1. Presented By: Mike D’Alessandro, MBA Research Tax Credits, LLC
NEW TAX LEGISLATION: Research & Experimentation PA Research & Development Tax Credits
Presented By:
Mike D’Alessandro, MBA
Research Tax Credits, LLC

2. Section 41 R&E Tax Credit December 2017 Senate omitted the R&E Credit
Reinstated by the Senate in December of 2017
Signed in December of 2017 by the President
R&E credit made permanent after 35 years
100’s key tax regulations
Many that impact small businesses
Many that impact manufacturing

3. History of the Federal R&E Tax Credit
Economic Recovery Act of 1981
Expired 9 times and Extended 15 times
Made permanent as of 2015 (12/18/2015)
Reinstated in Q4 of 2017 and preserved
Major Changes
American Jobs Creation Act of 2003 (2004) Summary of H.R th Congress
Old Rules
New Rules: 4 Part test

4. History of the Federal R&E Tax Credit
Economic Recovery Act of 1981
Expired 9 times and Extended 15 times
Made permanent as of 2015 (12/18/2015) as a part of the PATH Act of 2015
Reinstated in Q4 of 2017 and preserved
Preserved for 10-years

5. History of the Federal R&E Tax Credit
Major Changes
American Jobs Creation Act of 2003 (2004) Summary of H.R th Congress
Old Rules
New Rules: 4 Part test
PATH Act of 2015
Removal of AMT Limitation
New Start-Up Rules

6. History of the Federal R&E Tax Credit
Pennsylvania R&E Tax Credit
PA R&D Credit was to Sunset after TY 2015
Repealed the sunset provision
Continues to be offered annually
Annual PA R&D Tax Credits Awarded $55M
$44M to Large Companies >$5M in Assets
$11M to Small Companies <$5M in Assets
Annual List to the PA General Assembly

7. History of the Pennsylvania R&D
What is the PA Research and Development (R&D)Tax Credit?
An R&D tax credit is available for qualified research performed in PA with $55M available annually. Also the program has been extended to taxable years ending before January 1, The credit may be applied against the corporate net income tax, capital stock and franchise tax, personal income tax or any combination thereof, but may not exceed 50% of such qualified tax liability for tax years 2004 and earlier. The limitation for years 2005 and forward was eliminated. Unused credits may be carried forward fifteen taxable years by the credit recipient. The application is due by September 15, of the year of the application. To be received timely, it must be post marked by that date or in our hands by that date. No extensions are allowed. Taxpayers can apply to the Department of Community and Economic Development to sell or assign an unused credit. The purchaser or assignee must use the credit in the taxable year in which the purchase or assignment is made and the credit cannot exceed 75% of the tax liability for the taxable year. The purchaser may not carry credits forward or back or obtain a refund of any unused credit. This change applies to credits awarded in December The Department of Revenue will be required to report to the General Assembly the names of all taxpayers using the credit for credits awarded in December 2004 and after.
***Open Discussion on Credit Transfers and Credit Sales

8. Who qualifies for these Tax Credits?
“The tax definition of R&E and the scientific definition of R&E can be polar opposites.”
Any company that makes things
Any company that designs things
Any company that improves things
Any company that invests in the previous
Must show uncertainty & experimentation

9. 2018 R&E Tax Credit Overview
Key expansions to the Federal R&E Tax Credit will begin January 1, 2018: (PATH rules kept)
Removal of the Alternative Minimum Tax Limitation for companies under $50M
New Regulations for Start Up Companies under $5M first 5-years with $0 Revenue
IRS Form 6765: 280C at 65% will be 79%

10. Removal of the AMT Limitation
Businesses with less than $50 million in gross receipts will now be able to claim the credit against their Alternative Minimum Tax (AMT), thereby removing the single greatest barrier preventing companies from claiming the credit in the past.
This 2015 legislation and tax law will continue.
The 21% Tax Rate and AMT limit for C-Corps was addressed and solved in the new laws.

11. New Regulations For Start Ups
The bill includes a provision that opens the credit up for start-ups, allowing businesses with gross receipts of less than $5 million a year to take the credit against their payroll taxes (capped at up to $250,000 per year) for up to five years.
Start-Ups need one or more years with $0 in revenue to qualify for the wage tax credit.
Each $0 Revenue year provides one year.

12. R&E Credit is Expanded ASC vs. Regular Credit Calculations
Permitted to change methods annually
Alternative Simplified Credit (ASC) is now permitted to be used on amended returns
280C Election is still NOT permitted on amended returns
280C Election on the 2018 IRS Form 6765 will change from 65% to 79% (20% increase!)

13. What is the cost estimated by the IRS?
R&E CREDIT COST OVER THE NEXT 10 YEARS
Research Tax Credit $ B
Current R&E Credit $ B
Increase to “Small Business” $ B
Annualized for Small Business $ B
Expansion of the State R&D Credits

14. What does this mean to you?
The US tax code is over 74,000 pages
Opportunity to introduce a tax planning strategies to Clients
Creates value added ideas and service offerings
Increases Client relationship capital
Viewed as a resource
Helps the Client and creates a “Triple Win”

15. What does this mean to the Client?
For “S-corporations” and LLCs –
The R&D Tax Credit is a “flow-through” credit used to offset the personal tax liabilities of the shareholders
Form
6765
1065-B
(Sched. K1)
Shareholder’s 1040

16. How does this work? Calculate the most current years of R&E/R&D
Rolling 3 year average for Federal R&E
Rolling 4 year average for Pennsylvania R&D
“Reasonable Allocation of Wages”
Permitted to use allocations to calculate estimates and tie the time back to projects
Some documentation is required
Must show Uncertainty & Experimentation

17. Section 41 Framework 4 Part Test Technological in Nature
Very cut and dry, “no soft sciences.”
Technical Uncertainty
Process of Experimentation (Trial & Error Testing)
Permitted Purpose
Unless your business is a hobby it’s hard not to prove

18. Employee Timesheets Weekly, Monthly or Quarterly
Tracking Projects and allocating
Three types of qualified R&E/R&D
Product related activities
Process related activities
Technical Support, Direct Involvement Management Oversight, Administration and Supervision
Of the Product and Process related activities

19. Project Eligibility Worksheets
List of Annual Qualified Projects
These projects will demonstrate how the company qualified by proving the 4 Part Test requirement
Technological in Nature
Technical Uncertainty
Process of Experimentation
Permitted Purpose

20. What Expenses Qualify? Qualified Research Expenses: “QRE’s”
Box 1 W2 Taxable Wages including Owners Compensation (W2, Draws, Guaranteed Payments)
Any compensation subject to federal wage taxes
Supplies and Materials Consumed in R&E/R&D
Must be consumed doing research and accurately tracked
One of the most contested areas with the IRS
3rd Party Contractor Expenses (Must be in the US)
Subject to a 65% limit of total 3rd Party Expenses

21. Product Development Cycle
Ideation Phase: Customer Quotes & Proposals
Interaction Phase: Sales, Mgmt, Proposal
Development Phase: Engineering & Design
Option Phase: Tooling, Mfg, QA/QC, Prototype
Proposal Phase: Win or Lose the opportunity
Commercial Production (THIS is EXCLUDED)

22. Types of qualifying R&E activities:
Classic R&E: results from a deliberate decision to develop a new or improved product
Contingent R&E: results from a deliberate bid on an order whose specifications are beyond capabilities
Unplanned R&E: discovery that you cannot accomplish something with the present capabilities

23. When does this make sense?
When a Client has made an investment in…
Product
Process
Technology
New Line of Business
When you believe that qualified dollars the client has invested could be over $50,000
Facility upgrades and improvements are a good indicator of qualified investments

24. How does this work?
By working with trusted advisors or being referred into a Client opportunity.
Phase 1 Analysis:
Education
Identification
Qualification
Quantification
Then a turnkey fixed fee proposal is presented

25. What does this mean to the client?
Federal Research & Experimentation Tax Credits
In 2017 will net 3% to 10%
In 2018 will net 20% additional
Pennsylvania Research & Experimentation Tax Credits will net 3% to 5% (10-Year Average)
In 2018 will net 3.25% for large companies
In 2018 will net 5.00% for small companies
$100,000 in qualified expenses = $3,250 PA state credit (LG)
$100,000 in qualified expenses = $5,000 PA state credit (SM)

26. Where do you start? Conversation with the Client on NEW TAX LAWS
Reach out to a subject matter expert
Conduct an introductory meeting
Decide to move forward or not with Phase 1 Evaluation
Phase 1 Information Request & Complete Phase 1
Phase 1 is always delivered to the CPA first to prepare them
Review the ROI with the Client
Make the decision
Deliver the work papers, calculations and tax forms
Complete the engagement by delivering a final report

27. Section 41 Federal R&E and Pennsylvania R&D Tax Credit Questions
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28. For More Information:
Contact: Mike D’Alessandro, MBA Managing Director at Research Tax Credits, LLC 1275 Glenlivet Drive Suite 100 Allentown, PA Office: Mobile:

29. For More Information:
Chuck Mayfield, MCS, LEED Director of Technical Reports Research Tax Credits, LLC 3013 Big Spring Drive Joshua, TX Mobile: