If your company relies on the hard sciences or uses technology to create or improve products or processes, then you may be eligible for the federal Research and Development Tax Credit. Fear of being audited makes certain taxpayers (generally smaller companies, with limited resources) choose not to claim the R&D tax credit even if they may qualify.
IRS or state audits can certainly take an extraordinary amount of time and resources to handle. However, misconceptions abound about attempting to claim the R&D tax credit and the likelihood of a future audit, possibly stemming from the credit being a Tier 1 issue (i.e. top priority for review) in the IRS old “tiered” system for tax examinations and enforcement. The IRS discontinued the tiered system in 2012 and now leaves the choice to audit R&D tax credits to the discretion of field auditors. Further, recent taxpayer-friendly law changes and announcements clearly identify the importance of the credit as a matter of tax policy and global competitiveness. This in turn suggests that the IRS will not view R&D credit claims with the same level of skepticism as they did historically.
Bogus R&D Tax Credit Claims
There’s no doubt that some taxpayers that don’t qualify still claim fictitious or egregious credits. If a company that researched Van Gogh’s life tried to claim R&D credit, they would be denied because research in the social sciences (economics, business management, and behavioral sciences), arts or humanities is excluded from the definition of qualified research. However, a company that developed new formulation of artists’ paint would not be excluded, however.
Factors Considered by the IRS to Audit a Taxpayer
Certain factors can increase the likelihood of your R&D credit claim being audited:
- The overall size of your credit claim. The larger your credit claim, the higher the likelihood of audit.
- The credit you claim versus your industry average.
- Filing an amended return that claims the R&D credit can also increase your chances of an audit, as all amended returns routinely receive additional attention from the IRS.
- The industry you are in. If IRS perceives potential abuse within an industry, you may have a higher likelihood of audit.
- If your NAICS business code is one that indicates you may not be eligible, then you probably have a higher likelihood to get audited. Examples of such businesses include hair salons and restaurants.
How to be Successful on an R&D Tax Credit Audit
One secret: documentation, documentation, documentation. Regarding the quantitative aspects of claiming the credit, it is important to substantiate the amounts of your qualified expenses with proper records that clearly demonstrate the nexus between the activities performed and amount of credit you’re claiming. Regarding the qualitative aspects of the credit, it is important to provide documentation and/or create a narrative that addresses the IRS criteria to validate the eligible nature of qualifying R&D activities. Establishing the proper framework for supporting the R&D tax credit significantly increases the likelihood the claimed will be accepted on audit for both original and amended returns.
Other tips for a successful audit:
- Don’t go at it alone or rely on your deliverable alone. Bring in an experienced R&D tax credit specialist.
- Respond timely to information document requests (“IDR’s”).
- Know the IRS audit techniques guides, which the IRS publishes to inform field agents of areas to focus on.
- Treat your IRS agent with respect.
The R&D credit can provide a tremendous benefit to the right companies. Simply filing an R&D credit claim won’t cause an audit. However, working with tax experts familiar with the R&D tax credit and audit process will help to: (1) ensure the R&D tax credit claim will survive an audit (2) to identify efficient processes for supporting the R&D tax credit claimed every year.
Please call us today at 716.847.2651 if you would like to speak with us in more detail about the audit process or to evaluate whether your company may be eligible 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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The R&D tax credit can deliver significant tax savings, but many small businesses don’t realize it’s available to them.
Yes, there is a tax credit available to all businesses, including small businesses, for R&D costs. The tax credit has been a part of the tax code in some form since the 1980’s, although for the vast majority of that time it was considered “temporary.” It had to be extended 16 times before being made permanent in the Protecting Americans from Tax Hikes (PATH) Act of 2015. Perhaps the on-again/off-again uncertainty of the tax credit’s availability has led to its underutilization by many of the businesses it was designed to help.
Whatever the cause, so many eligible taxpayers are failing to claim the available small business R&D tax credit that some members of Congress have introduced legislation aimed at improving government efforts to educate small businesses on the topic. There are two bills currently in the Senate and House, S. 650 and H.R. 1543 that would require the IRS and the Small Business Administration to work in partnership to develop basic training sessions and related information relating to federal income tax credits, especially R&D tax credits that benefit small businesses and start-up companies.
Those efforts should focus on 3 main problems:
- Small businesses don’t know the R&D tax credit exists. In the early stages of a business, tax planning sometimes takes a back seat to tax preparation. Owners who prepare their own tax returns or rely on tax preparers with limited experience may fall into the trap of “doing it like last year” instead of analyzing each year’s income and expenses with a clean slate. A failure to recognize the availability of the R&D tax credit in one year can be compounded by repeating the mistake in future years.
- Small businesses don’t think they have R&D expenses. Many taxpayers skim past the R&D tax credit because they assume it’s only available to companies “in the business” of research and development, like a pharmaceutical or technology corporation. In fact, the tax credit is based on the activity performed, not the industry of the taxpayer. Costs may qualify for the tax credit if the activity:
- --Is designed to eliminate a technical uncertainty,
- --Includes some process of experimentation,
- --Is technological in nature, and
- --Is intended to create a new or improved product or process.
Activities focused on improving or redesigning existing products, as well as designing new products, can qualify. Costs associated with creating or improving a manufacturing process or new software may be eligible. Recent IRS guidance even eased limitations on eligibility of R&D expenses related to the development of internal use software.
- Small businesses don’t have an income tax liability against which to claim the tax credit. Until recently, this hurdle used to make many startups and small businesses ineligible for the tax credit at a time when they most needed support. As part of the PATH Act, Congress enacted provisions allowing certain qualifying startups and new small businesses to claim the tax credit against the employer’s share of Social Security taxes and to calculate the tax credit without regard to alternative minimum tax limitations.
Now that the R&D tax credit is a permanent part of the tax code and its applicability to small businesses has been expanded, many businesses are taking the time to learn more about the tax credit and find out if they qualify. The calculation of tax credits and the election to claim them can be a complicated process. If you’re wondering whether your business (small or large) may be missing out on these R&D tax credit savings, please contact us at Freed Maxick.
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 R&D Tax Credit, visit our Freed Maxick Guide to the Federal Research and Development Tax Credit webpage.View full article
A 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|
|Alternative Minimum Tax||$144,000||$144,000|
|R&D Tax Credit Generated||$40,000||$40,000|
|R&D Tax Credit Used||$4,000||$40,000|
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.
We 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.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
With the new release of income tax credits, three New York State business tax credits have been extended or created to help reduce New York State income tax liability. These credits include potential claims for refundable credits even if you do not owe any income tax and may benefit employers.
For a full explaination of these credits please see our client alert here.
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.
Over the past year, commercial and industrial buildings used approximately 50% of the energy in the U.S. economy. Building on the American Recovery and Reinvestment Act, operations can be made more efficient using cost effective efficiency improvements. The “Better Buildings” initiative gives commercial and industrial builds a chance to increase efficiency 20% by 2020. These changes are built into the President’s 2014 Federal budget, which includes a proposed tax change to modify and permanently extend the 179D Energy Efficient Commercial Building Deduction. There are various strategies to the initiative.
Streamlining Green Energy Incentives for Commercial BuildingsIn order to encourage businesses to go green, a number of financial measures are being explored. Progress has been made by proposing updates to the rules for the 179D tax deduction. The Federal Government is looking to redesign the current deduction to be more generous which will encourage building owners and real estate investment trusts (REITs) to retrofit their properties.
The proposal would raise the current maximum deduction for energy efficient commercial building property to $3.00 per square foot. The maximum partial deduction allowed with respect to each separate building system would be increased to $1.00 per square foot. For taxpayers that simultaneously satisfy the energy savings targets for both building envelope, HVAC, and lighting systems, the proposal would increase the maximum partial deduction to $2.20 per square foot.
The proposal also provides a new deduction based on energy savings realized from retrofitting an existing building. The deduction would be capped at 50 percent of the total cost of implementing the plan. The deduction would be allowed on a sliding scale ranging from $1.00 per square foot of retrofit floor area, for energy savings of at least 20 percent, up to $4.00 per square foot of retrofit floor area, for energy savings of 50 percent or more. Sixty percent of the deduction would be available when the property is placed in service and would be based on the projected energy savings performance of the commercial building retrofit plan. The remaining 40 percent of the allowable deduction would be available at a later point and would be based on actual energy savings performance of the retrofit plan.
Do you know what deductions are available for your business?CSP360 is one of the nation’s leading providers of cost segregation and consulting services to real estate owners. Our philosophy is to offer clients an experienced team of professionals who take a 360° view of a taxpayer’s assets. This helps our team identify credits and incentives that the taxpayer may benefit from. Contact usto learn more!
By: Jeffery T. Zawada, CPA
A few years ago, talk of harnessing energy for commercial or residential sustainability didn’t seem practical. With no replicable models for doing community based energy projects or investments, local development didn’t seem thinkable. But with recent opportunities in community solar, crowdfunding and R&D, there has been a surge in commercial and residential development and investment.
What are other States Doing?
In 2012, California-based company, Solar Mosaic, launched their first community solar investment project, allowing 51 California investors to earn 6.38% returns for investing in a 47 kilowatt solar array on the roof of the Youth Partnership in Oakland. Their subsequent 235 KW project ups the ante; opening up to regular folks in California and New York (and accredited investors in all 50 states).
The Mosaic model turns community solar into a simple investment, letting prospective investors select a particular Mosaic project to invest in, with significantly higher returns than parking money in a U.S. Treasury or savings account. For now, it’s limited to broad participation in just two states, New York and California. This is just one example of how solar companies are expanding the reach of solar energy output.
What is New York Doing?
Governor Cuomo, in his 2013 State of the State Address, announced the Charge New York Program; making NYS part of a clean tech economy. Due to the large amount of money NY is investing in panel installations for home and business; various companies in New York offer incentives and tax credits for both residential and commercial businesses looking to recoup some of the costs.
Companies like New York State Energy Research and Development Authority (NYSERDA) offer many state incentives and credits for commercial and residential builds.
NYSERDA Solar PV Program Incentives- Saves 40-70% off the purchase cost and install on a solar electric system by combining this program with other New York Energy SMART programs;
The NYSERDA Solar Thermal Program Incentive offers both residential and commercial 15-20% off the installed cost of an ST system.
On the state and federal level, NY offers tax credits and exemptions for various solar installations. Some of these include:
The NYS Solar Credit: Is a 25% credit of the total installation cost. You have to file tax form IT-255 to receive the credit. Be mindful; there’s a cap of $5,000 on this. If you are installing a 5kw system, you’ll be due back $5,000 from the state.
The federal solar tax credit: Allows for a 30% solar installation tax credit. This credit differs slightly from NY state credits. You need to calculate your expenses after rebates. For example- on a hypothetical 5kw system priced at $25,000, you can expect back $4,875 (this is by taking the $25,000, subtracting the state solar power rebate of $8,750 to arrive at $16,250. Then take your 30% and you’ll get $4,875).
The NYS solar tax exemption: for the addition of solar panels to your home; giving an exemption from property tax increases, even though you’ll be adding roughly 20 times your annual electricity bill savings to your property value.
Various Tax Credits Available to Industries
Author: Jeff Zawada, CPA
Most of the energy used in the United States comes from Fossil Fuels; petroleum, coal, and natural gas, with crude oil products currently used as the dominant source of energy.
According to the EIA (the United States Energy Information Administration) and OPEC, market fundamentals and expectations strengthened in January 2013; forecasting growth from 110,000 bpd to 1.05 million bpd over the course of the next 22 years. While only a 12% growth rate, compared to the 26% growth from 2004-2012, EIA projections are conservative and likely to increase.
What credits are available?
The IRS has specified tax credits for the oil and gas industry; at the state level legislation varies. “Fracking” — more formally known as high volume hydraulic fracturing — involves injecting large amounts of sand, water and chemicals deep underground at high pressures to extract natural gas from rock formations. The drilling is concentrated in the Marcellus Shale formation, a deep repository that runs through West Virginia, Ohio, Pennsylvania and New York. Natural gas drilling, while maintaining certain growth expectations, is still hitting barriers in New York State.
Permit applications for conventional vertical gas well, which are still allowed in NYS, have dropped from roughly 600 in 2008 to below 200 in 2012.
Site specific special assessment reviews have to be done on an individual basis.
Currently Governor Cuomo is expected to announce a formal decision after the Geisinger Health System study, launched in Pennsylvania by Degenstein Foundation, is finished.
State by State Analysis: Quick snapshot
Pennsylvania has created over 140,000 jobs in the last few years in the drilling industry. With the launch of the Geisinger Health study, PA will provide deeper insight into drilling impact and incentives across the board.
Ohio’s Knox and Stark Counties saw the most drilling activity since 2010, at 43 wells drilled. In total Ohio currently has 11 counties reporting drilling. The state of Ohio also maintains a cost recovery assessment, as per law 1509.50. All money collected, pursuant to section C of this law, shall be deposited in Ohio state treasury to the credit of the oil and gas well fund.
In New York State, the NYS Energy Research and Development Authority (NYSERDA) has recently provided incentives for alternative fuel trucks. Credits such as: vouchers of up to $40,000 for the purchase of compressed natural gas, hybrid electric and all-electric Class 3 through 8 trucks operating in New York City, and vouchers that cover up to 80% of the cost of purchasing and installing emission reduction equipment for medium- and heavy-duty diesel vehicles operating primarily in New York City; requests for pre-qualification are now being accepted- currently there is a wait list. E85, compressed natural gas, and hydrogen fuel that is used exclusively to operate a motor vehicle engine is exempt from state sales and use taxes. Additionally, NY cities and counties may reduce the sales and use tax imposed on 20% biodiesel blends (B20) to 80% of the diesel fuel tax rate. The exemption and rate reduction are in effect until September 1, 2014 (Reference from: New York Tax Law 1111 and 1115).
What credits are available to your business? Have you maximized your IDC planning? Learn more HERE.
Freed Maxick understands the growing complexity and nature of the oil and gas industry. We can navigate industry tax filing requirements, locate tax credits, and help with financial statement audits, reviews and compilations. Still have questions? Contact us to connect with our experts, or call us at 716-847-2651.