Timing Issues for Texas R&D Tax Credit Claims

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It’s upon us: that time of year when we have to schlep through mountains of financial paperwork and rack our brains to remember major life events, minor purchases, and everything in between. Yes, tax season is officially here.

Indeed, as we edge closer to spring, we also get progressively closer  to tax day – April 15. Just like spring cleaning your home, now can be a good time to get your financials in order.

However, with tax day drawing near, it’s important to know what dates apply to your State in order to prevent overlooking deadlines. Therefore, in our latest short video tutorial, we divulge the timing issues for the Texas R&D Tax Credit claim process to prevent any delays or missed cutoffs.

Watch the on YouTube here: https://www.youtube.com/watch?v=QkdYQhlBeuQ

Or alternatively, watch below:

 

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.

Examples of Qualifying and Non-Qualifying R&D Activities

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As the cut-off for lodgement of R&D tax claims approaches, companies should now be turning their focus to the preparation and registration of their R&D tax credit claim for 2015. Nonetheless, the fact remains that there is still quite a bit of confusion around what can and cannot be claimed.

To begin with, qualifying R&D activities generally fall into one of four general categories (see infographic below).

 

In relation to the above, it is important to note that ‘new’ or ‘incremental’ is determined as related to an individual company, rather than the industry or the world.

Additional examples of qualifying activities include:

  • Design and development of new products – particularly products that are safer, more effective or have increased functionality, better performance or longer shelf life;
  • research of new applications for existing products;
  • testing for compliance with domestic or foreign regulatory requirements;
  • design, development and implementation of new reagents, testing methods or protocols;
  • product experimentation and modification to increase yield or decrease reaction times;
  • improvement of manufacturing or production technologies, processes, techniques or procedures to increase yield, reduce waste and byproducts, improve safety, improve energy efficiency or comply with regulatory requirements;
  • design and development of scaled-up manufacturing processes;
  • development of prototype pilot batches of new product candidates for testing and validation;
  • implementation of automated processes or robotics to increase production efficiency;
  • Software development or information technology initiatives related to product or process improvements; and
  • research to receive International Organization for Standardization certifications, fertilizer safety or other similar certifications.

When claiming for the R&D tax credit, the following activities are unlikely to have a link to R&D activities and thus considered non-qualifying activities. Typically, these activities would relate to general company operating expenditure that the company would undertake regardless of R&D activities.

  • routine testing or inspection activities for quality control;
  • development related purely to aesthetic properties of a product or packaging;
  • testing and qualification of production lines;
  • production line modifications which don’t involve technical uncertainty, i.e. trouble shooting involving detecting faults in production equipment or processes;
  • market research for advertising or promotions;
  • routine data collections;
  • research conducted outside the U.S., Puerto Rico or any possession of the U.S.;
  • research that is funded by a third party other than the taxpayer; and
  • any other activities that don’t meet all of the four tests previously outlined.

Undeniably, the rules and regulations surrounding the R&D tax credit may be bewildering for some. Hence, a company may wish to seek external assistance to help identity their R&D eligible activities. Many accountants are not acquainted with the ins-and-outs of the R&D Tax, thus you may wish to consider a consultant that specialises in the area. Swanson Reed specialises in the R&D Tax Credit – contact us today to discuss your eligibility and learn more about how the R&D Tax Incentive may benefit your business.

Capitalizing on ‘IoT’ in Manufacturing: How Important is Documentation?

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Undeniably, majority of us are already familiar with a number of smart devices. Powerful, sensor-equipped smart phones, for instance, have brought an unprecedented level of connectivity to our daily lives. Likewise, the Internet of Things (IoT) promises to extend sensor technology to all sorts of objects, even those that are not usually associated with the term “smart”. From a pacemaker to a coffee machine, everything will be linked together through the Internet.

Thus, the burgeoning of this fully connected world represents a unique opportunity for innovation. Throughout the nation, businesses of all types and sizes are engaged in making the IoT a reality. In effect, according to IDC, the worldwide IoT market will grow from $655.8 billion in 2014 to $1.7 trillion in 2020. Furthermore, insights from the MPI Group‘s Internet of Things Study, reveal that 76% of manufacturers will increase their use of smart devices or embedded intelligence in manufacturing processes in the next two years.

However, are companies capitalizing on all the opportunities that IoT represents? Irrefutably, the very nature of IoT is intrinsically linked to innovation.  On the one hand, new products, novel business models, improved processes, and innovative interactions are bound to emerge. On the other hand, ground-breaking technological advances will be necessary before the IoT begins to realize its full potential. Either way, companies engaged in any type of IoT-related innovation may qualify for significant federal research and development (R&D) tax credits.

Nonetheless, despite approximately two-thirds of manufacturers believing that the IoT will increase their profitability, majority are actually lagging in maximising their IoT opportunities. Specifically, MPI Group’s insights highlight that manufacturing companies are overlooking substantial R&D tax credit savings.  In fact, the study reveals only 17 percent of manufacturers said they were planning to claim tax credits and incentives for their IoT investments, meaning most manufacturers (83 percent) are missing a critical opportunity. For those manufacturers not planning to claim credits and incentives for IoT investments, concern about the associated costs is identified by only 11 percent of respondents. Whereas nearly half (45 percent) of manufacturers say the reason for not claiming the credits is based on a lack of documentation.

Ultimately, manufacturers can address the cost and risk of research and development by leveraging the aforementioned federal, state and local tax incentives. Indeed, planning ahead by creating an infrastructure that identifies qualifying research activities and collects contemporaneous documentation is ideal in reducing future tax liabilities and synthesizing an R&D tax credit that will be sustainable on audit examination. However, although documentation is useful to support these credits, courts have ruled previously that oral testimony can be used to support them as well.  For taxpayers without detailed records, reasonable estimates based on the longstanding rule in “Cohan rule” may be allowed. Though, it is still preferential to always keep contemporaneous documentation in support of research activities.

In conclusion, the R&D tax credit is available to businesses that uncover new, improved or technologically advanced products, processes, principles, methodologies or materials. As noted above, the nature of IoT is inherently interrelated to innovation and many companies engaged in any type of IoT-based innovation may qualify for significant tax savings. While claiming the credit requires time, resources and expertise, it can also provide significant monetary and operational benefits to businesses. Nonetheless, the credit continues to be underused by qualified companies primarily because of a misunderstanding of qualification and documentation requirements for federal and state credits. Therefore, in this instance, it is best to contact that help of specialist R&D Tax Advisor to assist with your claim.

Swanson Reed’s R&D tax professionals are available to discuss the R&D tax credit – contact us today if you would like to know if your company now qualifies.

St Patrick’s Day Exclusive: The R&D Tax Credit for Beverage Innovation

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Each year on March 17th, the Irish and the Irish at heart across the globe observe St Patrick’s Day. What began as a religious feast day for the patron saint of Ireland has metamorphosed into an international festival celebrating Irish culture with parades, dancing, live music, beverages and food. Undeniably, for the creators and purveyors of whiskey, Guinness and green apparel, the day is indeed worth celebrating.

Nonetheless, festivity or not, the whiskey beverage industry may already be revelling due to a spike in popularity in recent years. In 2015 alone, U.S whiskey sales increased by 20% to $664 million, according to the Distilled Spirits Council of the United States. The steady rise of whiskey drinkers, aside from the Don Draper aspirants, is most likely due to more options being available in the market.

Essentially, the variant of alternatives available for the beverage comes down to an investment in research and development (R&D) to expand the products scope. Fortunately, federal and state governments offer R&D tax credits to beverage companies of all sizes to help offset the expenses of R&D.

To clarify, the R&D tax credit allows companies that perform eligible research to receive tax breaks on certain costs, as long as it was performed in the United States. However, the credits are often mistakenly assumed to apply only to the creation of a new product or package, but there are actually a number of ways in which beverage companies can qualify for research tax credits—including for activities that already regularly occur at the company. Consider the following examples:

Product:

  • Improving the taste, texture, or nutritional content of beverage formulations
  • Incorporating new or sustainable ingredients in a formula
  • Producing sample batches in a test kitchen or a pilot run

Processes:

  • Developing techniques that will reduce costs and/or improve product consistency
  • Redesigning processes to comply with new federal or state regulations

Packaging:

  • Creating new packaging to improve shelf life, durability, and/or product integrity
  • Reducing materials or using more environmentally friendly materials in packaging
  • Introducing new or alternative materials to improve packaging

Sustainability efforts:

  • Creating new methods for minimizing contamination, scrap, waste, and spoilage
  • Increasing energy efficiency of water, fuel, and utilities through the introduction of new technologies
  • Developing processes to convert waste to energy

Thus, from developing and testing the beverage formulation to improving the distilling process, the options for innovation in this field are ostensibly broad. However, it is an often overlooked fact that the expenditure incurred to bring these innovations to market is potentially available for a tax credit. On the whole, the R&D tax credit is a valuable tool for growing and improving products – whether that is for expanding the horizons of whiskey or growing innovation within your own businesses. Prompting the question, could an R&D tax benefit be the luck you need this St Patrick’s Day?

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 – contact us today if you would like to know if your company now qualifies.

The Digitalization of the Workplace: Is Internal-Use Software Eligible for the R&D Tax Credit?

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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?

Traditionally, it was a grey area for companies seeking to qualify for the Research and Development (R&D) tax credit on the grounds of IUS. The hurdle to qualify was harder, with companies needing to pass the high threshold of the innovation test – a three-prong test where the taxpayer must prove that the software is innovative, the software development involves significant economic risk, and the software is not commercially available. Moreover, IUS had conventionally been sketchily defined by the IRS as anything that is not a third-party-facing or a commercially available product.

However, the recent change in regulations from the Department of Treasury clarifies and relaxes the IRS’ position over IUS – which is now defined as software that is developed by the taxpayer for use in general and administrative functions that facilitate or support the conduct of the taxpayer’s trade or business.

Moreover, the Treasury and the IRS have clarified that any software designed to interact with third-party customers may now forego the high threshold of innovation test, even if that software was not designed with the goal of selling, leasing, licensing or otherwise marketing it to unrelated third parties.

For years, taxpayers shied away from claiming a research tax credit for internal use software due to definitional uncertainty and the expense of defending software claims in an IRS examination.  Overall, the new regulations provide favorable guidance with a broader and more realistic definition of software eligible for the credit. Through enhanced clarity, companies can now have greater confidence when investing in software innovation.

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.

Could the R&D Tax Credit be a Game Changer for Your Business?

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Indeed, the acceleration of change today is unprecedented. It creates new opportunities for those who embrace it, and threatens obsolescence for those who don’t. Accordingly, in today’s business environment there is an increased pressure on creating new customers, new products, and new services to drive revenue growth and profits.

Undeniably, innovation and disruption are the most powerful drivers of multi-factor productivity growth within a company. Moreover, unless your company has been making the exact same product the exact same way for the past five years, you could be missing out on lucrative tax benefits.

In particular, the Research and Development (R&D) tax credit provides an estimated $10 billion in annual tax savings for U.S. companies; however the credit remains under-claimed by the majority of qualifying businesses. In fact, the Wall Street Journal estimates that a mere 5 percent of qualifying companies claim the credit. Bearing in mind the broad application of the credit and recent changes to the eligibility criteria, the R&D tax credit could be a huge game changer for companies.

To elaborate, in December 2014 the federal Research and Development (R&D) Tax Credit was made permanent after years of last-minute, deadline-driven extensions. In addition, the R&D Tax Credit will be greatly expanded to benefit companies that were effectively obstructed from eligibility in the past. Start-ups and other small businesses should take distinctive note of major changes specifically intended for their advantage.  Now, start-ups (businesses with gross receipts of less than $5 million a year) will be able to take the credit, capped at $250,000 against their 2017 payroll taxes.

In addition to the direct start-up provision, starting in 2016, small businesses (businesses with less than $50 million in gross receipts) will now permanently be able to claim the R&D credit against their Alternative Minimum Tax (AMT). The removal of the AMT barrier may see a tenfold upsurge in the number of small businesses that can utilize the R&D Tax Credit. Combined, these two alterations will benefit start-ups and small businesses with approximately $2 billion in added tax savings.

It is important to note that the eligibility for the credit is much vaster than assumed and the credit’s definition of “R&D” is more expansive than just white coat research taking place in a lab. In effect, if you are making a product or process faster, cheaper, greener or more efficient — counting nearly all software and technology development done in the U.S. — then you may qualify.

Thus, considering the modifications outlined above, the R&D Tax Credit could be a massive game changer for innovative businesses of all sizes. Since the credit is now permanent, business owners can confidently include the credit as part of their annual tax planning. Ultimately, tax savings can hugely benefit businesses by injecting money back into the company. Contact Swanson Reed today if you would like to know more about how the R&D Tax Credit works and if you’re eligible.

Calculating the Federal R&D Tax Credit

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One of the most critical challenges faced by business leaders is overcoming the time crunch in modern society.  These leaders are so pressed for time that they often end up forgoing the formal learning opportunities that help ensure that the right capabilities and skills are being developed.

One approach to meeting the time-crunch challenge is implementing “short burst” learning that takes place over a more extended period than traditional formal programs, but that results in greater retention of learning and better outcomes as learning is immediately applied.

In light of this, we’ve created a series of short video tutorials  that break ideas and topics surrounding the R&D Tax Credit up into small lots. In our latest video tutorial, discover all you need to know about calculating the Federal R&D Tax Credit in just six minutes.

Watch on Youtube: https://www.youtube.com/watch?v=PAohJi_Bx1Q

 

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.

Why It Is Easier Than You Think To Get The R & D Tax Credit

There is a bit of a myth that in order to receive the governments R&D Tax Credit you need to be a supersized company with a massive research and development budget which employ hundreds of people in white coats. This is entirely not the case and this tax credit is of growing importance not just to the larger Texas companies, but to small companies and new start-ups too.

It is all in the Interpretation:

In previous times it has been harder for companies to gain and keep the tax incentive due to the onerous nature of the paperwork and evidential responsibilities that go alongside it. Changes and clarifications of the regulations and rules in recent times have allowed the interpretation of what can be seen as research and development to become wider and allow more companies to apply and successfully gain the tax credit. Industry as a whole benefits from this and none more so than the life sciences and healthcare areas. The opportunities for research and development in this industry are vast and it is time to take advantage of this tax credit.

How Do You Apply?

In order to receive the R&D tax credits, a company must meet the criteria which have been specified by the government. Looking at these criteria you can see why many companies just assume that they do not apply to them, but it is important that you speak to a company like Swanson Reed who can interpret these rules and who have expertise in the area, as the likelihood is that projects that your life sciences and healthcare company undertake come within the four part test and you could be receiving additional assistance with your taxes.

It’s an Ongoing Process:

Due to the nature of the R&D tax credits, a company should have an ongoing strategy for dealing with them. Because they have now been given a Tier 1 status it is likely that many companies receiving the credits will be audited. It is important to have the correct documentation and evidence to hand and to be able to maintain this documentation from the inception of any claim and throughout its lifetime. Knowledge of the tax system and rules around this specific area is a must in order to ensure that adequate paperwork is retained. It is therefore important to have the support of qualified and expert professionals in all R&D tax claim scenarios.

If you are at all unsure of whether you company is entitled to the tax benefits that R&D tax credits can provide you with, speak to one of the Swanson Reed professionals today and get the advice and guidance that you need.