Professional Documents
Culture Documents
Presented by
Raj Rajan, JD MBT Managing Director, CBIZ MHM, LLC Michael Silvio, CPA Managing Director, CBIZ MHM, LLC
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Agenda
Technical Rules Qualifying Activities, Processes and Costs Identifying Opportunities and Industries Practical and Regulatory Aspects of Proper Recordkeeping Current Case Law/Legislative Developments Summary/Key Takeaways Questions
Technical Rules
The Federal Research Credit : Technical Governed by IRC Sections 41 and 174 of Internal Revenue Aspects Code
Federal credit is 20% of qualified costs in excess of base limitation for activities performed with U.S. Various states have varying credit provisions relating to qualified costs in excess of base limitation for activities performed within the state Methods of calculation: Traditional Method Alternative Simplified Credit (Fed only) Reduced credit can be elected (IRC 280C) Fed: Can be carried back 1 year and carried forward 20 years (except for 2010 when, under specific circumstances, the carry back is 5 years) States: Certain states have varying carry forward provisions
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Technical Uncertainty There must be uncertainty concerning the capability to develop, method of developing, or appropriate design of a new or improved product or process at the outset of the project.
Process of Experimentation Substantially all of the activities must be elements of a process of experimentation to resolve the technical uncertainty. To document this process we must explain: The alternatives considered and attempted Testing performed on the alternatives Test results and analysis
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Research and Development Activities Design/Engineering Innovation/Experimentation Prototyping and Testing Foreign Outsourcing Design Fabrication/Prototyping Manufacturing Domestic Outsourcing Design Fabrication/Prototyping Manufacturing
Pr ocess New Manufactur ing Systems New Pr oduction Equipment Pr oduction Changes
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Qualifying Activities
New Product Development- expenses related to the creation of new products that previously did not exist. Includes any pilot model, process, formula, invention, technique, patent or similar property. The definition also includes products to be used by the taxpayer in its trade or business as well as products to be held for sale. Product Improvements- expenses related to the significant redesign of products, i.e. functionality. This does not include product redesign and changes related to appearance, individual market or customer tastes if these changes do not change the functionality of the product.
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Qualifying Activities
Process improvements- expenses related to improving the way that products are made. This includes efforts to reduce production costs by using different materials, increasing automation or making changes to use less energy. This also includes creating or designing R & D and production equipment, tools and dies. Software Development-Software must be developed and sold, licensed, etc. to customers. In this case the software is the product being sold. Software must be used in an activity that constitutes qualified research, or Software must be used in the production process.
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Exceptions
Expenses That Do Not Qualify:
Ordinary testing or inspection for quality control Efficiency surveys Management studies or activities Consumer surveys Advertising or promotions Acquisition of anothers patent, model, production or process Research in connection with literary, historical or similar projects (social sciences), Management function or techniques developed for internal use
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Exceptions
Activities that do not Qualify:
Activities not directed at functional aspects of a product (typically, this includes expenses relating to style, taste, cosmetics, etc.) The adaptation of existing business component to a particular requirement or customer need where no uncertainty element exists (Custom product development does qualify, I.e. job shop, etc.) Duplication of an existing business component (reverse engineering) Routine data collections Funded Research (I.e. by grant, contract or other) Research performed outside of the United States
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Costs Included
Wages, excluding any fringe benefits, of employees directly engaged in the research, or that provide direct supervision or support of the research. This amount can be found on line 1 of the form W-2. Supplies, excluding land and depreciable property. These supplies must be consumed in the performance of the research activities. Certain overhead costs can be included such as rent and utilities and telephone expenses. Outside services incurred during the research process. Only 65% of these costs are eligible for the credit. These costs include outside consultants, software programmers and engineers, outside tool and die makers, etc. Only costs related to activities performed in the United States and U.S. possessions qualify for the credit.
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What to look for Specific costs to include Specific activities to include Contemporaneous Documentation
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R&D Activity
Formulation development, V.O.C. requirements, prototypes, testing High tolerance, design and prototyping, testing Process engineering, design, fade resistance after washing, fabric strength and durability High tolerance, design and prototyping, customer specifications, testing Seed coating/development, equipment development, organics and organic pesticides Design, development, bioengineering, clinical engineering, prototyping, testing, process improvements Listed and generic drugs, clinical trials, FDA requirements, testing, prototyping, process engineering, inactive and , active ingredient determination High tolerance, software development, engineering, design, development, prototyping, testing Resource processing/extraction technologies, formulations, development, testing, prototype Structural design, abatement, remediation, waste disposal, infrastructure design and development Design, development, prototyping, testing, engineering Software development activities Formulations, process improvements, ingredients, shelf life, pH, packaging Engineering, materials development, process improvements, Formulations, pH, process improvements, prototyping, testing Engineering, process improvements, design, prototyping, testing Development, genetics, testing, biological testing, cell theory, process engineering Formulations, V.O.C., viscosity, pH, prototyping, testing, process improvements, Milspec Materials development, process improvements, design, development, prototyping, testing, packaging Concept/idea generation, programming, alpha and beta testing, functional enhancements/development, version changes, not debugging
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R & D Credit: Industry Opportunities-High Tech Component and product development Process/manufacturing improvements Supplies are usually involved First run or prototype costs involved Usually involves engineers and specialized expertise Usually complex products being developed Schematic drawings, test results, component drawings
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Attempt to identify the largest projects that individual cost centers work on. Try to support this determination with work plans, payroll records, etc. Reliance on the recollection of a department head should be your last resort. For documentation, use material originally prepared for non-tax reasons, if you can. Engineers are often pack rats. You might be surprised at the type of details that they retain.
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Contemporaneous Documentation
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Summary/Key Takeaways
The R & D Credit has broad application to a number of industries. You should look at your companys activities to determine whether you may qualify Remember, the 2010 tax year is a good year to take credits because they can offset AMT Seek to implement a system of controls and procedures to capture qualifying activities and costs contemporaneously throughout the year Remember, a great deal of eligible companies are still not taking advantage of the research credit Many favorable court decisions have been handed down recently cementing further that this credit is available and valuable to taxpayers Just because there is no current credit for 2012, dont let that stop you from reviewing this benefit. There are three (and sometimes four) years open by tax statute that companies can likely go back and take advantage of Watch for current extender legislation in the post election, lame duck session of Congress during 2012
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YouTube Link
To view our CBIZ BizTips Youtube Video on R & D credits, please click here.
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QUESTIONS?
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Upcoming Webinars
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Michael Silvio
Managing Director 858.795.2071 msilvio@cbiz.com
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Thank You