3 Key Misconceptions About the R&D Tax Credit

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Unfortunately, only one out of twenty small and medium sized companies who are eligible for the United States R&D tax credit take advantage of it.  However, smaller companies should not be dissuaded from filing it – particularly as the tax credit could be worth up to $10 billion annually to firms. Don’t hold back your claim this year, here are three of the most common misunderstandings exposed:

#1: The R&D tax credit is only for white-coated scientists or companies conceiving a new invention

The R&D tax credit is intended to boost innovation and improve business processes. It is not confined to creating the latest tech products or getting a patent. The R&D tax credit also encompasses companies who are improving or modifying products or manufacturing processes, for example, making a product cleaner, quicker, greener, or cheaper. By no means does the development or improvement effort have to equate to rocket science.

Furthermore, companies involved in basic research are understandably primary candidates for the R&D tax credit; however, the credit is also serious about enhancing applied science – resolving a customer’s issue or a production problem using acknowledged scientific principles. Problem-solving on the site, in the field, on the shop floor, or even behind a computer – all may eligible for the R&D tax credit.

#2 The R&D tax credit won’t help state taxes

In most cases, if your company is qualified for the federal credit, it should also benefit from the state credit. Thirty-eight states have a state R&D tax credit – and several states are looking this year to increasing their R&D tax credit or producing one. Several companies have been able to use state R&D tax credits to eradicate or considerably reduce state income taxes.

#3 The R&D  tax credit is reserved for large companies

Historically, many startup companies and small businesses were unable to benefit from the research credit due to operating losses or alternative minimum tax limitations.  However, in addition to making the research credit permanent, the Protecting Americans from Tax Hikes (PATH) Act added two new provisions that are effective January 1, 2016. These two provisions are designed to increase the number of startups and small to mid-sized businesses that can benefit from the credit. In our last post, we went into details of both of these two modifications to the credit.

It is imperative, nonetheless, that businesses recognize what kinds of costs are eligible in order to maximize the credit so that appropriate records can be sustained throughout the year. Swanson Reed’s R&D tax professionals are available to discuss the R&D tax credit and the changes in the new PATH Act – contact us today if you would like to know if your company now qualifies.

Circumstances Under Which Taxpayers Benefit from the R&D Tax Credit

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The Research & Experimentation Tax Credit or R&D Tax Credit is a general business tax credit under Internal Revenue Code section 41 for companies that incur research and development (R&D) costs in the United States.  Companies may claim the R&D credit against tax for certain qualified R&D expenditures, and combine the credit as one of the components of the general business credit.

To discover more, watch our latest presentation which explains the circumstances under which some taxpayers benefit from the R&D tax credit.

Watch below, or alternatively watch on YouTube: https://www.youtube.com/watch?v=nkBf7NBD8ys

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Swanson Reed is a specialist R&D tax firm and has helped many clients across a diverse range of industries. Contact us for more information on how we can advance your company’s market value and boost its bottom line through the Research and Development Tax Credit.

 

Is Strategy and Innovation Intertwined?

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The innovation strategy defines the role of innovation and sets the direction for innovation execution. However, the role of innovation in helping organizations achieve growth targets is often unclear and the revenue growth from innovation is insufficient, unless managed with great rigor. Despite this, however, many companies fail to develop and execute an innovation strategy.

Nonetheless, companies cannot afford to ignore the benefits of leveraging innovation through strategy. PwC’s 2016 Industrial Manufacturing Trends report finds that investments in technology are “essential” for the growth of the U.S. manufacturing sector.  Many of the technological innovations used in manufacturing today will be commonplace within the next 5 to 10 years, meaning that manufacturing executives “must lead with an eye toward that reality, and not merely the current bottom line.”  Fundamentally, innovation capability can be leveraged if corporate culture and strategy fit with each other.

Ultimately, successful innovation should be an inbuilt part of your business strategy. Good strategies promote alignment among diverse groups within an organization, clarify objectives, and help focus efforts around them. Companies regularly define their overall business strategy (their scope and positioning) and specify how various functions—such as marketing, operations, finance, and research and development (R&D) —will support it. Without an innovation strategy, innovation improvement efforts can easily become a miscellaneous concoction of much-touted best practices: dividing R&D into decentralized autonomous teams, spawning internal entrepreneurial ventures, or setting up corporate venture-capital arms, to name just a few. Overall, innovation calls for a holistic approach that operates on multiple levels –   innovation becomes “strategic” when it is an intentional, repeatable process that creates a significant difference in the value delivered to consumers, customers, partners and the corporation.

What do you think, are strategy and innovation intertwined?

R&D Tax Credit for Internal-Use Software (IUS)

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In the era of the digital age, there are few areas of our lives which are not impacted by the use of technology. The business world, in particular, is moving faster and becoming more global, more mobile, and more digitized.  Ultimately, as technology advances, the digitalisation of the corporate workplace is inevitable.

As a result of this digitalization, many companies have internal-use software (IUS) systems in place. To clarify, IUS includes software that has been acquired, internally developed, or modified exclusively to meet the entity’s internal need. Nonetheless the question remains, can companies capitalize on the costs incurred in developing this type of internal software?

Our latest video tutorial explores this question and covers the qualifications for R&D Tax Credit for internal-use software (IUS).

Watch below, or alternatively watch on YouTube at: https://www.youtube.com/watch?v=G9brpOrqkRc

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Swanson Reed is a specialist R&D tax firm and has helped many clients across a diverse range of industries. Contact us for more information on how we can advance your company’s market value and boost its bottom line through the Research and Development Tax Credit.

How to Determine if a Taxpayer is Paying AMT

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The alternative minimum tax, commonly referred to as the AMT, was designed in 1969 to ensure that wealthy taxpayers didn’t use loopholes to escape paying their fair share of taxes. The AMT has its own set of rates (26% and 28%) and requires a separate computation that could substantially boost your tax bill. Basically, it’s the difference between your regular tax bill, figured using ordinary income tax rates, and your AMT bill, figured by filling out more IRS paperwork. When there’s a difference, you must pay that amount, the AMT, in addition to your regular tax.

When an AMT payment is required, affected taxpayers could end up paying thousands more in taxes. This ultimately highlights the importance of understanding if an AMT payment is obligatory.

In light of this, in our latest video tutorial, we cover the process of determining if a taxpayer is paying Alternative Minimum Tax (AMT). Watch on Youtube at: https://www.youtube.com/watch?v=VwiOrmfnb4o

Or alternatively, watch below:

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Swanson Reed is a specialist R&D tax firm and has helped many clients across a diverse range of industries. Contact us for more information on how we can advance your company’s market value and boost its bottom line through the Research and Development Tax Credit.

Creativity vs Innovation in R&D

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Is the results of research and development (R&D) derived from creativity or ground-breaking innovation – or a combination of both?

“Creativity” and “innovation” are two words that frequently get pitched in brainstorming sessions or company mission statements. Without a doubt, these principles are highly esteemed in the modern workplace, but do leaders who use the expressions accurately know the difference between them?

The key disparity between creativity and innovation is the focus. Creativity is subjective – it is almost impossible to measure and is about releasing the possibilities of the mind to generate new ideas. Innovation, on the other hand, is completely measurable. Innovation is about implementing adjustments into moderately stable systems to make an idea practical. Thus, an organisation can use innovation to apply its creative assets to propose a suitable solution and acquire a return on its investment.

Therefore, to ensure companies remain competitive in a rapidly intensifying and accelerating technological market, businesses need to develop creativity and turn it quickly into innovation. However, it is an often overlooked fact that the expenditure incurred to bring these innovations to market is potentially available for a tax rebate.

To elaborate, the federal R&D tax credit  is a frequently overlooked tax benefit, with companies often mistakenly believing they don’t qualify. The government lets you deduct the costs of research and experimentation to develop or improve a product, formula, invention, process or technique. While the R&D deduction is relatively simple for small businesses to take, doing additional calculations to claim the “innovation” or R&D tax credit can be more complex but rewarding for entrepreneurs. The credit reduces taxes dollar for dollar, and entrepreneurs can generate the biggest credit by ramping up research activities over time.

Overall, creativity is vital in today’s business world to stimulate new ideas. However, driving business ultimately derives from sifting creative ideas through an innovation process to initiate those ideas into action.  Thus, stressing the importance of leveraging the data that surrounds people, organisations, products, and processes, to drive R&D and build new revenue streams and new commercial models. Indeed, creativity is the price of admission, but it’s innovation that pays the bills.

Creativity and innovation can create new opportunities for your business and allow for the creation of new products or solutions, via research and development. there were a host of tax breaks that Congress included in last December’s tax extenders legislation, the PATH Act. The new rules and regulations outlined in the PATH Act have made it easier for all types of businesses to profit from the R&D Tax Credit. Contact us today to see if you are eligible to claim the R&D Tax Relief.

Where Does The U.S. Rank in Economic Competitiveness?

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Citing a dwindling economic growth to high unemployment rates and stagnant wages, pessimists argue that the United States finest days are in the past. However, are they correct in this assumption?

A recent report from the Council on Foreign Relations, Keeping the Edge, claims otherwise. The report analyzes where the United States ranks in key dimensions of economic competitiveness. The findings reveal that on innovation, which upsurges living standards in advanced economies, no other country is close.

For instance, total US research and development (R&D) spending is higher as a share of the economy than since the 1960’s and, in absolute terms, no other country invests as much in R&D as the United States. In specific, at 2.8 percent of gross domestic product, the United States does spend heavily on R&D, however, major Asian economies – including Japan, Taiwan, and Korea – have ramped up R&D spending. In fact, according to the report, by 2020 China is projected to exceed the United States as the world’s largest R&D spender.

Moreover, the report highlights that of the top twenty universities in the world that generate the greatest consequences on scientific research, sixteen are in the United States. However, the report does find a red flag in the United States economic overview. Funding for public universities has struggled under exceptional financial pressure. If they are deprived of incentives or resources to perform high-risk but hypothetically high-impact research, scientists and academics are not as likely to produce transformative research. In light of this, the report concludes that where the United States deficiencies exist, is also where the government can have the largest part in guaranteeing the United States remains prevailing and innovative for decades to come by ensuring policies are put in place.

Nonetheless, the report reveals positive results in relation to the United State. In particular, the findings highlight that when it comes to scientific breakthroughs and commercial innovations, the United States is leading the way due to a heavy spend in research and development compared to other countries. If you have conducted research and development within your company you may be eligible for R&D Tax Credits. Contact us today to find out if you’re eligible.

Big vs Small Companies: Who Spends More on R&D in United States

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The United States, as a whole, spends the most on R&D in absolute terms and also more than most industrialized countries on R&D relative to GDP. At 2.8 percent of GDP, U.S. national R&D expenditures are currently higher than at any time since their peak in the early 1960s, when the costly U.S. space program commenced.

Indeed, companies have been pouring money into research and development at the fastest pace in 50 years. From November through the end of March 2015, U.S. companies funded R&D at an annual rate of $316 billion, or about 1.8 percent of gross domestic product, the largest share ever for the private sector. That’s up from 1.7 percent 2014 and 1.6 percent from 2007 to 2014.

Ultimately, the foundation of U.S. R&D spending has evidently shifted over time. In the 1960s, the government was responsible for two-thirds of national R&D, and businesses most of the rest. Now the shares have flipped: businesses make up two-thirds of R&D spending decisions.

Begging the question, what subdivision is spending the most on R&D expenditure – big or small companies?

In 2008, 67 percent of all R&D expenditure in the United States was paid for by private companies. Although small companies have increased their R&D spending significantly in recent years, the largest share of financing for innovation in the United States is still supplied by large enterprises, rather than small, newly founded entrepreneurial firms.

However, could this be set to change in 2016?

Historically, many startup companies and small businesses were unable to benefit from the research credit due to operating losses or alternative minimum tax limitations. Although, new alterations to the R&D tax credit are now making it easier than ever for startups and small businesses to benefit. To elaborate, thirty-five years after its original formation as a temporary provision of the tax code, the federal R&D tax credit was finally made permanent by The Protecting Americans from Tax Hikes Act of 2015 (“PATH” Act) in December 2015. Within the PATH Act, two new provisions were outlined which makes it more accessible for smaller businesses.

The first new R&D tax provision will have an enormous effect on startups. Formerly, early-stage companies that were not producing adequate income to have a federal income tax liability could only carry forward the credit for use in future years. Beginning this year, eligible startups with less than $5 million in gross receipts can apply up to $250,000 of their R&D tax credit against their payroll taxes. So now even if you don’t have a federal tax liability, the credit can generate instantaneous value for your business. Read more about the Payroll Tax Benefit with examples here.

The second provision is a positive update for shareholders of qualifying pass-through entities, such as S corporations, that have an Alternative Minimum Tax (AMT) liability. This modification allows eligible businesses with $50 million and less in gross receipts (based on a three-year average) to apply the R&D tax credit against the AMT liability. Ultimately,  this eradicates a huge obstruction that had prohibited many small businesses from obtaining the credit in the past. Read more about the AMT liability here.

Ultimately, the enhanced capability for more small businesses to use the R&D credit could see the U.S. observe a boost in smaller companies undertaking R&D. Start-ups, in particular, can now enjoy current cash benefits rather than having to wait until their companies produce taxable income to take advantage of the credit savings.

It is imperative, however, that businesses recognize what kinds of costs are eligible in order to maximize the credit so that appropriate records can be sustained throughout the year. Swanson Reed’s R&D tax professionals are available to discuss the R&D tax credit and the changes in the PATH Act – contact us today if you would like to know if your company now qualifies.

 

How to Calculate The Alternative Minimum Tax (AMT)

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Tax season is over, but if you had to pay the federal Alternative Minimum Tax (AMT), there may still be work to do.

Essentially, the AMT is a separate federal income tax system with its own tax rates, and its own set of rules governing the recognition and timing of income and expenses. In our previous video tutorial, we described more about what the AMT is and how it impacts the R&D Tax Credit.

Now, our latest tutorial outlines how to calculate the AMT. Watch the video on YouTube at: https://www.youtube.com/watch?v=CYi14pGsiUM 

Or alternatively, watch below:

https://www.youtube.com/watch?v=CYi14pGsiUM 

Check out our series so far:

Swanson Reed is a specialist R&D tax firm and has helped many clients across a diverse range of industries. Contact us for more information on how we can advance your company’s market value and boost its bottom line through the Research and Development Tax Credit.

The R&D Tax Credit for the Retail Industry…

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When the subject of research and development (R&D) tax credits is mentioned, images of white coat scientists are often conceptualized. However, those designing and creating those white coats may be eligible for the claim too. In fact, R&D tax credits are a frequently overlooked opportunity for retail and apparel companies.

Furthermore, several businesses in the apparel industry are unaware that they may be eligible for the credits due to the fact they manufacture their products overseas. Nonetheless, these same companies frequently have sample makers or testers here in the United States. Despite offshoring the production of their products in Asia or Europe, a company’s domestic design and development activities may still make them eligible for federal or state R&D tax credits.
Certainly, by capitalizing on these opportunities, fashion and apparel retailers can produce generous tax savings, including generating cash for their past and future investments. To meet the requirements for the credit, a company must endeavour to cultivate or improve the quality, reliability, or functionality of one of its processes, products, or software.  Thus, as defined by the IRS, the R&D credit is essentially an activity-based credit.

In fact, several apparel manufacturers have previously executed qualifying activities. Although aesthetic modifications are not traditionally eligible, activities related to improving a garment’s functionality or performance, for example weather-resistant clothing or dye formulas, may well qualify. In addition, software development, such as e-commerce and point-of-sale solutions, can also be eligible.

Moreover, the use and further development of innovative materials are also likely to lead to further activities that qualify for the R&D tax credit.  An example of a company utilising innovation in the apparel industry is Kusaga Athletic, aka creators of the ‘greenest t-shirt on the planet’. The company spent two years in R&D and have developed and prototyped a compostable, biodegradable shirt that uses less than one per cent of water to manufacture a standard cotton tee. This is exceptionally eco-friendly as it takes 3,000 litres of water to make a single cotton t-shirt and over two billion t-shirts are sold worldwide every year. Hence, due to investing in R&D, Kusaga Atheletic is having a huge positive impact on the effect of climate change.

Consequently, R&D can not only have a positive effect on the environment, but can also increase a company’s competitive edge in an increasingly innovative economy. Thus, organizations that take advantage of these incentives to drive innovation can create tax savings for their own business and assist in generating growth for their national issues, business models and interactions with customers, suppliers and intermediaries. If you believe your company is undertaking qualifying R&D activities, contact one of our specialists today to find out if you could benefit from R&D credits.