business income, 20% of taxable income, or the greater of (1) 50% of W-2 wages or (2) 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property with respect to the qualified trade or business.  

Three Examples of Calculating a Qualified Business Income Deduction

Example 1: assume you file a joint tax return, have taxable income of $420,000, and qualified business income of $75,000.  

Your share of W-2 wages related to the qualified business is $20,000. Taxable income has caused the wage limitation to fully phase in, as a result, the qualified business deduction will be the lesser of the following:

Taxable Income: $420,000 x 20% = $84,000
Qualified Business Income: $75,000 x 20% = $15,000
50% W-2 wages:  $20,000 x 50% = $10,000
QBI Deduction $10,000

This calculation becomes slightly more complicated when your taxable income falls within the phase in limits of $157,500 - $207,500 ($315,000 - $415,000 in the case of a joint return). When 50% of the W-2 wages are greater than 20% of the qualified business income, there is excess qualified business income. In this case, a wage limit percentage will need to be calculated by reducing your taxable income by the threshold amount divided by $50,000 ($100,000 in the case of a joint return). The excess qualified business income is then multiplied by the wage limit percentage to determine the qualified business income limit. The qualified business income deduction is then found by reducing 20% of the qualified business income by the qualified business income limit.

Example 2: assume you file a joint tax return, have taxable income of $400,000, and  qualified business income of $75,000.  

Your share of W-2 wages related to the qualified business is $20,000.  Since taxable income is over the threshold amount you will be subject to a wage limitation. The qualified business deduction would be calculated as follows:

Taxable Income: $400,000 x 20% = $80,000
Qualified Business Income:   $75,000 x 20% = $15,000
50% W-2 wages:  $20,000 x 50% = $10,000

Calculation of the Wage Limit:

Taxable Income ($400,000) – Threshold Amount ($315,000) 

______________________________________________________

  $100,000

 =       85%   
Qualified Business Income $15,000
Less: 50% W-2 Wages $10,000
Excess Qualified Business Income $5,000
Wage Limit Percentage 85%
QBI Limit $4,250
   
20% Qualified Business Income $15,000
Less: QBI Limit $4,250
QBI Deduction $10,750

As stated above, the limitation based on W-2 wages and capital begins when your taxable income is above the threshold amount of $157,500 ($315,000 in the case of a joint return). This limitation is the greater of (1) 50% of W-2 wages related to the qualified business or (2) 25% of W-2 wages related to the qualified business plus 2.5% of the unadjusted basis of qualified property related to the qualified business. Qualified property is tangible property that is subject to depreciation.  

Example 3:  assume you are filing a joint return, have taxable income of $450,000, qualified business income of $80,000, your share of qualified property related to the qualified business is $100,000, and and there are no W-2 wages.  

Since taxable income is over the threshold amount you will be subject to the greater of the wage or wage and capital limitation.  

Taxable Income:   $450,000 x 20% = $90,000
Qualified Business Income: $80,000 x 20% = $16,000

The wage limit is the greater of the following:

50% W-2 Wages: $0 x 50% = $0

or

25% W-2 Wages: $0 x 25% = $0
Plus: 2.5% of Capital: $100,000 x 2.5% = $2,500
Total: $2,500
   
QBI Deduction $2,500

It is important to note that the qualified business income deduction is determined by looking at the facts of each entity separately. If you invest in more than one pass-through entity, the qualified business income deduction will be determined on an entity by entity basis.

Freed Maxick’s Tax Team Can Help You Cut Through Tax Reform Complications

Determining your qualified business income pass-through deduction can become very complicated.

Not only are you subject to various limitations, you must be sure your investment is included in the definition of qualified service trade or business. Although doing the analysis and calculating your QBI deduction can be tricky, our tax professionals are available for a no cost review of your situation.

To set up an appointment with the Freed Maxick tax team, call us at 716.847.2651 or click here to schedule an appointment, today.

For more insight, observations and guidance on the new Tax Cuts and Jobs Act, visit our Tax Reform webpage.

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