Black Line Group – Confidential2 Seminar Agenda The R&D Tax Credit - It’s found money –The story behind the credit –Who gets to use it From $15,000 to $3,500,000 –Real Stories. Real Businesses. Real Money. The 64 Million dollar question: How can you take advantage of this credit? Getting Down To Business – What you need to do to use the R&D Tax Credit

Black Line Group – Confidential3 The Difference between a Tax credit vs. Tax Deduction Credit = dollar for dollar reduction in the amount of taxes paid Deduction = income on which you do not pay tax

Black Line Group – Confidential4 What is the R&D Tax Credit? A tax incentive provided by the U.S. government to encourage businesses to invest in activities within the U.S. that will provide for product and process improvements and/or the introduction of new products or processes Applicable to C-Corps, S-Corps, LLC’s Partnerships, Sole Proprietorships and Joint Ventures

Black Line Group – Confidential5 History of the R&D Tax Credit R&D Tax Credit has a history over 24 years Used by the majority of Fortune 1000 companies Much legislative activity The tax credit is a valid tax planning opportunity which is permitted under IRC §41 and §174.

Black Line Group – Confidential6 An opportunity there for the asking Small to medium sized companies represent 98% of the companies in the US but only 7% of the R&D tax credit claims 1 7% [1] Joint Committee on Taxation calculation from Internal revenue Service, Statistics of Income and Data

Black Line Group – Confidential7 Where is the R&D? Qualified R&D spending takes place in many areas within a business, not just an R&D or Engineering department

Black Line Group – Confidential8 Get credit for your investment in your business R&D spending includes: –Internal labor (i.e. salaries, wages, bonus) Direct research Direct supervision of research Direct support of research –Supply costs (prototype costs, lab supplies, etc) –External labor (contractor payments)

Black Line Group – Confidential9 Activities that are R&D Friendly To qualify as a legitimate R&D activity, it must be: –Conducted for a permitted purpose –Intended to resolve technological uncertainties –Involve a process of experimentation –Use a permitted science Any new OR improved product, process or software development initiative has potential for R&D tax credit qualification

Black Line Group – Confidential10 1 st R&D Test for Qualification Permitted Purpose Test: “What is the goal of this project?” EVOLUTIONARY DEVELOPMENT

Black Line Group – Confidential11 2 nd R&D Test for Qualification Technological Uncertainty Test: “What is not known at the outset of the project?”

Black Line Group – Confidential12 3 rd R&D Test for Qualification Process of Experimentation Test: “What was done to eliminate the uncertainties?” FAILURE IS REWARDED

Black Line Group – Confidential13 4 th R&D Test for Qualification Technological in Nature Test: “What science is being relied upon as you perform the activity?”

Black Line Group – Confidential14 Case Study #1 Precision Metal Stamper $165,000+ Tax Credits Identified Goal- To create a new product, a miniature flat wire, to be used for the medical industry. Technical uncertainty- To discover a process to deburr the wire with an extremely high level of precision. Uncertainty related to whether they would be able to meet cost constraints. Experimentation- Evaluated several alternative processes to minimize burrs during the stamping process. Also evaluated several deburring processes as well.

Black Line Group – Confidential15 Case Study #2 Specialized Molding Medical Company $265,000+ Tax Credits Identified Goal- To design an electronic scalpel for surgical use. Technical uncertainty- Discovering a molding design which would provide adequate sealing and prevent electrical leakage out of the product and bodily fluids leakage into the product during surgery. Experimentation- Evaluated several molding designs, including over-molding and sonic welding until they found a solution with the best seal characteristics.

Black Line Group – Confidential16 Case Study #3 Metal Stamping Manufacturer $310,000+ Tax Credits Identified Goal- To develop a new protection basket used in computer servers’ line cards. Technical uncertainty- How to develop the stamping methodology to punch the basket’s air pockets without damaging the basket. They also had stringent production efficiency requirements placed upon them from their customer. Experimentation- –Evaluated several alternative stamping processes until they discovered one which would allow for fast and damage-free punching.

Black Line Group – Confidential17 Case Study #4 Custom Injection-Mold Products Manufacturer $165,000+ Tax Credits Identified Goal- To create a new process for injection-mold ATV bumper. Technical uncertainty- Difficulty with ATV mold design, such as the gating and injection processes, due to the unusual shape of the bumper (shaped like an “A”). Additional challenges with temperature variation, mold over-fill, and structural integrity of the bumper. Experimentation- Performed iterative testing with gate configurations (number of gates and positioning), material evaluation, and temperature variations to eliminate inconsistent forming.

Black Line Group – Confidential18 Case Study #5 Precision Machining & Metal Stamping $165,000+ Tax Benefit $70,000+ increase in refunds from prior years claims Goal- To create the manufacturing process for a micro- miniature component used in the medical industry. Technical uncertainty- The product was extremely small, and because of its medical application, required stringent dimensional tolerances of it’s inter-fitting components to be met, while working within cost constraints. Experimentation- Evaluated different stamp forming methods, material types for the product, and created several prototypes to discover the best method to meet the dimensional tolerance requirements.

Black Line Group – Confidential19 Precision Gasket Company (Specialty manufacturing company. Everything is customized ) Permitted Purpose –Pump Manufacturer requested technical support to extend life of Peristaltic Pump Tube and keep from fatiguing –Customer goal to obtain 40 hours of “life before failure” –Evaluate design options incorporating second component to provide support to flexible tubing

Black Line Group – Confidential20 Precision Gasket Company Technical Uncertainty –Support strap concept has never been implemented. –Wrong material thickness and shape could cause poor pump performance and tubing to fail prematurely. –How to best mount strap at each end so strap also meets design life goal.

Black Line Group – Confidential21 Precision Gasket Company Process of Experimentation –Material Sourcing Process various strap samples Not many suppliers Try to avoid buying custom material –Shape Development Process Made over 10 shape modifications Strap would “walk away” from tube –Fabricated prototypes and delivered to customer for testing Strap material frayed when it was cut Used heat to melt the material together to keep from fraying Needed to sew edge to create ridge to keep tube centered

Black Line Group – Confidential22 If you can answer YES to these…. Do you have an R&D, product development or design department? Do you provide design, engineering, or testing services to your customers? Are you a software development company or in the business of manufacturing a product? Have you recently applied for and/or received patents?

Black Line Group – Confidential23 Examples of “Qualifying Activities” Develop new, improved or more reliable products, processes or formulas Develop prototypes and models including computer generated models Design tools, jobs, molds and dies Develop or apply for patents Perform certification testing Conduct testing of new concepts and technology Develop new technology Attempt using new materials Perform environmental testing Add new equipment Automate/streamline production process or manufacturing process Develop software or hardware Improve or build new manufacturing facilities

Black Line Group – Confidential24 Maximizing the R&D Tax Credit Who has the expertise to maximize the R&D tax credit? Calculation vs. Study Approach Most CPAs choose not to specialize in the R&D Tax Credit area Boutique R&D Firms Partnering with your existing CPA

Black Line Group – Confidential25 Will filing an R&D Tax Credit trigger a tax audit? Filing an amended return for an R&D Tax Credit does not automatically trigger an audit. Exception: If you have a credit in excess of $1 million

Black Line Group – Confidential26 Recent Developments LEGISLATION: –Credit has always been included in temporary tax bills and has been extended 11 times since 1981 –The credit expired 12/31/05 –Proposal currently in Congress to extend the R&D tax credit for two years through December 31 st 2007 REGULATIONS: –Final regulations were issued in December 2003

Black Line Group – Confidential27 Reading The Small Print Determination of “open” years for amended R&D tax credits is contingent on usability of the credit (GBC rules) R&D Credits can not reduce federal tax below the TMT Credits can be carried back 1 year and carried forward 20 years 280C Election – The election to take the reduced credit as opposed to reducing deductions by the amount of the credit

Black Line Group – Confidential28 What We Need To Determine If the company can generate a meaningful R&D Tax Credit –Amount of “qualified spending” –Base-period spending If and when the credits can be used –AMT –Number of shareholders

Black Line Group – Confidential29 Getting started… What you need to do 1.Identify and Understand the Opportunity 2.Accumulate and Document the Methodology and Results 3.Perform the Calculation/Amend Returns

Black Line Group – Confidential30 The Bottom Line… 1.Substantial R&D tax credit savings going unclaimed 2.This is a valid tax planning opportunity – NOT a tax shelter 3.Even if you are claiming the R&D tax credit, you may be leaving dollars on the table

Black Line Group – Confidential31 Don’t hesitate to contact us after the seminar with any additional questions Scott Schmidt (763) Harbor Lane Suite 216 Plymouth MN 55447