4 Items for Your R&D Eligibility Checklist

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Foregone Opportunities

The Research and Development (R&D) Tax Incentive was originally established in 1981 as a manner of encouraging businesses to seek innovation by creating new products and technologies or improving upon their existing products and processes.

Each year billions of dollars are claimed, offsetting the liabilities of investing in such research. However, many companies are foregoing the billions remaining in the budget due to a lack of knowledge regarding the tax incentive eligibility.

The majority of these companies are small and mid-sized businesses who may realistically need funds from their tax returns to maintain functionality.

Four Items for your R&D Checklist

Refer to the items below when considering your R&D eligibility.

1. Innovation

If you are revamping your product line, innovating your production capabilities, inventing new market technology or developing internal software you may be eligible for the R&D tax return.

Innovation is key as the information your R&D activities produce must be novel.

2. Uncertainty & Risk

Before initiating the R&D project there must be a question to which, at your current knowledge of the technology, you have no answer or no clear answer. You may have a hypothesis.

The uncertainty and risk involved in the research and development further proves the first point, that your development is indeed producing new knowledge.

3. Qualifying Research Activities (QRAs)

QRAs are the documented evidence of your research and development tasks.This can include anything from the plan writing involved in developing a novel product specific production line to the clinical testing involved in inventing an entirely new technology to detect disease.

Documenting these activities is necessary to substantiate the last item on our checklist.

4. Qualifying Research Expenses (QREs)

QREs go hand in hand with QRAs; these are the documented expenses tied to your research and development activities. Expenses are the labor directly associated with the development or management of development and supplies used during development.

Supporting Innovation

While your company may not be inventing the cure for aging, you may now have determined that the small anti-stick technology you developed for your caramel apple production line qualifies for the R&D Tax return.

If  you would like to discuss your eligibility for the R&D Tax Incentive further, please do not hesitate to contact one of Swanson Reed’s offices today.

The Wait is Over – Internal Use Software Regulations Finalized

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The United States Treasury proposed new regulations regarding Internal Use Software (IUS) for purposes of the research and development (R&D) credit under Section 41 of the Internal Revenue Code on January 20, 2015. These proposed regulations were finalized on October 4, 2016, bringing the suspense to an end. The finalized regulations are very similar to those proposed which was not the only positive outcome. The definition of IUS for purposes of the Research Credit was clarified and the non-IUS definition extended, aiding taxpayers in determining eligibility requirements. The IRS also provided clarity on how dual-function software is treated and what type of internal software can still qualify for the Research Credit. The regulations were not introduced retroactively and taxpayers are not able to amend prior returns.

 

Overview of Clarifications of IUS

The finalized regulations provide a clear definition of IUS as software developed for general administrative functions facilitating or supporting the conduct of the taxpayer’s business. Generally these functions are administrative or general tasks required for the function of the business, and are not designed for client use.

They are defined in three categories:

  • Financial Management
  • Human Resources Management
  • Support Services

Software characteristics not qualified for the Research Credit:

  • Software offered for commercial sale, lease or licence, or otherwise marketed to third parties;
  • Software to enable a taxpayer to interact with third parties; or
  • To allow third parties to initiate functions or review data on the taxpayer’s system.

Any software developed primarily for any purpose described above is not considered to be IUS within the new regulatory definition.

 

The Consistency Rule

The finalized regulations require taxpayers who have previously claimed the research credit to adjust and recalculate their base calculations in order to claim research expenses under the newly defined, favorable regulations in current and future years’ returns. Taxpayers must perform two calculations;

  • One applying the new regulations for tax years after January 20, 2015; and
  • One for any returns amended for prior years by choosing between TD 8930 or Regulation 1.41 – 4(c)(6)

 

Dual Function Software

Dual function software is presumed to be software that has been designed primarily for a taxpayer’s internal use. However where a taxpayer can identify a subset of elements of the software that only enable to the taxpayer to interact with third parties or allows third parties to initiate functions or review data, that presumption does not apply. The portion of expenditure allocated to this subset only needs to qualify for the Research Credit under the less stringent four-part test.

Where this third party subset has been identified and their remains dual function software or a subset of elements of dual function software a safe harbor rule is applicable. This allows for a taxpayer to include 25 percent of the potentially qualified research expenditures associated with the dual function subset through meeting the four-part qualifying test, while the remaining 75 percent would have to meet the higher threshold of the innovation test below.

Safe harbor is applicable where such third party interactions are reasonably anticipated to constitute at least 10% of dual function software use. When changing focus from dual to IUS or the opposite, qualifying expenses are determined on a prospective basis according to the time of change in taxpayer intent.

 

Three Part Test for IUS

Qualification for IUS requires three core tests can be established:

  • Innovation Test – Measurable and objective, and should reduce the potential for controversy. Innovative software must result in cost reduction, measurable improvement such as speed or reliability.
  • Significant Economic Risk – reasonability test requiring detailed documentation and circumstantial consideration. Taxpayer must show commitment of substantial resources, uncertainty due to technical risk and degree of uncertainty.
  • Commercially Available Test – Analysis of whether similar software may be purchased, leased or licensed and used for the intended purpose without modification, satisfying the innovation and significant economic risk requirements.

In determining the eligibility of your research, speaking with a qualified and experienced professional will be highly beneficial. Many opportunities to claim the research and development incentive are surpassed due to the common mistake of assuming ineligibility.

Whether you are interested in eligibility, adjusting your base calculation or preparing a claim as per the released IUS Regulations, if  you would like to discuss the R&D Tax Incentive further, please do not hesitate to contact one of Swanson Reed’s offices today.

Boost Your Competitive Advantage Through R&D

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Businesses that develop a research and development (R&D) strategy are more likely to grow and succeed.

Why is this? In performing R&D, companies must internally review their processes and technologies in order to identify issues. With these weaknesses targeted, both the products and services offered can be improved upon.

Innovation enables productivity and customer satisfaction to increase thereby strengthening the company’s competitive advantage.

 

Developing a Strategy

Each strategy is unique, depending on the drive and size of the company. For a small business it is beneficial to focus on perfecting the chain of production or delivery of service in order to enhance customer experience gaining trust and mutually beneficial relationships.

A larger company would also benefit from this but typically once a business is well established R&D turns toward introducing new products and services to expand further into the market.

 

Supporting Your Growing Business

While R&D is extremely necessary to increase competitive advantage, it is often times very costly. For a small business this can be challenging especially when your business is not yet profitable. The good news is that the R&D Tax Credit recognises this.

Research and development does not need to happen in a test tube to be eligible for return.

If  you would like to discuss the R&D Tax Incentive further, please do not hesitate to contact one of Swanson Reed’s offices today.

Issues Facing Multinationals After Apple’s Tax Headlines

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Apple in Ireland

This week Apple has taken a blow from the European Commission as the EU demands Apple pay their withstanding taxes to Ireland to the tune of about 14.5 billion US dollars. While Apple would be the one with a large bill, the focus lies heavily on the Irish government for what the EU defines as selective treatment or creating a special benefit for an individual or company. However, Ireland refuses to claim the taxes. Why?

By accepting the $14.5 billion Ireland will put at risk its reputation for being a cheap and stable market in which to perform business. As of 2014, Ireland had $350 billion or 311 billion euros of foreign direct investment which was 165% of GDP. Despite what is sure to be a costly fight with the European Commission, Ireland can not afford to lose these large investors. This, in effect, will damage Ireland’s relationship with the many multinationals functioning there such as Facebook and Google who have their European headquarters in the country.

Apple & the Big Brother

Apple CEO, Tim Cook, has issued a clear letter addressing Europe’s Apple community stating that the opinion issued by the European Commission has no factual basis as Apple pays the taxes it owes. The company continued to say that as nearly all of Apple’s R&D (research and development) is performed in California the vast majority of their profits are taxed within the US. This year Apple is lined up to spend about $10 billion on R&D increasing their research spending by about 30% from 2015. The letter concluded by drawing attention to proactive rather than retroactive lawmaking and by committing to further investment in Ireland and the European market.

Why has the US government supported Apple in this fight? For some time there has been conversation regarding the repatriation of profits being made abroad. While bringing the era of parking money offshore to an end would be beneficial for the US, allowing Apple to pay the sum would potentially add to the federal deficit. Additionally, Washington has stated its concern regarding the European Commission encroaching on US Government Jurisdiction. However it seems that not only the US is getting involved.

Bigger Fish to Fry

This is only the beginning of much more to come – governments worldwide have been struggling with how to tax the intangible multinationals and now the conversation has been opened. The question is; will these multinationals be forced to pay for their previous agreements or will rulings move from the current period forward?

If you would like to discuss the R&D Tax Incentive further, please do not hesitate to contact one of Swanson Reed’s offices today.

R&D Recreating Business

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Competitive Differentiation

We are all beyond aware of the rapidity of innovation today. In less than twenty years we have seen the technological dreams of Sci-Fi favorites come to life. Just this July we watched as the launch of Pokemon GO transformed the business sphere overnight, creating new methods of engaging consumers. As we accelerate our technological capabilities the challenge we face is to balance that technological innovation within human spheres such as workplaces, learning environments and business.

In a review of R&D transformation in relation to digitalization, SAP Vice President – Thomas Ohnemus, wrote that, “only five percent of companies say they’ve mastered digital transformation to the point of competitive differentiation.” In this quickly evolving market, competitive differentiation can be achieved through rapid response to the demand for innovation. This is where R&D must constantly be one step ahead of the game.

Shifting Business Structure 

While this race of market prediction is typically seen in the electronic industry, Ohnemus draws attention to the frequency in which companies are shifting from offering products to offering services. In this way companies must rethink the way they perform business; selling a service often requires continued customer relations, troubleshooting and preventative care to keep the service running smoothly.   

Innovating to Create Innovation

As the industry itself transforms, so must the workplace and the expectations surrounding furthered education within companies. Google has been one of the greatest workplace innovators – as the source of much of the world’s information Google employees are encouraged to take full advantage of the resource. Furthering education on topics of interest as well as using the company’s wide range of technological innovations to improve company culture and communication. This can be extended from personal interests to company training as education methods become faster and more accessible harnessing the strengths of millennials.


A famous example of this is Google’s 20 percent projects. Google allowed creativity to blossom and subsequently produce major projects such as Gmail and Google News by allotting for 20 percent of working hours to be dedicated to furthering personal projects and interests. While the 20 percent project time is rumored to have lost momentum it is true that, “any company can benefit from learning how to better attract and manage innovators, foster engagement and ultimately lead to success.” Thomas Ohnemus suggests that nowhere are these innovative techniques more important than in R&D.


If you would like to discuss the R&D Tax Incentive further, please do not hesitate to contact one of Swanson Reed’s offices today.

Financial Benefits of IC-DISC and R&D Tax Credits for U.S. Manufacturers [FREE WEBINAR]

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Is your manufacturing company one of the many in the United States that is experiencing a rapid increase of exported goods?  Exporting creates an opportunity to use a tax savings strategy by creating an Interest Charge – Domestic International Sales Corporation (IC-DISC). Not just for large C-Corporations, an IC-DISC applies to small/medium pass-through entities as well. However, while over 6000 small and medium businesses take advantage of the tax incentives of the IC-DISC, thousands more that are eligible are failing to do so.

Likewise, another tax incentive frequently overlooked by manufacturing companies is the R&D Tax Credit, who presume they must have on-site laboratories or breakthrough ‘white-lab coat’ research to claim the credits. Comparatively, others distress that they will face complex tax calculations or that it will trigger an IRS audit. However, many small businesses can claim the R&D tax credit. Moreover, with the changes to the permanency of the R&D tax credit and the PATH Act, the credit is now more easily available to smaller companies and start-ups.

Therefore, to elaborate on these often disregarded tax incentives, Swanson Reed has teamed up with Export Advisors to provide a FREE Webinar next week on the tips and tools you need for claiming the R&D tax credit and the  IC-DISC in the manufacturing sector. This webinar also includes an interactive Q&A session at the end to answer any questions you may have.

WHEN: Tuesday, August 23, 2016 from 1:00 PM to 2:00 PM (CDT) – Add to Calendar
Cost: Free

Structure:
1:00pm – 1:25pm CDT – R&D Tax Incentives for the Manufacturing Industry
Presenter: Cherie Jones, Tax Director – Swanson Reed
1:25pm – 1:50pm CDT – IC-DISC for the Manufacturing Industry
Presenter: Dave Spray, President – Export Advisors
1:50pm – 2:00pm CDT – Interactive Q&A Session

To ensure you don’t miss out, register for our free webinar on EventBrite:  https://www.eventbrite.com/e/financial-benefits-of-ic-disc-and-rd-tax-credits-for-us-manufacturers-tickets-27137424768 

New FDA Regulations Create R&D Tax Credit Opportunities For Food Manufacturing

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On September 10, 2015, the Food and Drug Administration released the final preventive controls rules to implement the FDA Food Safety Modernization Act (FSMA). The two new food safety rules aim to ensure the U.S. food supply is safe by shifting the focus from responding to contamination to preventing it.

The new guidelines, identified as the “Preventive Controls for Human Food rule” and “Preventive Controls for Animal Food rule,” embody a major alteration in how the federal government proceeds with food safety. Traditionally, the government carried out a responsive, crisis-based approach. Now, as a consequence of these new rules, a preventive model will become the standard model.

Consequently, the roll-out and implementation of the Food Safety Modernization Act has brought change to all aspects of food and beverage manufacturing. In particular, the regulations will require food manufacturers to highlight potential risks and develop control systems to prevent or minimize identified issues. Ultimately, the new rules affect virtually every facet of the food manufacturing industry and will entail heavy investment in technological improvements for food manufacturers across the “farm-to-table” sequence.

Despite posing as a potential challenge for the food manufacturing industry, the Research and Development (R&D) tax credit opportunities are one means of decreasing the cost acquired by companies in becoming compliant with the new regulations. The 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.

In regards to the new regulations, the R&D tax credits could apply to many of the activities that the food manufacturing industry will need to undertake in meeting the new FDA requirements. 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 food manufacturing companies can qualify for research tax credits,including:

  • Brain-storming about how to approach the quarantining process of contaminated food as a whole;
  • Improving facility safeguards to protect against the adulteration of food at various points in the manufacturing process;
  • Developing and testing prototypes of new manufacturing equipment or new components for existing equipment to better guard against error; and/or
  • Enhancing the functionality of software used by equipment involved in screening out contaminants.

As can be seen from the above, the food manufacturing sector has significantly changed due to the new regulations; bring bringing new opportunities and challenges to business leaders and policy makers. These regulations will demand substantial industry investment to meet the challenges presented by the new rules. This ultimately reveals that the R&D tax credit is not simply an important option for the manufacturing industry to utilize, but one which it would need to use to remain competitively viable.

If you would like more information, contact us today to discuss your eligibility and learn more about how the R&D Tax Incentive may benefit your business. Alternatively, earlier this year Swanson Reed teamed up with Capstan Tax Strategies to provide a  free seminar  on the tips and tools you need for claiming the R&D tax credit in the manufacturing sector. To learn more, watch the manufacturing webinar on YouTube at: https://www.youtube.com/watch?v=Zqw6sUXZhPg

NAM Manufacturers’ Seek Tax Reform to Boost Competitiveness

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Indeed, the slowing global economy, a still-cautious consumer, rising interest rates, a stronger dollar, and tax and regulatory uncertainty could each pose downside risks to U.S. economic growth. Along those lines, manufacturing production and retail sales numbers have been lower than expected over the past few years, and export sales growth has continued to be sluggish in light of economic challenges abroad.

With that said, manufacturers in the recent National Association of Manufacturers (NAM) Manufacturers’ Outlook Survey remained mostly optimistic. In specific, 61.7% of manufacturers said they had a positive outlook for their company, up from 56.6% in March and 59.6% in December.

On the other hand, the numbers in the report reflect manufacturers’ seemingly overwhelming frustration with regulations and finances. Manufacturers view a corporate tax rate of 25 percent or less, a long-term research and development tax credit, and robust cost-recovery provisions as essential elements of tax reform that would make them more competitive.  In specific, 82.6% of respondents said their company’s total spending on state and federal regulatory compliance had increased over the last few years — with capital investments and expenditures the most likely use of funds if those compliance costs dropped — while 74.3% favored lowering the corporate tax rate to 25%.

Of all of the key indicators, research and development (R&D) remains a key concern for manufacturers in the survey. In specific, more than three-fifths of respondents said they favored making an enhanced research and development incentive permanent, with 55.0% expressing a desire for robust capital cost-recovered provisions as a chief component of comprehensive tax reform.

Nonetheless, the current R&D tax credit remains a frequently overlooked opportunity for manufacturing businesses. Alongside traditional manufacturing, the United States is seeing a rising wave of innovation that has the capacity to transform existing markets and value networks. However, many innovative manufacturing companies are unaware of the potential cash-saving benefits they are eligible for.

In light of this, Swanson Reed, in partnership with Capstan Tax Strategies, recently completed a webinar which covered the basics of claiming the tax credit and cost segregation for the manufacturing industry. View the webinar here, or alternatively, on YouTube at: https://www.youtube.com/watch?v=Zqw6sUXZhPg 

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 qualifies.

Rethinking R&D Tax Documentation: Swanson Reed Appears in The Tax Advisor

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The R&D tax credit, worth approximately $7 billion annually in recent years, saw 17,700 corporations claim $6.6 billion in R&D Tax Credits on their tax returns in 2005 alone. Indeed, the many economic benefits of the R&D tax credit are well documented – however, just how well do individual companies need to keep their documents?

New research undertaken by Swanson Reed and published in the July edition of the Tax Advisor magazine explores the debate between the taxpayers and the IRS as to what records and substantiation are sufficient for claiming the R&D Tax Credit. The article examines the qualification rules and the IRS’s approach, and recent court cases to identify best practices in documenting and substantiating research tax credits. In particular, the cases have largely concluded that there was not enough documentation or that the documentation was insufficient as it is not specific enough or is disorganized.

The full extent of the importance of these findings will most significantly impact tax claimants and those operating in the discipline of research and development. Nonetheless, a better understanding of the role of documentation may help businesses plan more successful strategies for substantiating research tax credits.

The full Tax Advisor article can be found here: http://www.thetaxadviser.com/issues/2016/jul/practical-documentation-of-qras-for-r-and-d-tax-credit.html 

How the PATH Act Can Benefit Your R&D Tax Credit

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In December 2015, the federal R&D tax credit was made permanent by The Protecting Americans from Tax Hikes Act of 2015 (“PATH” Act). Apart from instilling confidence in US businesses to invest in R&D, the PATH Act included two new provisions that will make it easier for startups and small and medium-sized businesses to immediately benefit from the R&D tax credit.  

Essentially, taxpayers that couldn’t utilize or take full advantage of the tax credits in the past should now reassess their eligibility and possibly take advantage of this lucrative incentive.

However, there are a lot of questions surrounding the new rules of the permanent R&D Tax Credit, in particular, the new payroll tax offset. To provide clarification, our latest video tutorial outlines the fundamental aspects of the PATH Act, focusing on the new adjustments to the payroll tax offset.

Discover how the PATH Act of 2015 can benefit your R&D Tax Credit in under five minutes below. Alternatively, watch on YouTube at: https://www.youtube.com/watch?v=MQjLcptoSGU&feature=youtu.be

Want more like this?

Check out our series so far:

If you are wishing to claim the Payroll Tax Offset, and avoid IRS inspection, you may wish to contact a qualified R&D tax specialist, such as Swanson Reed. In addition, you will need to properly document your R&D projects as soon as they start. Read our blog on ‘How to make the most of your R&D Tax Credit Claim’ to discover more about the documentation needed.

Contact Swanson Reed 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.