As a CPA, you want to provide your clients with the best service possible. Part of superior service includes saving them the most money, wherever and whenever you can. And a cost segregation study can answer that call to help discover more hidden cash. Read on to find out how.
Is your company aware that certain tax incentives expired within The Protecting Americans from Tax Hikes Act, known as the PATH Act? However, have no fear, there are still many components that are still active.
Even though parts of the PATH Act expired, on the whole, green building tax incentives remain an important tax savings strategy for businesses. In direct proportion to the growing efforts to reduce energy consumption, companies that own commercial or industrial property will continue to need insight and guidance on green building incentives.
The section 179D deduction provides benefits for businesses, architects, engineers and contractors when they build or renovate a building that is energy efficient. In addition to the 179D deduction, the 45L tax credit also is not applicable in 2017. The 45L tax credit was applicable when building units provided a level of heating and cooling energy consumption that is lower than national energy standards. However, the good news is any project placed in service prior to 1/1/2017 is still eligible to have a 179D or 45L study conducted.
Technology companies can and do qualify for valuable tax credits and incentives, such as the R&D tax credit. However, in today’s advanced technological world, the lines are a little blurred when it comes to truly qualifying as a “technology” company.
In terms of qualified research activities and their associated expenses, to claim the R&D tax credit, you only need to take a broad definition of what a technology company consists of: any company where the primary product is some kind of technology, including software and hardware.
With this broad definition, technology companies are highly likely to spend heavily on software or hardware research and development activities to create new or improved products.
Here are the top 10 qualified R&D activities that technology companies – perhaps just like yours – often perform:
Social media and networking companies operate in a broad industry that involves the design and development of many different mediums, including business networks, enterprise social networks, social gaming, social networking and video sharing.
To deliver these products and services to customers, social media and networking companies invest heavily in technology and software to conduct their business. Often, these activities and related expenses are deemed as qualified research expenses for R&D tax credit purposes.
Companies that invest in software research and development activities for new or improved software programs and systems can qualify for R&D tax credits under Internal Revenue Code (IRC) Section 41. Whether the software is developed to be a product for sale or developed primarily for internal use, the life cycle follows a standard process involving many qualified research and development activities.
The software development life cycle has several different variations, but many follow a Waterfall or Agile process.
The Internal Revenue Code (IRC) includes “software” as a business component for R&D tax credit purposes. However, the type of software development determines the level of legal tests that must be satisfied (i.e., the four-part test or additional three-part test) for software development activities to qualify for the credit.
Identify Qualifying Wages
A key component of pharmaceutical research spending is the wages paid to in-house chemists, scientists and other technical personnel. Most of these employees perform a variety of activities, some of which are qualified (creating experimental formulations) and some of which aren’t (drug quality control and FDA filing). This makes identifying and qualifying these employees a challenge.
To claim the R&D tax credits, you need to analyze how employees’ activities are tracked throughout the year. Do you have a formal project accounting system that enables employees to document their time? If so, are all company personnel using it consistently?
While you aren’t specifically required to use project accounting to claim the R&D credit, you must retain sufficiently detailed records to substantiate that the expenditures claimed are eligible for the credit. Having a process in place to establish the correct amount of eligible wages is critical to substantiating the R&D costs for your pharmaceutical company.
Depending on the company’s time tracking system, qualified activities such as direct supervision and administrative support often are overlooked. Even if your company doesn’t require employees to track their daily time and activities, at a minimum, employees need to record and allocate their activities into qualified and nonqualified tasks.
Don’t Wait To Document Qualified Research ExpendituresTo meet the substantiation requirements, it’s also critical to maintain contemporaneous documentation, such as management meeting minutes, technical emails, lab notes, formulation and chemistry progress reports, and other documents showing qualified time.
The IRS and state tax authorities may deny your claim for the tax credit if you lack documentation in key areas. Common problem areas in an audit include lack of project nexus between the qualified activities and the eligible expenses, as well as a lack of sufficient contemporaneous records to prove that R&D activities are in fact taking place.
Make it a priority to track and gather relevant information. Personnel movement is more common than ever, and staff turnover can limit the availability of key information to properly substantiate R&D activities. In addition, many retention policies are now shorter in an attempt to lessen risk, which often limits the availability of key information to properly substantiate credits.
Even if your company isn’t in a position to conduct a full R&D review now, you should lay the groundwork to ensure the necessary information is available when the time comes to do a full study.
Ready to claim R&D tax credits for your qualifying research expenses? Download your complimentary, educational guide to learn more.
Many companies in the U.S. work in the life sciences industry, including firms working in the fields of pharmaceuticals, biomedical, biotechnology and medical devices. For the bulk of companies in life sciences, developing new or improved products involves a complex interaction between the development process, manufacturing process, and regulatory approval and commercialization.