As the country continues to grind through the COVID-19 pandemic, states have been looking for ways to help businesses impacted by the unprecedented economic downturn. In addition to the incentives offered by the Federal government, several states have acted on their own either by authorizing new, COVID specific incentives, amending existing programs or by working within the confines of the existing rules and regulations of some programs.
Populous Holdings, Inc. v. Commissioner marks a highly favorable case decision for taxpayers claiming the research and development tax credit in general, and for the architecture industry in particular. In Populous Holdings, the court granted summary judgment in favor of the architectural design services taxpayer, holding that all five representative contracts at issue in the case were unfunded and therefore eligible for inclusion in calculating the tax credit.
A $2.5 million tax credit grant is making its way to 12 states in order to speed up processing times for Work Opportunity Tax Credit Program certifications!
A recent opinion by the California Office of Tax Appeals (OTA) ruling against an apparel industry taxpayer demonstrates a continuing trend by federal and state taxing authorities to focus on a taxpayer’s ability to substantiate adherence to meeting each element of the four-part test under section 41—most notably the process of experimentation requirement. In addition, the ruling indicates increasing scrutiny regarding a project’s activities having been undertaken for a permitted purpose.
On June 29, 2020, the Governor of California, Gavin Newsom, signed into law the fiscal year 2020-2021 state budget, which included provision AB 85, limiting the ability of certain taxpayers to use net operating losses (“NOLs”) and specific business credits for the 2020, 2021, and 2022 tax years. Specifically, for tax years beginning on or after January 1,2020 and before January 1, 2023, taxpayers with a net business income or modified adjusted income of greater than or equal to $1 million will have their NOLs suspended during the period, and businesses will be capped at claiming $5 million in business credits per tax year.
Since the beginning of the pandemic it has been a whirlwind of unprecedented economic impacts. With that came the Coronavirus Aid, Relief, and Economic Security (CARES) Act and a curtailment of enforcement actions by the Internal Revenue Service (IRS), including audits. Per the People First Initiative the IRS generally avoided launching new audits from April 1st through July 15th. This did not prevent the IRS from opening audits to protect the government’s interest in preserving statute of limitations. (See IRS, IR-2020-59) In a report released June 29th, National Taxpayer Advocate Erin Collins said that the IRS launched substantially fewer audits from April 1st to June 1st compared to the same period in 2019. The IRS launched 71% fewer Corporate audits, 79% fewer Partnership audits, and 65% fewer individual audits. In total across all types of examinations there was a 65% decrease during this time period. With July 15th approaching the assumption is that there will be an increase in audits launched. However, with the pandemic still in a critical state as numbers of COVID-19 cases rise it remains to be seen what will happen as things are more fluid and the rules of the game are constantly changing.
Taxpayers rejoice! A recent case decision signals good news for the R&D legal landscape—Audio Technica U.S., Inc. v. U.S. In this case, the taxpayer was a manufacturer of high-quality audio and microphone equipment. After being denied its claimed research credit during audit, the taxpayer sought to litigate the issue through the Northern District of Ohio in June of 2019 in an 8-person jury trial.
During this time of unprecedented economic challenges faced by small businesses during COVID-19, rare glimpses of bipartisanship are encountered to assist small business with economic relief. Due to the economic challenges faced by small businesses the economic relief provided is in a constant state of fluidity. This has been the status quo for the Paycheck Protection Program (PPP). The President signed into law the Paycheck Protection Program Flexibility Act (PPPFA) to address the concerns voiced by the small businesses utilizing the program. The Congressional intent of the new law is to allow greater flexibility for business to use the PPP loans that was not provided by the initial short-term fix of the PPP set up under the CARES Act. This new law provides the following expansions and flexibility to address the issues created by the CARES Act – PPP, that was a band aid and not a comprehensive bandage when it was enacted.
Despite the size of the veteran workforce, tapping into the population has proved to be a challenge for many non-governmental employers. In 2012, to address the challenges faced by Gulf War-era II Veterans, Congress passed the Vow to Hire Hero’s Act, which expanded the Work Opportunity Tax Credit (“WOTC”) with the addition of four new, veteran-specific categories. The WOTC was created in 1996 to provide a federal tax credit to employers that hire individuals from specific target groups. People from these target groups have been identified by the U.S. government as having historically high unemployment rates. By many measures, the WOTC has been a success and continues to have bi-partisan support in Congress.
Life is in a constant state of flux right now with the COVID-19 virus. It has affected daily life and the economy. Congress has worked to provide economic stimulus programs such as loans and credits. The intent of Congress was to stimulate the economy and help employers maintain business and retain employees to alleviate the economic hardship caused by COVID-19. However, as is typical when trying to quickly stop the negative impact of a disaster, details get omitted from the legislation and key areas need clarification as we have seen recently with the Paycheck Protection Program (PPP) and the Employee Retention Credit. More specifically, with the PPP concerning the deductibility of expenses when payments were made with debt forgiven funds and with the Employee Retention Credit in determining whether employers could claim the Employee Retention Credit when the only payments made to furloughed employees was for their health care benefits.