Did Uncle Sam take a healthy bite from your firm’s cash flow this year? If you’re interested in recouping some of those dollars, then the Federal Research and Development Tax Credit could be the perfect tax savings solution for you.
The Big Credit that No One Talks About
At least for many years, this was the case. The credit was originally enacted by Congress in 1981 to stimulate innovation by US companies and was rarely utilized by Architectural and Engineering firms. The law contained rigid discovery and documentation standards that severely narrowed its applicability. Taking advantage of the credit was also limited by the temporary nature of the credit and certain Alternative Minimum Tax (AMT) limitations for the owners of pass-through entities such as partnerships and S-corporations. The result was that most of the credits claimed were by large publicly traded companies.
Times (and the R&D Credit) Have Changed
The tide began to turn a few years ago when Treasury Regulations lifted those rigid discovery and documentation standards. Tax Court cases followed that made it much easier for AE firm activities to qualify for the credit. Then came game-changing tax legislation in December 2015. The Protecting Americans from Tax Hikes (PATH) Act made the credit a permanent part of the Internal Revenue Code. In addition, effective January 1, 2016, companies with $50 million or less in average gross receipts are no longer restricted by the AMT limitations as they previously were. There was even a provision added to allow start-up companies to use the credit vs. their corporate payroll tax liabilities. The new rules have opened the credit to thousands of private businesses and their owners and in turn, has generated significant tax savings.
Dollar for Dollar – It’s Well Worth Considering
Even if you have considered the credit in the past and passed on pursuing, it may be time to take another look. The design work that AE firms perform daily will likely qualify for the credit, creating a significant planning opportunity to reap big benefits. It’s important to remember that a credit is a dollar for dollar reduction of taxes as opposed to a deduction which saves taxes based on the taxpayer’s effective income tax rate.
The key to maximizing the credit is to capture all qualifying research expenditures (QRE’s). QRE’s include payroll costs for staff involved in qualifying activities, supplies consumed and certain subcontractor costs.
A firm specializing in calculating the credit can work with you to capture and document these expenses and make determinations on which of your activities will qualify for the credit. At Stambaugh Ness, we are huge proponents of the R&D credit because we have seen firsthand the impact it has on firms. For so many, it’s a credit they’ve been led to believe they don’t qualify for and we love being able to turn that around. In fact, we perform all R&D studies on a fixed fee basis and provide a free initial assessment to predict the range of your credit. By doing so, you can quickly calculate your return on investment and determine whether it makes sense to move forward. We will not only educate your staff on the intricacies of the credit but will also teach you how to best capture qualifying credits for future periods along with providing documentation to support your claim.
Savings Still Available for 2016 Filings
Many firms have jumped on board to claim the R&D credit in 2016 and save significant federal taxes. If you have already filed your 2016 returns without considering the credit, it is not too late. We would be happy to make an assessment on whether it would make sense to amend your 2016 tax filings and join in the savings.
In case you can’t tell, I have a soft spot for the R&D Credit and would love to talk to you about your options. Reach out to me and let’s see if we can get some of those 2016 tax dollars back in your pocket.