Busineswoman Working on Tax Credits Claiming R&D tax credits.

How to Ensure Your Client Receives the Maximum R&D Credit

By Credit, Research and Development Tax Credits, Startup, Tax, Tax Credits, Tax Incentives

The Credit For Increasing Research Activities or R&D tax credit allows businesses to claim credits for activities related to research and development.

Despite its benefits, several misconceptions prevail. Many taxpayers believe that the credit only applies to large research or healthcare organizations. Meanwhile, others think that businesses must be successful in their R&D activities to qualify.

To help your clients determine whether they’re eligible for tax liability relief, asking the right questions is critical. Let’s look at some ways to make sure that your clients receive the maximum R&D credit.

FIND OUT IF YOUR CLIENT QUALIFIES FOR AN R&D CREDIT

The first step is to find out if someone actually qualifies for this type of credit. Ask your clients the following questions:

  • Is your business involved in creating new products or upgrading existing products?
  • Do you employ software developers, engineers, or a dedicated R&D department that performs research for your business?
  • Do you outsource R&D to outside vendors?

R&D, while often associated with the software and medical sectors, also applies to a wide range of industries, such as car manufacturing and food & beverage.

Companies in these sectors develop new foods, beverages, types of vehicles, or prototypes of new products. It isn’t essential for businesses to conduct research pertaining to new breakthroughs or inventions to qualify for the credit.

WHAT TYPE OF RESEARCH DOESN’T QUALIFY?

There are certain types of research that can’t be used to claim an R&D credit. This includes:

  • Research conducted outside the United States
  • Data collection for the purposes of market research
  • Basic testing of products or equipment for quality control

HOW MUCH DID YOUR CLIENT SPEND ON R&D?

To make sure your clients receive the credits they’re eligible for, make sure they list all relevant expenses, such as:

  • Materials used for R & D such as supplies, tools, and machinery
  • Rental costs for technology and services. For example, in software development, this may include hardware rental and cloud storage fees.
  • Taxable wages paid to employees engaged in these activities
  • Funds spent on outsourcing R&D. This may include fees paid to laboratories for testing as well as the wages of employees or independent contractors who perform testing.
  • Has R&D spending increased, decreased, or remained static compared to prior years? The largest credits go to businesses where these expenses have increased. However, those with static or decreasing expenses, however, can qualify for smaller credits.

R&D CREDIT CAN APPLY TO BOTH INCOME AND PAYROLL TAXES

Keep in mind that the R&D credit isn’t only for income taxes. It may also be used by qualified businesses to offset payroll taxes of up to $250,000. However, these businesses must not have had any gross receipts prior to the five-year period ending in the current tax year.

In addition, they must not have more than $5 million in gross receipts in the current tax year. If the credit exceeds the payroll taxes owed, the remainder can be carried forward to the next quarterly return.

Taxpayers can benefit from the credit even if they don’t owe any income taxes this year. If they paid taxes last year, credits can be applied to the previous year to offset taxes paid.

WHAT ABOUT AMT?

Small businesses that pay alternative minimum tax (AMT) can use R&D tax credits, as well. The only limitations are that their average gross receipts for the last three tax years must not exceed $50 million dollars. Publicly-traded companies that pay AMT are excluded, however.

MAKE SURE YOUR CLIENTS GET THE MAXIMUM R&D CREDIT

For any business engaged in research and development, the R&D credit can be a beneficial way to save money on income and payroll taxes. Be sure to ask your clients the right questions to see if they qualify.

At Incentax, our tax credit experts can help taxpayers identify the maximum state and federal tax credits they qualify for. To learn more, contact us today.

Cost segregation and depreciation concept.

Cost Segregation Considerations for Residential and Multiplex Owners

By Cost Segregation, Real Estate, Tax, Tax Credits, Tax Incentives

Real estate offers great diversification potential in an investment portfolio.

Aside from being a source of passive income, real estate investing also comes with considerable tax benefits. Did you know that you can minimize your tax liabilities through cost segregation? Below, we define cost segregation and explain how it can benefit real estate investors like you.

DEFINING COST SEGREGATION

At its heart, cost segregation is a tax strategy. It allows real estate investors to reclassify their real estate holdings to accelerate depreciation.

The process effectively reclassifies all of your commercial and residential holdings. Once this occurs, you can realize depreciation benefits at a higher and faster rate.

But, what is depreciation? Essentially, it’s an accounting method that allows you to allocate the cost of an asset over its expected useful life. Typically, commercial and residential properties depreciate over 39 and 27.5 years respectively. However, cost segregation allows you to reclassify these properties and depreciate them over a period of five, seven, or 15 years.

Therefore, cost segregation can be an effective tool for reducing your tax burdens. The strategy must be implemented with great care, however, to avoid any IRS underpayment penalties tied to improper classifications.

HOW TO CARRY OUT COST SEGREGATION

To start reclassifying your assets, you need to carry out a cost segregation study or analysis on your real estate assets. Since an engineering-based analysis holds more weight in court, it’s best to look for a professional with engineering experience.

The individual will also need to have experience in other fields such as architecture, construction, and tax accounting to provide a comprehensive and formal cost-segregation analysis. 

As mentioned, a non-residential property (1250 property) is subject to a 39-year straight line in depreciation. Meanwhile, residential 1245 properties are subject to a 27.5-year depreciation. With cost segregation, you can depreciate over five, seven, or 15 years.

Items that are segregated or separated in a cost segregation analysis include electrical systems, carpeting, wall covers, partitions, millworks, and phone systems. Reclassifying these components as either personal property or improvements to the land (depreciable over five, seven, or 15 years respectively) leads to potential tax savings for you.

A cost segregation analysis will set you back $10,000 to $20,000, however. This means that it is most profitable for large-scale commercial real estate investors and rental property owners. When something can be depreciated, a recovery period is a massive factor in determining the benefits of segregation.

So, when should you commence cost segregation? An ideal time is immediately after the purchase, remodel, or construction of a property. If you can do so within a year, you stand to gain a lot more in terms of a tax advantage.

BENEFITS OF COST SEGREGATION 

Many people know that the 2017 Tax Cut and Jobs Act decreases marginal tax rates for individual tax brackets.

But, did you know that the law also allows 100% bonus depreciation on qualifying properties or assets acquired after September 27, 2017? Prior to 2017, the bonus depreciation limitation was 50% of the qualifying asset.

The new law also allows for Qualified Leasehold Improvement Properties to qualify for bonus depreciation. Cost segregation effectively reduces the expenses associated with real estate holdings, increases your cash flow, and maximizes your investment returns.

In terms of cost segregation, there are significant advantages for manufacturing and medical office facilities. To get more industry-specific guidance, refer to the IRS page for cost segregation.

IS COST SEGREGATION RIGHT FOR YOUR BUSINESS?

The IRS has outlined several approaches for carrying out cost segregation. As mentioned earlier, however, the best method is one that’s engineering-based. Partnering with an experienced tax firm can help you carry out an IRS-compliant cost segregation process. 

When it comes to tax credit partnerships, Incentax is your go-to firm. Our tax credit experts employ a proven, client-centric process to identify and maximize all available state and federal tax credits for your business. Contact us today to discuss whether cost segregation is the right option for your business.

Businesswoman working on R&D tax credits in the office.

4 Ways The R&D Tax Credit Frees Up Cash for Your Next Project

By Industry, Research and Development Tax Credit, Tax, Tax Credits, Tax Incentives

Any business looking to significantly reduce its tax liability needs to take advantage of the research and development tax credit, otherwise known as an R&D tax credit.

Organizations that develop new products/services or focus on enhancing existing products are eligible for the R&D tax credit. Below, we explain why the R&D tax credit is a valuable incentive and how it can free up cash for your next project.

WHAT IS AN R&D TAX CREDIT?

The R&D tax credit was put in place as part of the Economic Recovery Tax Act of 1981. Its purpose was to increase innovation in America and secure its competitive edge on the world stage. In 2015, the PATH Act extended the tax credit permanently.

The R&D tax credit is derived from the wages of employees who perform qualifying work. The R&D tax credit was instituted as a reward for businesses that spearhead technological innovations. This makes the R&D credit one of the most valuable incentives available to business owners and startups today.

WHO QUALIFIES FOR THE TAX CREDIT?

The R&D is available for any business that performs the following activities:

  • Designs and develops new products or services
  • Enhances and upgrades innovative products or services
  • Develops new software
  • Automates manual processes
  • Experiments with emerging technologies
  • Creates prototypes
  • Employs scientists, engineers, and other technical professionals

Most importantly, qualifying activities don’t have to “succeed” for your business to claim the credit. The minimum requirements for a business to qualify for the R&D tax credit are as follows:

  • Your business should have gross receipts for less than five years. This essentially means that your company should have been founded within the last five years.
  • You should also have gross receipts for less than five million dollars for the credit year
  • Your business must take part in qualified R&D activities as mentioned above

WAYS THE R&D TAX CREDIT FREES UP MONEY FOR YOUR NEXT PROJECT

  • Tax Relief

If your company is profitable and your business is due for a corporation tax payment, the tax credit will reduce the amount you must pay. If your tax credits exceed the amount you owe, you’ll get the rest as a credit.

  • Refunds

If your business has already paid corporation taxes for the period you applied for the R&D tax credit, you’ll get your money as a rebate. A rebate is a reimbursement of the tax that you’ve already paid.

  • Credit

The IRS credits back about 5% to a maximum of 15% of your company’s total qualifying expenses, including contractor payments, wages, and equipment used to perform R&D work.

If your company is posting losses, you are eligible to receive between 14% and 33% of qualifying R&D expenditures. Your business may also choose to withhold any R&D loss and instead carry it forward against any future profits. The R&D tax credit recurs so you can claim it every year.

  • Cash Flow

With the R&D tax credit, you save up to $250,000 every year on R&D expenses for a maximum of five years.

WHY YOU NEED A TAX EXPERT TO LOOK INTO THE TAX CREDIT

As can be seen, the R&D tax credit is a great incentive for innovation-focused businesses. To ensure that your business receives the maximum value of the credit and to protect you from any IRS audits, consider partnering with experienced tax experts.

Such experts should possess expertise in technical innovations and tax law. They can help you gather the relevant documentation to substantiate your claim and mitigate your liabilities in the event of an audit.

At Incentax, we are dedicated to maximizing every available tax credit for your business. We offer expertise in engineering, tech, and R&D practices. In addition, we can handle the entire R&D process for you so that you can focus on running your business.

HOW INCENTAX CAN HELP

Tax laws are increasing in complexity, and there isn’t a one-size-fits-all solution for every business. At Incentax, we can offer customized solutions that fits the needs of your business.

Above all, we can provide an assessment of how much money your business can save for your next project by filing an R&D tax credit claim on your behalf. If you’re looking for a one-stop-shop for federal and state tax savings, get in touch with us today.

Businessman going to work in an Opportunity Zone.

5 Ways Opportunity Zones Create Economic Growth

By Industry, Innovation, Startup, Tax, Tax Incentives

If you’re looking for ways to save on your tax bill, consider investing in an Opportunity Zone fund. This program allows businesses to earn tax credits by investing in distressed communities. Let’s look at several benefits of this program for both businesses and individuals.

WHAT ARE OPPORTUNITY ZONES?

An Opportunity Zone is a designation created as part of the 2017 Tax Cuts and Jobs Act. The law provides incentives to businesses for investing in “opportunity zones,” areas that are low-income and undercapitalized.

These communities are located throughout the United States in most major cities in all 50 states. The objective of these zones is to spur growth in these communities by encouraging private investments in Qualified Opportunity Funds (QOF).

In other words, you can defer taxes on capital gains by investing in a Qualified Opportunity Zone Fund within 180 days of selling property that earned you a profit. If you hold your QOF investment for 10 years, any gains you make from its sale will be tax-free.

5 BENEFITS OF OPPORTUNITY ZONES

At its heart, Opportunity Zones offer taxpayers a chance to defer tax payments. There are also several important benefits for economically distressed regions. The following are five ways that investments in Opportunity Zones can increase commercial development and community growth.  

NEW JOBS

Distressed communities often suffer from a lack of employment opportunities. As there may be few local businesses in these areas, people seeking work must often commute a long distance to find it.

Opportunity Zones provide incentives for businesses to expand and hire more employees. In this way, jobs are created in communities that need them the most.

VIBRANT NEIGHBORHOODS

By encouraging people to open businesses in economically disadvantaged areas, Opportunity Zones can contribute to the growth and vibrancy of local neighborhoods.

Community leaders can play a crucial role, offering input about investments that will fill the needs of community residents. For example, a neighborhood may benefit from a diversity of restaurants, grocery stores, and retail outlets.

TAX REVENUES FOR COMMUNITIES

When new businesses are created, it generates more tax revenue for local communities. This provides funds that can be invested in essential services such as schools, roads, public transportation, and hospitals.

Improvements in local infrastructure, in turn, make a community more attractive to business owners and skilled workers.

AFFORDABLE HOUSING FOR DISADVANTAGED POPULATIONS

Individuals who invest in real-estate projects in Opportunity Zones can qualify for tax benefits. If developers build or renovate homes and apartment buildings, it can help meet the demand for affordable housing in these communities.

Of course, this depends on the type of housing that’s built. Critics worry that investors may focus on gentrification projects that attract higher-income residents rather than helping the disadvantaged.

That said, there have been efforts by legislators to ensure that investments focus on reviving struggling neighborhoods. In 2019, congressman Hank Johnson introduced the Opportunity Zone Fairness and Inclusion Act to prohibit investments in luxury building projects.

ECONOMIC REVIVAL

By all considerations, 2020 was an extremely challenging year for business owners. Many had to close their doors, either temporarily or permanently, due to lockdowns.

As businesses attempt to recover in 2021 and beyond, they need all the help they can get. Opportunity Zones can be one factor that encourages investors to support communities that were the most affected by the pandemic.

INVEST IN AN OPPORTUNITY ZONE FUND TODAY

Opportunity Zones provide benefits to investors as well as communities. With over 8,700 Qualified Opportunity Zones around the country, you have many investment choices before you.

If you’d like to benefit from this program and need help navigating your way around Opportunity Zones, it can help to consult with experts.

At Incentax, we are tax credit specialists who can help you identify state and federal tax credits to help offset the cost of doing business. To learn more about our services, contact us today.

An expert explaining qualifying R&D expenses to a group of researchers.

3 Types of Qualifying R&D Expenses You Can Claim

By Research and Development Tax Credits, Tax, Tax Credits, Tax Incentives

Research expenses in science and technology qualify for a federal R&D tax credit. Improving your products or developing new ones may enable you to take advantage of this tax incentive. If more than 50% of your qualifying R&D activities occur at a particular location, you can apportion a percentage of R&D to that location.

The Protecting Americans from Tax Hikes (PATH) Act of 2015 and The Tax Cuts and Jobs Act of 2017 (TCJA) have made it easier for businesses that develop innovative products and services to qualify for the tax credit. You can either claim the R&D tax credit or deduct your qualified expenses under IRC Section 174. Note that exploration expenditures don’t qualify as Section 174 expenses.

1. RESEARCH WAGES

Employee wages directly tied to R&D activities are the main expenses you can claim. They include wages for:

• Employees who perform qualifying research activities, such as scientists who conduct lab experiments or engineers who construct pre-product prototypes. These are the people who directly perform the main qualifying research activities. 
• Employees who perform direct supervision like first-line managers or supervisors
• Employees who offer direct support in administrative services such as clerks, security personnel, and training staff

The staff associated with the qualifying expense must have an employment contract with the company. They should not be self-employed or operate as a private contractor. The costs associated with employee wages that you can claim include:

• Gross wages
• Employer’s NI (National Insurance) contribution
• Pension expenses, accident reimbursement expenses, and travel expenses associated with R&D projects

Wages must be paid within the accounting period and should be paid before submitting the claim. The tax credit you receive will be based on the time your employees worked on the R&D project.

This is because employees are unlikely to spend all of their time on R&D activities. They will also perform other non R&D duties. Records like timesheets are used to determine the time an employee spends on an R&D project.

2. RESEARCH SUPPLY 

Supply expenses are associated with the materials consumed when carrying out R&D activities. Examples include costs related to the use of chemicals during the testing process. Supplies pertaining to prototype testing, perfecting a patent application, or testing for product alternatives can also be included.

• Utilities

The utility costs (electricity, water, fuel, and gas) you incur in carrying out an R&D project can be claimed as a qualifying expense. The utilities must be used directly in R&D activities, however. You can also include the expenses that are incurred in running machinery or equipment for performing R&D activities. Note that expenses like rent can’t be included in the utility expense.

• Software

The software that is used directly in R&D activities is a qualifying expense. This can be standard software like Microsoft Word or Excel. It can also be dedicated software that is custom-made for a specific R&D project.

3. RESEARCH CONTRACT

Research contract expenses are costs incurred as a result of R&D activities carried out by a private contractor or organization that’s not affiliated with your company.

For the contract expense to qualify for the R&D tax incentive, the contracted work must take place in the United States. An agreement must also be drafted before performing the qualifying research. 

The contracted research is 65 percent of the expenses you incur. Examples of these expenses include an engineering consultant’s fee, a subcontractor’s fee for generating prototypes, or lab fees for performing tests. A written agreement between the taxpayer and the contractor is required for the contract expense to qualify.

It is essential to know the expenses that qualify for the federal R&D tax credit and the ones that don’t qualify so that you can take full advantage of the tax incentive.

You can use the R&D tax credit to offset costs when conducting research to solve real-world challenges. At Incentax LLC, we offer a diverse range of tax credit opportunities that benefit companies in various fields and industries. Contact us to find out how you can lower your overall tax rate as you develop innovations that benefit society.

Arizona tax credit

Arizona’s Refundable R&D Tax Credit

By Research and Development Tax Credits

Arizona provides the refundable R&D tax incentive to businesses involved in increased research and development activities in their production. This includes companies that fund research-conducted activities at the state’s university. 

The main purpose of this tax incentive is to encourage businesses in Arizona to invest more in research and development. The A.R.S §41-1507 established the refundable R&D tax incentive, and the Arizona Commerce Authority (A.C.A.) administers it.

The Refundable R&D Overview

The legislative session in 2010 passed Senate Bill 1254 that allowed the refund of the R&D tax credit. The A.C.A. has the authority to approve up to 5 million dollars of the refundable R&D tax credit if you apply for it. A.C.A. will approve your refund based on your application’s date and time. The business that applies for the funds first is given first priority. When applying for the funds, you must use actual numbers and not estimates. 

Companies have been applying for the refundable R&D incentive in large numbers leading to a rapid depletion of credits. In 2019 the state of Arizona introduced a cap for each applicant. An applicant can receive up to 100,000 dollars in one year. You can apply for the funds on the first day or after the first day, which should be a business day that follows closing the previous calendar year.

Who is Eligible for a Refundable R&D Incentive?

Beginning 2010, your company may be eligible for the funds, and you can claim a partial refund of the current year’s excess R&D Tax credit. This is possible if your business employs less than 150 employees who work on a full-time basis. 

You can apply to A.C.A. a partial refund up to 75% of the excess amount. Your company must also meet the requirements of A.R.S §41-1507, §43-1074.01, or §43-1168. You will need to submit your application to A.C.A. and get a certification before filing your tax returns. Also, a refundable processing fee is required. The fee is 1% of what your company is being refunded. The business must also comply with employer and business A.R.S sanctions.

Development Activities for R&D 

Arizona businesses must conduct specific research and developmental activities that will qualify them for the tax credit. Here are the requirements of activities that qualify:

1. Technological

Businesses that are involved in the technology and experimentation process have to make sure they rely on engineering, biology, or computer science.

2. Qualified Purpose

The research intention must be to develop a new product or improved product or process.  The end result should improve quality, reliability, and performance.

3. Technical Uncertainty

The activities of the research must purpose to solve technical uncertainty regarding the ability, design, or method of a new process or product.

4. Process Experimentation

The research activities must involve developing a hypothesis, evaluating procedures, and conducting tests. The process experimentation should aim at the efficiency of a new process.

Qualified Expenses for Refundable R&D Tax

There are specific qualified expenses for the refundable R&D incentive. They include wages for your employees who perform research and development, including supervision duties and direct support activities. 

The materials and supplies that you used to conduct qualified research is another eligible expense. The consultant you hire for the research and outside facilities used for testing, including equipment, cloud services, and leased computers, also qualify.

The refundable R&D tax credit strives to encourage businesses to engage more in research and development and create more employment opportunities. Companies can use the tax incentive to offset some of their expenses, especially during difficult times, and keep their doors open. Business owners in Arizona can now divert capital into technology and research and improve their economic performance. For more information on the refundable R&D tax credit, contact our tax experts who employ proven, client-centric processes to maximize available tax credit for all types of businesses.
 

real estate developers cost segregation

The Benefits of Cost Segregation for Real Estate Developers

By Cost Segregation, Tax Credits, Tax Incentives

The Benefit of Cost Segregation

Knowing how to make the best use of tax laws will reduce a real estate developer’s tax liability while also increasing the company’s cash flow. Applying an effective cost segregation strategy is a successful way to achieve that result. Lower tax liabilities and increased cash flow both reduce the need for borrowing and speed up investor returns.

A follow-on result is that sound cost segregation frees up capital for the next land purchase, construction project, or remodeling phase.

Who Can Make Use of Cost Segregation?

This strategy can be used by a developer who may be starting with raw land and will then be adding infrastructure and part-finished or completed buildings which will then be sold on or leased out. Developers may also use cost segregation if they have purchased an existing building with a view to refurbishing it or converting it to a different use. The project to purchase, construct, or alter a building should be valued at a high enough figure for the tax savings to exceed the analysis and report preparation costs. This means the strategy is typically available to developers who:

  • Have recently purchased real estate or who intend to.
  • Have already or will construct a building or buildings on newly purchased or currently owned land.
  • Currently own or lease commercial property which will be renovated or converted from one use to another.
  • Have not previously used cost segregation to reduce their tax burden on a project, and who are eligible to recompute previous years’ depreciation deductions. Recomputing deductions usually means changing accounting methods from the previous years, which is why forward planning this aspect of accounting is so important.

What is Cost Segregation?

The strategy is founded on identifying and then segregating specific elements within development project into specific asset classes. Those classes are defined as being either personal or real property. The Cost Segregation Overview is covered in Chapter 6.3 of the IRS Audit Techniques Guide, but, briefly, the four asset classes are:

  • Land (which cannot be depreciated.)
  • Land improvements such as sidewalks and landscaping which can be depreciated over 15 years.
  • Buildings and structures which may be depreciated over 27.5 years for residential buildings such as apartment blocks, or 39 years for commercial buildings such as warehouses and manufacturing plants.
  • Personal property which may be depreciated over 5, 7, or 15 years.

Potential Asset Categories

It is possible to segregate a building’s internal and external components in such a way that 20% to 40% of the entire structure may be depreciated over 5 to 15 years, and not 27.5 or 39 years. Qualifying items and components which will attract accelerated depreciation include:

  • Concrete slab floors.
  • Doors, paneling, partitions, some floors and ceilings, crown molding, etc.
  • Electrical systems, certain plumbing and process piping, ventilation systems.
  • Specialized kitchen equipment.
  • Carpeting and wall coverings.
  • Computer systems, including dedicated electrical outlets, phone systems, and lighting systems.

Recent legislation has added other classifications making possible savings even greater. 2017’s Tax Cuts and Jobs Act enables developers to deduct a percentage of assets in the first year they are put into use. Eligible used property may attract a 100% allowable depreciation instead of the original 50%. This “bonus” feature will expire in 2022.

Working with a Specialist

The benefits of successfully preparing a cost segregation analysis and audit-supporting report are impressive. The larger the project, or projects, the greater the derived benefits of depreciation acceleration for reduced costs and increased cash flow.

In the same way that it pays to work with an architect or engineer who specializes in specific types of construction projects, it also pays to work with an experienced and successful cost segregation analyst. Existing projects can be analyzed and previous years’ tax liabilities can be recalculated.

Future projects can be worked on in such ways to ensure maximum and speedy results are achieved. Please feel free to contact us to discuss the topic in more detail, and so we can answer your questions. Please just contact us by clicking this link.

tax credits for law firms

3 Powerful Tax Credit Tips for Your New Law Firm

By Research and Development Tax Credit, Tax, Tax Credits

Tax Credits and Your New Law Firm

You have opened your new law firm, and likely have two primary goals: to maximize revenue and to minimize expenses. The first goal will benefit from, for example, focusing on your primary area of legal practice, effective marketing to your niche, and delivering great results for your clients.

One way of minimizing expenses is to make the best use of tax advice, so you legally pay as little business and personal tax as possible. Tax credits are available to new law firms. To benefit from those potential credits it is important to understand enough about federal and state tax laws so you plan ahead before simply incurring costs. Not planning ahead can cost a firm the credit and force them to rely only on deductions.

The Difference Between Tax Credits and Tax Deductions

Business expenses can be used to reduce tax liability. The federal corporate tax rate is 21% and California’s state corporate rate is 8.4% (the ninth highest in the country.) To contrast the difference, for every dollar-related expense you reduce federal taxes by 21%. Tax credits, however, mean that for every credited dollar you will reduce tax liability by a dollar up to the limit of the available credit.

Potential Tax Credits

Many tax credits are available to any small business or business start-up. As a law firm, it may be possible to claim credits associated with your particular area of practice. Let us begin with a more general example and then look at two approaches directed at law firms.

Common Tax Credits for Small Businesses

Your firm may offer health insurance for yourself and your employees. A program purchased through the SHOP Marketplace would qualify for tax credits, as would a scheme providing paid family leave covered by the Family and Medical Leave Act for certain employees.

Improved Process Tax Credits

The Research and Development Tax Credit is available to firms that enhance existing processes or develop and improve on existing prototypes and software. Many new law firms are founded by entrepreneurs who see opportunities to improve on what other firms currently offer. Enhanced processes to serve clients that are considered new to the taxpayer, and not necessarily new to the world as used to be the case, may qualify.

If your law firm has improved on the ways cases are handled, records are kept, research into previous cases or governing legislation is handled and analyzed, how clients’ records are recorded or communicated, etc. then you may qualify for R&D tax credits.

Greater efficiencies lower costs and improving client experience helps to grow revenue. Planning ahead before designing and implementing such improvements may result in a valuable tax credit as well as improved office practices.

Innovation is no longer limited to major corporations with dedicated R&D divisions. The 2015 PATH Act (Protecting Americans from Tax Hikes) made R&D tax credits permanent. It also modified the criteria to benefit small businesses and start-ups.

Making Additional Use of Practice Specialties

Many new law firms handle accident and injury claims. Many people who have been seriously injured suffer from long-term disability. It makes sense in a number of ways to ensure the firm’s offices are easily accessible to such clients, as well as them being served by someone in a similar situation. Empathy as well as expertise matter to clients.

The Disabled Access Credit is available to businesses that make their offices and other facilities fully accessible to anyone with physical disabilities. A law firm specializing in accident and injury claims may, automatically, make access easier to its clients, claiming a tax credit for such alterations makes more sense than simply limiting tax liability to a depreciation write-off.

The Work Opportunity Tax Credit (WOTC) is also available to firms that hire people belonging to one of ten targeted groups who have faced barriers to being employed. Physical disability is one of those groups. To qualify for the credit, the firm must obtain approved certification and file IRS Form 8850 within the designated timeframe.

Final Comments

Setting up your new law firm is exciting. Making full use of IRS opportunities to reduce costs is good business. Fully benefiting from tax credit opportunities must be planned for and clarified, in many cases, before expenses are incurred.

In this article, we have offered just three ideas on how a new law firm can claim tax credits. To learn more and to discuss your plans and how your firm can minimize its tax liabilities, please contact us by clicking this link.

four year lookback R&d tax credits california

A Four-Year Look-Back at State Taxes and R&D Taxes in California

By Research and Development Tax Credit, Tax, Tax Credits, Tax Incentives

The world is changing at a fast-paced rate. What used to be typical cities have morphed into smart cities. Over the past four years, state and R&D taxes in California have undergone unprecedented changes.

Changes in state taxes and R&D taxes inform various life aspects. They drive economic growth, influence wages, and affect the quality of life. What is more, the R&D incentive tax program helps companies reduce their tax liabilities and focus better on their business developments.

Understanding the R&D and States Taxes in California

Do you live in California or on the West Coast? You can agree that California has among the world’s globe most innovative economies. Through the R&D tax program, taxpayers stay tax compliant as they engage in R&D activities.

Whether you operate in healthcare, technology, manufacturing, engineering, or any other industry, your business is eligible for R&D tax credits. Today, the good news is that startups can claim R&D tax credits to offset their payroll taxes and improve their bottom line.

Thanks to the R&D incentive, California-based companies reduce their tax liabilities effortlessly. This helps them focus on other key business areas.

The Four-Year Lookback of State Taxes and R&D Taxes in California

California’s high rate of economic growth fosters organizational growth. Companies are becoming increasingly productive and efficient. Looking back four years ago, most Californians focused on the 2017 tax season. Largely, this increased focus was due to the Jobs and Cuts Act-informed tax system.

Most Californians started seeing changes in their paychecks earlier in 2018. According to the Tax Policy Center, “About 65 percent of households paid less in individual income taxes in 2018 as a result of the TCJA. About 6 percent paid more.”

California’s state income taxes are now rate-based, ranging from 1% to 12.3%. Additionally, the Golden State Tax assesses a 1% surcharge on taxable incomes of one million dollars and above.

In California, the state collects county, local, and combined state sales taxes at a rate of 7.5%. This rate comprises two portions. The first portion of 6.5% is the state option and the localities collect the remaining 1%.

The Intent of the R&D Tax Credit and its 4-Year-Long Transition

Unlike other tax programs, the R&D initiative has been quickly adopted to encourage more state activities. This is because the program creates numerous opportunities. For instance, it offers job opportunities associated with research and development activities.

Since its inception, the R&D tax credit has expanded drastically. The most significant change in the past four years is the credit rate. Since adoption, the R&D tax and credit rates were 8% and 12%, respectively. And the qualified research credit rate has increased from 12% to 15% from 2017 to date.

The 2017-2021 California State and R&D Tax Changes

For the past 4-years, there have emerged seven tax brackets on ordinary incomes. There is 10%,12%,24%,32% ,35% and 37% respectively. This means that as you move up your pay scale, your tax scale also increases.

Better yet, your tax bracket is equivalent to your taxable income and filing status. The filing status can be single, married filing separately or jointly, head of household, or qualifying widow or widower. Significantly, state taxes and R&D taxes have extended filing deadlines due to the Covid-19 Pandemic.

How to Benefit from Tax Credits like R&D

The above changes for the past 4 years have helped businesses thrive. The question is, how do you know whether your business qualifies for R&D tax credits like R&D? Well, don’t fret. At Incentax, we’re dedicated to helping your business benefit from tax credits. Our tax experts will take you through a meticulous process to identify and maximize all state and federal tax credits for your business.

Contact us and we’ll do the heavy lifting for you.

https://www.investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx

5 Reasons Cost Segregation is Important

By Cost Segregation, Real Estate, Tax, Tax Incentives

Higher profitability, lower tax liability, and increased cash flow are the three primary factors which make cost segregation so important. In addition, lower taxes and increased cash flow mean plans for the business can be crystallized and implemented more easily. Cost segregation is, therefore, part of the bedrock of success for real estate investors and developers.

Cost Segregation in Practice

Constructing, renovating, remodeling, and acquiring real estate for commercial use typically result in depreciating those assets over a 27.5- or a 39-year period. The timescale depends on whether they are residential (apartment blocks, single family homes, etc.) or commercial (shopping malls, hotels, warehouses, etc.)

By identifying specific, and IRS-approved, components that can be segregated from the rest of the real estate they can be allocated to accelerated depreciation categories. The three primary categories are land improvements, specific additions to the building’s core structure, and personal property. Those components may then be written off in 5, 7, or 15 years.

It is possible, therefore, to reduce income tax liability by up to $70,000 for each $1,000,000 of building cost basis owned. Specific savings are based on a detailed cost segregation analysis applying IRS-approved standards.

Making Use of Cost Segregation in Business

1. Simple Depreciation Acceleration

When a piece of real estate is constructed or acquired, there is usually a minimum time span before its value will increase enough for it to be sold at a profit. Maintaining the property generates costs; those costs should obviously be less than the corresponding income. Property and income taxes become payable. The amount of tax due is usually reduced by the 27.5- or 39-year depreciation write-off approach.

Cost segregation enables tax liability to be reduced. By shifting depreciation of approved components from 27.5 or 39 to 5, 7, or 15 years, that accelerated depreciation reduces each year’s tax liability. By reducing tax payments, cash for running costs, and capital for further investment is automatically generated. It does not have to be borrowed, attracted by exchanging company stock for new investment, or for corporate plans to be delayed.

2. Partial Asset Disposition

If the property is being renovated, then some components will be removed and replaced with new and improved components. The old and the new components will be depreciated. Unless partial asset disposition (PAD.) is taken, double depreciation of those old and new assets accumulates. This will impact recapture tax calculated at ultimate sale. By having previously segregated components into different asset classes, the recapture tax is reduced.

3. More Availability Means Greater Benefit

Cost segregation was once used, primarily, by major corporations. Today, properties with a cost basis in the hundreds of thousands as opposed to the tens of millions of dollars now qualify for accelerated depreciation. This, on its own, makes the principle both viable and important for the smaller investor or developer.

4. The Time Value of Money

A simple advantage of applying a cost segregation strategy is that money available today is worth more than ultimate profit made available at eventual disposition. By accelerating depreciation, even by a small amount on lower-value properties, cash flow improves. That cash becomes available for both running costs and for growth. When used for growth by investing in additional properties, components in those new properties can also be subject to accelerate depreciation, thus magnifying the benefit.

5. Cost Segregation and 1031

Relinquishing and acquiring real estate benefits from capital gains tax deferrals when managed via a 1031 Exchange. The increased profit generated by segregating costs is not, therefore, necessarily subject to immediate taxation payable on sale. All the tax can be deferred.

Personal as well as corporate investors can, by making use of The Tax and Jobs Act legislation, eventually avoid paying that tax if, when they move out of active property ownership, they reinvest in approved development zones. After an amount of time, the deferred tax is forgiven. The benefits of cost segregation can, therefore, be “held” indefinitely, and the benefits of recent legislation are increased.

The Takeaway

Cost segregation is important. It enables a business’s profit to increase and cash flow to improve by accelerating the depreciation on real estate components. The immediate and long-term benefits make it a crucially important strategy for real estate investors and developers. Completing cost segregation analyses correctly and to IRS standards demands competence in specific areas of real estate, and experience in tax law. To discuss how you can make use of this strategy, please click here to contact us.

metal fabrication and machine shops r&d tax credit

R&D Tax Credit for Fabrication and Machine Shops

By Tax, Tax Credits

The R&D tax credit is one of the most beneficial tax incentives available. Businesses can leverage this benefit to recover costs associated with research and development. Fabrication and machine shops, in particular, can also offset expenses related to developing new parts or designing a new fabrication process from new materials.

The business activities you engage in that require research and development of new products or processes are eligible for the R&D Tax credit. The tax incentive can enable you to become more successful and increase profit margins.

Benefits of the R&D Tax Credit

The R&D Tax credit is the largest credit for companies in the United States. It enables companies to save money, reinvest, and stay competitive.

Businesses have been able to continue with operations even in times of uncertainty, like in the period after the 2008 financial crisis. The credit has also led to growth in profit margins, increased high-paying technical jobs, and a high employment rate in the U.S.

It has the potential to help your business stay competitive and drive the economy in the right direction.

History of the R&D Tax Credit

The R&D Tax credit was introduced in 1981 to encourage businesses to invest more in innovation and increase technical jobs. This allowed companies to develop new products, improve, design, or process products, and even software to claim the R&D Tax Credit.

The credit act was introduced due to the growing concern that businesses’ research spending had declined and negatively impacted the economy. Low growth rate and lack of competitiveness led to this decline.

This was evident when the American automotive industry was overtaken by Japan. The R&D tax credit was introduced as a stimulant to encourage automakers in America to reinvest and recover their competitiveness.

Increased Eligibility for R&D Tax Credit

The tax incentive continued to evolve over the years. In 2003, new regulations were passed that marked a significant turning point for businesses in the U.S. The “Discovery Rule” was eliminated. This rule required research activities to be “new to the world” as a qualifying criterion unachievable for most businesses.

With the elimination of the rule, business activities only have to be new before you can claim the tax credit. Whether your business has iterative steps necessary to improve the production process or update software, the activities will enhance business operations. These will still help in keeping your business competitive.

R&D Tax Credit Qualifying Activities in California

Companies can qualify activities from the development of a concept to the completion stage where the product or process or even formula is ready to be released into the market. You can benefit from the R&D tax credit, depending on your state’s qualifying criteria.

Many states offer the tax incentive which follows specific federal regulations and the IRS guidelines. The rules and guidelines will help you to know what constitutes QREs (Qualified Research Expenditures).

California business owners benefited from the R&D tax credit for over 30 years and use the criteria for developing a new or improved product, processes, or software. Your processes or production have to be technological in nature, eliminate uncertainty, and be a process of experimentation.

Many businesses are not aware of the R&D tax credit, or business owners do not know how to go through the process. To be successful and remain profitable, you can use this incentive to offset costs, reinvest, and stay competitive. Businesses can consult experienced tax experts on how to leverage the tax benefit. Contact us and find out how you can utilize the R&D tax credit.

tech startup hiring roles

4 Positions Your Tech Startup Needs to Fill

By Startup

90% of new businesses end up failing, and tech startups are more prone to this due to the newness of the ideas they usually bring to market. Hiring the right team to guide your tech startup from its infancy through its growth stage is one of the universally recommended ways to guide your company to success. 

According to a survey by CBInsights, 23% of small businesses fail because of not hiring the right management team. The company’s first managers have a very important role in the firm as they set the organizational and departmental policies and culture, which is often difficult to change as the company ages.

Here are 4 other crucial roles that you should consider filing for your tech start-up.

1. Chief Executive Officer (The Visionary)

This the leader of the team, whose goal should guide the team members. The position involves setting up the long-term organizational vision, then coming up with strategies to meet them.

A CEO is responsible for the building, development, and motivation of the senior executive team and is usually heavily involved in their hiring. A solid, cohesive team will lead the company to success, while a bad mix or composition of the executive results in business failure.

Start-ups and small companies are often unable to hire specialists and consultants, and the CEO should be able to step in and help solve this problem.

Other important roles for the team leader in a growing tech firm include:

  • Creating the organization’s culture
  • Dealing with other third parties, including suppliers and the government.
  • Making all the important decisions, including operational, marketing, and managerial.

2. Chief Sales Officer (The Hustler)

No matter how useful a product is, your business will not succeed without a strategy to generate leads and acquire new customers. This position is even more crucial in the highly competitive and dynamic tech industry.

The chief sales officer is responsible for coming up with and implementing customer acquisition programs and formulating strategies to keep clients. They ensure that the tech company’s product brings in enough revenue and profits to sustain its growth.

3. Chief Financial Officer

The CFO is responsible for the Finance and Accounting departments. This entails acquiring funds for the growth process and ensuring they are used appropriately. Money-related decisions all the way from budgeting to bookkeeping also fall under their jurisdiction.

A competent CFO ensures that there are strategies to acquire more funds if needed. They also usually accompany the CEO to meetings with current and potential investors to discuss the company’s financial health and expectations.

4. Chief Technology Officer (The Doer)

A CTO fulfills various roles for a growing tech company, including developing a customer-focused product and leading the coding and engineering teams. The position requires an officer that is competent both in the technological and business aspects of the company.

They are usually the first hires for tech start-ups as they play a big part in actualizing the product. CTOs are also responsible for managing all aspects of the project during the development stage. This is why you need to hire an officer that has management skills in addition to the coding and marketing skills required for the job.

Does Your Growing Tech Company Have These Employees?

Hiring the right employees for the important roles highlighted above can make or break your company. Your firm’s growth is highly dependent on competent leadership and the above hires will increase your survival rate.  

Now that you have assembled a great team, you only need tax professionals to help develop a working tax credit strategy to ensure your tech company is taking advantage of all the tax credits available to it. Contact us today for a free consultation. 

WOTC concept

The WOTC is a Win-Win For Employees and Businesses

By Tax Credits, Uncategorized

Today’s businesses always seem to be facing complex tax issues as they try to keep pace with changing regulations. As a result, several credits and deductions that would benefit the company’s tax bill may be overlooked. The Work Opportunity Tax Credit (WOTC) is one such program that your business can qualify for. 

What is the WOTC?

The WOTC was enacted as a federal tax incentive program in 2015 to give employers tax credits to hire candidates with special employment needs. Initially signed in 1996, the act has been extended several times and is authorized until December 31, 2020.

The program is jointly administered by the Department of Labor and the Internal Revenue Service (IRS). State agencies oversee the certification progress to ensure that employers hire candidates who meet the WOTC tax credit criteria.

The Department of Labor has recently awarded additional WOTC grants to states experiencing backlogs in the program. 

WOTC grants employers a tax credit between $1,200 and $9,600 per worker from one of the targeted groups. These include veterans, ex-felons, vocational rehabilitation referrals, summer youth employees, as well as those receiving Temporary Assistance for Needy Families (TANF), and government assistance recipients. 

The reasoning behind this tax incentive is to assist persons who are often left behind job-wise. Employers who may hesitate to hire from this group can benefit from tax incentives to include them in their recruitment plans. 

Credit Requirements and Amounts

How much a company can receive in tax credits is largely dependent on which classification the worker is in, as well as their total earnings and hours worked. This credit can be claimed for two years for each eligible employee as follows:

  • Hired recipients enable employers to take the tax credit for up to two years. The first year’s tax credit claimed is 40%, up to $6,000 of the first year’s wages, once the employee has worked 400 hours. If the employee has worked between 120 and 400 hours, a 25% tax credit is taken. An exception to this is that long-term family assistance recipients enable employers to take 40% of qualified wages up to $10,000 and 50% of second-year wages up to $10,000. 
  • Employment of long-term family assistance recipients allows a 40% credit of the first year with qualified wages up to $10,000 and 50% the second year. 

IRS rules state that the WOTC must be applied against a tax liability. As in the case of general business credits, unused credit can be carried back one year and carried forward for 20 years. 

Applying For The WOTC

Businesses applying for the WOTC must submit IRS Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” on or before the applicant’s first day on the job.  Form 9061, The “Individual Characteristics Form,” must also be completed by the employer upon hiring the job candidate. Additional documentation may also be necessary to prove the applicant is part of a target group.

The forms are mailed to the state’s WOTC coordinator within 28 days of the employee’s first day on the job.  Once the state verifies the employee is WOTC-eligible, the company can take the appropriate tax credits. 

Employers can then claim the credit on Form 3800 against their income taxes, as detailed by the IRS. 

Incentax can assist your business in identifying and maximizing state and federal tax credits through a streamlined process. Our team of experts evaluates programs and incentives the business is eligible for to maximize returns. Contact us to start taking advantage of tax credits to increase your company’s bottom line. 

hiring manager explores WOTC

Does My Business Qualify for the Work Opportunity Tax Credit?

By Tax, Tax Credits, Uncategorized

The Work Opportunity Tax Credit (WOTC) is a federal tax credit designed to benefit businesses that hire individuals who are in “targeted groups” that have historically found it difficult to obtain employment. The WOTC benefits both employers and employees as it helps people in difficult circumstances find jobs. As an employer, you can hire as many qualified employees as you want. The IRS and Department of Labor have complete information about the WOTC.

Obtaining Certification For a Work Opportunity Tax Credit

Pre-Screening

Before you can claim this tax credit, you must obtain certification that the person you’ve hired is a member of one of the targeted groups listed below. The first step is to file Form 8850, a pre-screening form within 28 days of the eligible employee starting work.

Limitations on Credits

The amount of the credit is limited to business income tax liability or the amount of social security tax owed.

Claiming the Credit

Depending on your status as a taxable employer, tax-exempt employer, or tax-exempt organization, you may need to fill out Form 5884 as well as Form 3800, which is for General Business Credit.

What are the Targeted Groups?

The Internal Revenue Service provides guidelines regarding who qualified as a member of a targeted group. For you to be eligible for this tax credit, you’ll have to hire people from one or more of these groups.

Long-Term Unemployed

A qualified long-term unemployment recipient is someone who has been unemployed for at least 27 consecutive weeks. To qualify, they must have received unemployment benefits for at least part of this period.

Ex-Felon

A qualified ex-felon is someone who is hired within a year of being convicted of a felony or released from prison after serving time for a felony.

Recipient of Long-Term Family Assistance

A long-term family assistance recipient is a member of a family who fits into one of several categories. They must have received assistance under an IV-A program for at least the last 18 months; for 18 months beginning after 8/5/97, or they are no longer eligible for this assistance because a state or federal law limited the maximum time they could receive these payments. For the latter, cessation of payments must have been within the last 2 years.

Designated Community Resident

A Designated Community Resident (DCR) must be between the ages of 18 and 40, reside in an empowerment community, an enterprise community, or a renewal community. These are all federally designated locations with high levels of poverty and economic distress. They must remain in one of these areas after being hired.

Supplemental Security Income Recipient

A qualified Supplemental Security Income (SSI) Recipient is someone who has received SSI benefits within 60 days of being hired.

Vocational Rehabilitation Referral

To qualify as a vocational rehabilitation referral, someone must have a physical or mental disability and presently or previously receiving services from a Department of Veteran’s Affairs program, an Employment Network Plan under the Ticket to Work program or a state plan approved under the Rehabilitation Act of 1973.

Supplemental Nutrition Assistance Program (SNAP) Recipient

Qualified SNAP recipients are between the ages of 18 and 39. They or a member of their family must have received SNAP benefits for 6 months or for a minimum of 3 of the last 5 months.

Summer Youth Employee

A qualified summer youth employee must be at least 16 and under 18, employed only between May 1 and September 15. They must also reside in an Empowerment Zone, Renewal Community, or a Renewal Community.

The WOTC Can Help Your Business Save on Taxes

The WOTC can help businesses save money on taxes while also providing jobs to people in targeted groups. If you want to claim this credit, make sure you hire employees who qualify. If you need help understanding the WOTC or any other tax credits that could benefit your business, you may want to consult with a professional.

The tax credit experts at Incentax help businesses take advantage of all possible tax credits. To learn more about our services, contact us.

new markets tax credit

Investing and the New Markets Tax Credit

By Tax Credits, Tax Incentives

Traditionally, the New Markets Tax Credit was claimed by investors comprised of large corporations or financial institutions. It is possible, however, for individuals, and even the Community Development Entities (CDEs), to invest themselves. Investor capital reaches financially distressed areas via the qualified CDEs in that locale.

The New Markets Tax Credit Encourages Economic Growth

A business or entity applies with the Community Development Financial Institutions Fund (CDFI) to become a certified Community Development Entity (CDE). Once this is achieved, the CDE can apply for tax credits with the Department of the Treasury. The Community Development Financial Institutions Fund is a bureau in the Treasury Department. This bureau oversees the allocation of the NMTC. There are several steps to becoming a certified CDE, but your business or institution may already qualify.

Many financial institutions and businesses are already certified CDFIs or SBICs. These two designations automatically qualify such companies and institutions as CDEs. Community Development Financial Institutions are usually community credit unions or banks. They are already helping provide access to lending for underserved communities. Specialized Small Business Investment Companies are companies designed to increase small businesses’ access to investment in low-income areas, which is also the aim of the NMTC.

Once the CDE has applied for credit with the U.S. Treasury, they can align investors with business projects in their community. The capital is invested in the CDE in exchange for the NMTC which the investor can claim against their federal income tax owed. Private entity CDEs efficiently and fairly extend this funding and recruit investment to meet the needs of the qualifying projects they choose within their communities. The recipients of the funding are designated as Qualifying Active Low Income Community Businesses or QALICBs.

Changes to the New Markets Tax Credit (NMTC)

The most recent change to the NMTC came in December 2019. Through the Fiscal Year 2020 appropriations bill H.R. 1865, President Trump signed into law a $5 billion extension of the NMTC. Designed as a one-year extension, it was a prescient move for the President. Businesses and communities were hit hard by the Coronavirus pandemic that came with the new year.

According to the New Markets Tax Credit Evaluation, investors are able to claim up to 39% income tax credit on their investment. $12.9 billion dollars were allocated in 9 rounds, over the first eight years of the program. This equals out to about $1.5 billion per allocation round. The recent extension will significantly increase that allocation amount at a time when communities and QALICBs need it most. 

Paul Anderson, of the NMTC Coalition, reported that funding for 2019 was $3.5 billion. As the program has continued to receive extensions, the allocation amount has increased. Many businesses and projects are in dire need of funds. Certain changes made to the NMTC Compliance FAQs were made in response to the Coronavirus pandemic.

Communities Become Candidates

The United States Census determines in large part which communities can qualify to receive NMTC qualifying investments.  Communities are judged to be qualifying investment opportunities by census poverty level. Some communities qualify because of their status as a “targeted population.” A population can receive this designation because of natural disaster as was the case with Hurricane Katrina and the subsequent Gulf Opportunity Zones

The New Markets Tax Credit intends to help underserved communities, devastated communities, and investors simultaneously. In 2004, the American Jobs Creation Act defined targeted populations in Subtitle C: Community Revitalization. It also set a precedent for identifying potential QALICBs, 

Americans have benefited from CDFI funding for almost two decades. In July 2020, the CDFI Fund awarded $3.5 billion in New Market Tax Credits. This amount brought the allocations awarded to a total of $61 billion. Contact us for more information on how your business can invest in America. 

tech company research and development

Does Your Business Qualify for R&D Tax Credits?

By Research and Development Tax Credit, Tax, Tax Credits

The topic of Research and Development (R&D) is often associated with images of scientists gathered around a table to discuss complex formulas and space-age discoveries. But did you know that if your company’s staff employs personnel such as software developers, engineers, and machinists, your R&D expenses could qualify for tax credits

Many companies fail to take advantage of this tax credit, unaware that they have qualifying R&D expenses that are approved by the IRS. These do not have to be pioneering inventions or innovative undertakings. Rather, this credit is available to companies that create or improve products and trade processes.  

IRS Criteria for R&D Credits

The federal R&D tax statute provides a credit of up to 10% of qualifying expenses. However, many states also have this credit which can bring the total percentage to as high as 20%. Rules for determining what qualifies as R&D expenses are listed under Internal Revenue Service Code section 41. 

The IRS has a predefined set of criteria that determines what activities satisfy the requirements of qualifying R&D expenses. These are as follows:

  • The activity must have a purpose such as improvements in function, performance, reliability, or quality. Projects related to the appearance of a product do not qualify. 

  • Technical uncertainty related to the capability, methodology, or design of the business. The uncertainty must be attempted to be resolved with experimentation. This does not include any economic uncertainties.
     
  • The project must rely on hard science such as engineering, physical/biological sciences, or computer science. 

Once all the above criteria are met, then related expenses in wages, supplies, and contract research that were incurred during the project can be considered qualified R&D expenses. 

Technology R&D Expenses

According to Accounting Today, here are some of the most commonly overlooked technology expenses that can qualify as R&D expenses: 

  1. Cloud-Computing Costs
    Many companies have harnessed the power of cloud computing which provides an efficient way of storing, processing, and analyzing data. The server, platform, and Software as a Service (SaaS) technology costs included in cloud computing may fall under qualified research expenses (QREs) for both federal and state R&D credits. Development platforms and beta-testing of software are also included in this classification.  

  2. Migration Of System Platforms 
    The complex project of migrating systems to the cloud often involves technical uncertainty and failure, qualifying it as an R&D expense. 

  3. Replacement Of Obsolete Parts
    Should a part from a product become obsolete, redesigning and testing are necessary for a replacement. This process involves technical uncertainty and failures which can be considered R&D expenses. Expenses can include wages of engineers and other associates involved in the redesigning process so long as their contributions are clearly demonstrated. 

  4. Automation Expenses
    Technology that is developed to improve the efficiency of the manufacturing process is considered a QRE. Robotic components are a good example of this as uncertainty exists as to where to place them and what they will do. The cost of the robot itself cannot be included, but the research into where and how they will fit into the process as well as the testing are qualified expenses. 

  5. Artificial Intelligence and Machine Learning
    Artificial intelligence and machine learning are used to improve manufacturing efficiencies. As a result, the research expenses involved in these aspects would also qualify as QREs. 

Other Industries Eligible For R&D Credits

There are many other industries and applications where qualifying R&D expenses can be claimed. The CPA Journal lists several of these in various areas.

Restaurants, for example, may have qualifying expenses such as ways to improve nutrition, safety, and preservation of food. The construction industry involves designing new heating and air conditioning systems as well as new construction techniques. Agriculture involves researching and designing new irrigation systems, harvesting improvements, and new feeding techniques for livestock.

Many taxpaying companies can benefit tremendously from the R&D tax credit. However, millions of dollars go unclaimed yearly since businesses fail to recognize exactly what qualifies for this credit. 

Incentax can help identify and maximize qualifying R&D expenses for your business. Contact us for more information on how you can take advantage of these tax credits.  

sb 1447 hiring employees covid

What California Business Owners Should Know About SB 1447

By Tax, Tax Credits, Uncategorized

Those of you with a business in California know all too well about COVID-19 wreaking havoc on keeping things afloat. There’s good news, though: if you still have not experienced a turnaround in your business due to the virus, some tax credits are now available to help you.

One bill passed in California this fall is SB 1447, or a $100 million hiring tax credit for small businesses. A lot of business owners are already taking advantage of this to help them get back on track, including those who had to let employees go.

What do you need to know about this new tax credit? Take a look at the details and how to use it to your advantage to avoid further crisis.

SB 1447 Explained

SB 1447 is defined as a small business hiring credit to give tax credits if employers hire more employees throughout 2020. It applies to the tax year beginning this year and going through January 1, 2021.

For businesses like yours, it helps save you exponential money if you need more employees to keep your business operating optimally. You might have held off hiring more employees since spring out of fear of the future tax burdens.

Three California Democrats put this bill in motion: Sen. Steven Bradford, Sen. Anna Caballero, and Assemblymember Sabrina Cervantes. It was just one part of California’s recent laws put in place to help the business community bounce back after COVID-19 hardships.

These legislators noted a sobering fact before getting the bill passed: Small businesses suffered a 21.5% loss of jobs earlier in the year. This new bill brings major relief, even if you need to know a few more things to qualify.

Are You a Qualified Small Business Owner?

To qualify for this tax break, you need to fall under two guidelines:

  • You’ve employed fewer than 100 employees since December 31, 2019.
  • You had a 50% reduction in gross receipts between April 1, 2020 and June 30, 2020.

Keep in mind the credit is capped at $100,000 per qualified small business owner. When you hire new people, the new employees need to be paid qualified wages and not paid through the Personal Income Tax law or the Corporation Tax law.

These provisions are just the basics. Calculating your tax credits has specific rules you need to look at more carefully. One thing to note is any new hires working full-time can not work for you more than 167 hours per month.

Calculating Your Tax Breaks

To figure the tax break you get back, know you receive $1,000 for each net increase in qualified employees. You have to compare your average number of employees for the 2nd quarter of this year with the average number you had between July 1 and November 30.

Another great thing to consider with this new bill: You can apply your credit against qualified sales and use taxes. If you are a retailer, this is a major benefit when you have a lot of other tax burdens annually.

The aggregate amount of credit available will also have a cap at $100 million, if covering the majority of California’s hurting small businesses.

What will the tax benefits really be, though? Will it lead to a brighter future for California’s small businesses? On a national scale, many small businesses likely wish for the same.

Bringing New Lifeblood to the Small Business Community

When California Governor Gavin Newsom signed the bill back in September, he said: “This is really about the lifeblood of California’s economy, it’s about a sense of pride and spirit that we all have. This is about the California dream.”

Now available as a tax credit for the next five years, you can bring your business back from the brink. This tax bill joins an exclusion of federal Paycheck Protection Program loans from gross income tax filings, giving Californian businesses further breaks.

Contact us at Incentax LLC so we can help educate you on the many tax breaks available to businesses today.

net operating losses farmer concept

What You Need to Know About Net Operating Losses (NOLs)

By Tax, Tax Credits

Net operating losses (NOLs) are not always detrimental to your business. The government has created ways for businesses to offset these losses. There are flexible options available for carrying tax assets forward into future tax years, or back depending on your businesses current cash flow needs.

NOLs Explained

Net operating losses are realized when businesses are expensing more than they take in. According to the IRS, “If your deductions for the year are more than your income for the year, you may have a net operating loss.” This is particularly relevant to businesses with annual incomes that were affected by the recent novel coronavirus restrictions. 

Net operating losses in a farm context are easily visualized. A farmer who has a crop failure in his first of three years in the farming industry will have incurred a net operating loss. This loss will be counted as an asset against the hoped-for income of the next year. This asset is carried forward to the second year and applied to that year’s income. The deduction of up to 80% of the previous year’s loss is then applied in farming year 2.

Carrying forward the loss works in the farmer’s favor if farming year 2 is a bumper crop. His high income of the second year is tempered by the deduction of year 1’s loss, thus reducing his taxable income accordingly and saving him money spent in income tax. The remaining 20% of the NOL can be applied to farming year 3’s bumper crop reducing that year’s taxable income slightly. Losses incurred would be counted and discounted against future farming years until the losses were accounted for.

The disadvantages of being allowed to carry forward a loss rather than carryback are two-fold. First, if the loss is carried backward it can be applied to a previous tax year that had a higher rate and it could provide the company with a tax refund. Second, because of the time value of money, it is better to have cash now rather than in the future.

The TCJA (Tax Cuts and Jobs Act) caused a lot of changes to occur with regard to taxation in 2017. One of the changes made was a disallowance of carryback for excessive losses. This affected most taxpayers carrying large losses disadvantageously.

A two-year carryback period had been an option previously, but was no longer viable from 2018. Farmers were allowed a carryback period of up to 5 years. The option for most taxpayers carrying a large loss was for them to carry forward the loss indefinitely. The recent CARES (Coronavirus Aid, Relief, and Economic Security) Act made changes to the implementation of some aspects of the TCJA in regard to NOLs.

NOLs and the CARES Act

The CARES Act put a temporary suspension on the implementation of TCJA section 172 by allowing to carryback losses to 5 years. This effectively puts a hold on the elimination of the two-year carryback limitation present in the TCJA. The CARES Act makes it possible for businesses to carryback losses incurred in tax years 2018 through 2020. 

It is important for businesses to have proper documentation of NOLs. This is then disclosed in notes with the financial statements of the company when income taxes are filed. Between the changes that the TCJA made to the Internal Revenue Code (IRC) and the amendments that the CARES Act made to the TCJA, this year will be a doozy for business owners and their tax advisors. Tax strategies are available to take advantage of NOLs. Contact us to find out how your NOL can be a boon instead of a burden to your business this year.

tech research

3 Ways to Fund Your Tech Company’s Research Activities

By Innovation

Research plays a vital role in the evolution and success of tech companies because it promotes sustainability. As such, your tech company’s research can give it a competitive edge in the market by helping you develop plans that spearhead innovations. That implies that creating solutions for future problems that you can predict becomes a possibility through research.

So, if you want to speed up the growth and evolution of your tech company by introducing innovations and breakthrough products in the market, investing in research activities for your tech firm is critical. It is a fact that tech entities grapple with the highest expenses for research, and the cost can amount to billions of dollars for large organizations.

On the other hand, research expenses can be minimal for small tech businesses, yet they are still vital for the success of such establishments. The competitive nature of the tech marketplace is one of the reasons why it is difficult for individuals to finance research initiatives. Here are some of the funding options you can consider for your tech company’s research activities.

Approach Angel Investors

One of the reasons why you should consider seeking funding for your tech firm’s research initiative from angel investors is that these individuals have a high net worth, and their annual income is also huge. Most angel investors are open to new ideas. They typically operate alone, but may also join with others to form a fund.

Before approaching an angel investor, you must put together a solid business plan and a great pitch. Capturing the attention of an angel investor with enthusiasm and promising data points about the current situation and future potential of your tech business is what will help you secure the funds you need for your research activities.

Angel investors fund your company in exchange for a return on investment. You also need to ensure that your finances are in order and that your management team is competent. The reason is that these are some of the factors which determine whether an angel investor will invest in your tech operations or not.

Additionally, the personality of the angel investor you choose should be in sync with yours. That way, the two of you will get along for the benefit of the initiative you need to finance. Giving an angel investor as much information as possible allows them to make an informed decision regarding investing in your research operations.

Consider Crowdfunding

Online crowdfunding sites help individuals finance inventions, businesses, and projects. They make this possible by bringing various people together who are ready to cooperate and support organizations or entrepreneurs to attain a particular goal. In that case, you need to research such sites to understand the projects they finance.

When seeking funds from crowdfunding websites to finance your research, you need to consider publicizing your initiative to friends and family. The support you get from such persons can spur other people to contribute to your cause. You also need to assess traffic, payment methods, social networking provisions, and fees before opting for a particular crowdfunding site.

Seek Assistance from The Government

The federal government can step in and fund your tech company’s research initiative depending on the nature of your invention. For example, if your research project focuses on a positive impact on the environment or saving energy, you can approach the Department of Energy for funding. Remember to research the requirements of the program you are pursuing to gain insight into the guidelines that government agencies have put in place.

Accessing federal funding for your tech company’s research activities implies that you will be in a position to compete favorably with large firms.

Winning the confidence of the investors or the agency you are seeking funding from is paramount if you do not want your project to stall. If you need more information on ways to fund your tech company’s research activities, contact us today.

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