Everything You Need to Know About R&D Tax Credits Presented by Lloyed Lobo & Alex Popa
Everything You Need to Know About R&D Tax Credits
Presented by Lloyed Lobo & Alex Popa
OUTLINE
▪ Overview of the R&D Tax Program ▪ Benefits ▪ Qualification Criteria ▪ Case Study ▪ IRS Requirements ▪ Do’s and Don’ts ▪ Q&A
R&D Tax Overview
WHAT IS R&D Tax Credit? ▪ General business tax credit for businesses
that incur R&D costs in the US ▪ Established in 1981, made permanent in
2015 ▪ Credit can be claimed on all open tax years
(typically 3)
How Can You Use It? ▪ Carry back to the previous year ▪ Current tax year or carried forward up to 20
years ▪ Payroll taxes up to $250k/year (additional
criteria) ▪ Alternative Minimum Tax (additional criteria)
But I’m not profitable...
You can offset payroll taxes of up to $250k per year if you: ▪ Have revenues for 5 years or less ▪ Have $5m or less in revenue for the tax year ▪ Are not a tax exempt organization under 501 Additional credits can be carried forward.
But I’m not profitable...
You can offset AMT if you have less than $50 million in average revenue for the 3 preceding years. Find out what your AMT is.
APPLICABLE INDUSTRIES
What Can I Claim?
▪ US employee salaries ▪ US subcontractors costs ▪ Materials consumed in R&D
How Much Can I Recover? ▪ Federal
6% of eligible expenditures or 14% of half of the average R&D expenditures over the past
three years. If expenditures remain constant over a three year period, this method results in a 10% credit
▪ State
Differs from state to state California is 15% of eligible expenditures, calculated as
15% of half of the average R&D expenditures over the past three years
How Do I Qualify?
1. New or improved business component
2. Technological uncertainty 3. Systematic process 4. Technological in nature
How Do I Qualify? 5 questions to determine if you qualify: 1. Was there a scientific or a technological
uncertainty that could not be removed by standard practice/engineering?
2. Did the effort involve formulating a hypothesis
specifically aimed at reducing or eliminating the uncertainty?
Continued…
How Do I Qualify? 3. Was the adopted procedure consistent with the
total discipline of the scientific method, including formulating, testing, and modifying the hypothesis?
4. Did the process result in a scientific or
technological advancement? 5. Was a record of the hypothesis tested and
results kept as the work progressed?
CASE STUDY
CASE STUDY
▪ Software startup with operations in California
▪ 7 developers (1 front-end, 6 back-end)
▪ Salaries are $150K per year and ~80% of time is eligible
CASE STUDY
▪ Front end development typically not eligible ▪ Eligible expenditure pool for salaries would be ~$840k
▪ Federal portion → ~$50k, California portion → $63k
▪ Total R&D tax credits received are $113k
Could be ~$122k+ if 3 years of consistent R&D spend.
IRS REQUIREMENTS
WHEN TO CLAIM?
• Must be specified, elected, and filed on the original 2016 tax return before you can begin to offset payroll taxes in 2017
• March 15: S-Corps with Dec YE. Others need to claim by the
15th day of the 3rd month following the end of the tax year • April 15: C-Corps with Dec YE. Others need to claim within
3.5 months following the end of the tax year • You can request a 6 month extension
TECHNICAL DOCUMENTATION ▪ Have been documented at the time the work was
completed ▪ Highlight technical obstacles or challenges ▪ Be dated
TECHNICAL DOCUMENTATION
Most important thing is to document the technical challenges/obstacles as the work progresses.
▪ Capture: the problem and the iterations undertaken to attempt to resolve the problem
▪ What are the different hypotheses and how was each hypothesis tested?
▪ For a typical software project, only the major technical challenges/obstacles encountered by the team in a month need to be documented -- not every little problem.
TIME TRACKING ▪ Track time by project and activity ▪ Track all activities, including non-R&D ▪ Any type of system can be used (or excel if you don’t have
one) ▪ Time sheets can be entered daily or weekly and at half or
quarter day intervals
IRS REVIEWS
R&D Tax Review ≠ Tax Audit Multiple types of Reviews: ▪ Technical ▪ Financial ▪ Technical & Financial
THE DO’S AND DON’TS
THE DO’s
Do: ▪ Pay yourself and staff ▪ Start time tracking and proper
documentation now ▪ Incorporate your company
THE DON’T’S
Don’t: ▪ Underestimate the importance
of documentation ▪ Focus on the business
opportunity ▪ Leave R&D claims until the last
minute
OUR PROCESS
Lloyed Lobo 650-452-5009 [email protected] BoastCapital.com | @BoastCapital