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Summing It Up

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


Jonathan Tretter

Recent Posts

Agricultural R&D Tax Credits: Which Activities Qualify?

agricultural-activities-qualify-r&dtaxcredit.jpgNew call-to-actionIf you handle finances and expenses for a commercial farm, you know how technology influences food production, from handling crops or livestock to shipping the product to market, especially with ever-evolving food sciences. As a financial professional of a large farm, you can also appreciate that there are business tax benefits available and you can understand the basics of some of those benefits.

What you may not know is how much the federal Research and Development (R&D) Tax Credit may be available to help lower your income tax bill.

What is the R&D Tax Credit?

The now-permanent R&D credit, enacted in 1981, allows taxpayers who use the hard sciences or technology to create or improve products or processes to save up to 13% of eligible spending on their taxes. Often large companies in the manufacturing, software, high-tech, and pharmaceutical industries claim the credit. Beginning last year, if you meet certain criteria the credit can also be used to offset Alternative Minimum Tax for certain small businesses and start-up businesses can utilize the credit against a portion of their quarterly payroll taxes.

Activities that qualify for the credit must meet the following four criteria: involve new or improved (aka “permitted”) products, processes, or software; be technological in nature; work toward elimination of uncertainty; and involve the process of experimentation.

Qualifying Agricultural R&D Tax Credit Activities

The agricultural industry frequently incurs costs for innovations that can qualify for the R&D credit. Technological advancements like robotics to increase yield or improve production efficiency, or technology to evaluate and test soil, are just a few activities performed by farms and other agricultural businesses that could qualify them for the R&D credit.

Qualifying agricultural activities can include developing new or improved:

  • Technologies and/or processes to improve the harvest lifecycle, from planting to harvest
  • Breeding and/or feeding techniques for livestock
  • Waste reduction or reuse
  • Packaging processes for better managing moisture or temperature
  • Methods or technologies to minimize/eliminate crop damage from disease
  • Technologies to improve the ultimate yield and freshness of product from harvest through transport
  • Product development through cross-breeding
  • Irrigation systems, or soil improvement, plant nutrients or fertilizers

New call-to-actionWhile the above might bring to mind crop production, dairy farming, livestock raising, poultry, and egg production, there are other activities that qualify. These include urban agriculture, grocery delivery, nutritional science and industrial trans-fat elimination, as well as wine and craft beer production, coffee and chocolate production, gluten-free production, meat science and fish farming.

Agriculture may present many opportunities fo R&D tax credits now and in the future. Contact us to explore this area further and to help your farming operation apply for the R&D tax credit.

For more insight, observations and guidance on the R&D Tax Credit, visit our Freed Maxick Guide to the Federal Research and Development Tax Credit webpage.

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R&D Tax Credits and AMT: Chasing Those Blues Away

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New call-to-actionA recent taxpayer-friendly change in the federal tax law has effectively expanded the number of taxpayers that can use research and development (R&D) tax credits to reduce their income tax liability. Companies that rely on the hard sciences or use technology to create or improve products or processes can reduce federal taxes using R&D tax credits. 

Historically, the rules applicable to general business credits only allowed the use of R&D tax credits to offset regular tax up to the amount of the alternative minimum tax (AMT). In many cases for corporations, shareholders in S corporations, and partners in partnerships, the high-income earners were paying AMT in excess of their regular income tax liability—meaning they could utilize none of the R&D tax credits generated each year (though the tax credits could then be carried back one year, and carried forward up to 20 years).

This limitation on the use of R&D tax credits discouraged companies and individuals subject to AMT from performing an R&D tax credit study, since they weren’t able to utilize the R&D tax credits generated.

New Opportunity to Claim R&D Tax Credits 

The IRS and Congress were aware of this limitation and instituted changes through the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). Effective for tax years beginning after December 31, 2015, “eligible small businesses” and their owners can use R&D tax credits to offset AMT.

The following example demonstrates the impact the PATH Act has had on the ability of a small business owner to utilize R&D tax credits. In this example, the taxpayer is an owner of an S corporation and a Limited Liability Company (LLC) and the taxpayer is actively involved in both entities. The flow through ordinary income and R&D tax credits from the S Corporation are $140,000 and $15,000 respectively. The flow through ordinary income and R&D tax credits from the LLC are $260,000 and $25,000 respectively. The taxpayers’ utilization of R&D tax credits and the resulting tax savings pre and post Path Act are shown below.

  PRE PATH ACT POST PATH ACT
Adjusted Gross Income $540,000 $540,000
Regular Tax $148,000 $148,000
Alternative Minimum Tax $144,000 $144,000
Difference $4,000 $4,000
R&D Tax Credit Generated $40,000 $40,000
R&D Tax Credit Used $4,000 $40,000
Tax Savings   $36,000

Note: AMT limitations continue to apply to any R&D tax credits carried forward from taxable years beginning before 2016.

“Eligible Small Business” Defined

This new tax savings opportunity is available for a non-publicly traded corporation, partnership, or sole proprietorship if the average annual gross receipts for the three-taxable-year period preceding the credit year do not exceed $50 million. Partners, LLC members, and S corporation shareholders must also meet this gross receipts test.

This change in the PATH Act may present your business with an opportunity to re-evaluate your activities to determine qualification for R&D tax credits.

New call-to-actionWe may be able to quickly tell you if you are an eligible small business that qualifies for R&D tax credits. Have your financial and tech specialist contact us for a no-cost preliminary consultation with a member of our R&D tax credit services team.

For more insight, observations and guidance on the R&D Tax Credit, visit our Freed Maxick Guide to the Federal Research and Development Tax Credit webpage.

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Start-up Companies, Payroll Taxes, and R&D Credits: What’s the Connection?

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Cash is king in the early days of a new company, and you may be able to use federal R&D credits to generate much needed cash during the initial years of your new company.

R&D and the QSB Election

New call-to-actionThe R&D credit, which rewards companies for increasing research expenditures, was permanently extended by the Protecting Americans from Tax Hikes (PATH) Act of 2015. In addition, for tax years beginning after December 31, 2015, the PATH Act allows qualified small businesses (QSBs) to elect to offset the employer portion of Federal Insurance Contributions Act (FICA) payroll taxes with R&D credits.

A QSB is a corporation, including an S corporation or partnership that has gross receipts of less than $5 million for the current tax year and did not have gross receipts in any tax year preceding the five-tax-year period that ends with the current tax year.

Start-up companies generally incur losses during the initial years of operations and are unable to use R&D credits. The QSB election allows start-up companies to use R&D credits that might otherwise go unused or are not claimed. In addition, claiming R&D credits in the initial years of operations can generate larger tax credits in future years when research expenditures increase and profits grow.

The QSB election must be made on a timely filed tax return, including extensions, and can be made for up to five tax years. A QSB can elect to apply up to $250,000 of current year federal R&D credits against their employer portion of FICA payroll tax liability beginning with the calendar quarter following the date on which the tax return is filed. Any excess elected amount exceeding the employer portion of FICA payroll tax liability is carried forward to the next calendar quarter. A QSB must also file IRS Form 8974 with Form 941each quarter.

For example, let’s say your new company is a QSB and has R&D expenditures of $25,000 per year for the first five years of operations. As a result, your new company generates $2,500 of R&D credits each year. By making the election to apply R&D credits against the employer portion of FICA payroll tax, your company enjoys $12,500 of cash savings.

Do You Qualify?

Basic questions to determine whether your company is eligible to claim R&D credits include:

  • Do you have payrolled employees?
  • Are you developing a new products or processes? What’s in the pipeline?
  • Do you have wages associated with that development? Who’s doing the R&D?
  • Do you retain rights to what you developed? To qualify, you don’t need to hold exclusive rights, just significant ones. For instance, can you take what you’re developed and apply it to your next project without anyone’s legal permission?

Let our tax credit experts help you determine if your company’s activities are eligible for R&D credits by contacting us today.

For more insight, observations and guidance on the R&D Tax Credit, visit our Freed Maxick Guide to the Federal Research and Development Tax Credit webpage.

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