2. The Difference between a Tax credit vs. Tax Deduction
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Credit = dollar for dollar reduction in the amount of taxes paid
Deduction = income on which you do not pay tax
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3. 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
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4. History of the R&D Tax Credit
R&D Tax Credit has a history over 32 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.
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5. An opportunity there for the asking
It is estimated that the amount of credits claimed by businesses each year has risen to nearly
$8 billion
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6. 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
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7. 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) if:
Payment is contingent on success (fixed price)
Rights are retained as to the R&D
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8. 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
Non-intuitive examples??
In general, activities are eligible for the R&D tax credit if they are:
Being conducted for a permitted purpose (i.e. improved quality, reliability, functionality or cost reduction),
Intended to resolve technological uncertainties through a process of experimentation,
Using a permitted science (i.e. any of the engineering sciences, chemistry, biology, or computer science)
Any new OR improved product, process or software development initiative has potential for R&D tax credit qualification
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9. 1st R&D Test for Qualification
Permitted Purpose Test:
“What is the goal of this project?”
EVOLUTIONARY DEVELOPMENT
SWAP AND PLACE “EVOLUTIONARY DEVELOPMENT” BELOW THE PICTURES OF THE CARS
Goal examples – include regulatory concerns and FDA approvalsYou do not need to obtain your goal
Goal needs to increase function, performance, quality, or reliability or improve cost efficiency
Goal can not be purely aesthetic or cosmetic in nature
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10. 2nd R&D Test for Qualification
Technological Uncertainty Test: “What is not known at the outset of the project?”
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11. 3rd R&D Test for Qualification
Process of Experimentation Test: “What was done to eliminate the uncertainties?”
FAILURE IS REWARDED
Evaluation of one or more alternatives
Modeling, simulation or prototyping
Conducting experiments to test the
hypotheses, refining the hypotheses, or
discarding the hypotheses
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12. 4th R&D Test for Qualification
Technical in Nature Test: “What science is being relied upon as you perform the activity?”
Evaluation of one or more alternatives
Modeling, simulation or prototyping
Conducting experiments to test the
hypotheses, refining the hypotheses, or
discarding the hypotheses
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13. Custom Spring and Stamping $70,000+ Total Federal Credits since 2010
Case Study #1
Custom Spring and Stamping
$70,000+ Total Federal Credits since 2010
$100,000+ Total State Credits since 2010
Goal- To develop a very small tab in a very small tube (.028" diameter) used within a medical device, and an inspection system to view the forming
Technical uncertainty- Could engineers develop a tab small enough to meet customer requirements? How should the tube be handled in order to maintain its shape?
Experimentation- Technical personnel evaluated whether current development techniques could be used to form tab. Current tools were unsuccessful since the tab could not be made small enough for tube. Engineers had to design and build a custom fixture that allowed tube to be held and rotated into proper position and then design and build a tool that would fit the tab. The tube is slightly magnetic so technical personnel tried using slight magnetism to pick up and orient the part but this proved to be unreliable and slow. Standard tweezers caused the part to deform. Ultimately, engineers had to develop custom tweezers to handle the tube
Black Line Group – Confidential

14. Precision Spring and Wire Form Manufacturer
Case Study #2
Precision Spring and Wire Form Manufacturer
$22,000+ Federal Tax Credits Identified
$23,000+ State Tax Credits Identified
$325,000+ Total Credits Identified
Goal- To develop a bi-foldable door hinge that can contract and expand within a 150º range. The hinge needed to meet functionality and quality requirements
Technical uncertainty- How to create a reliable manufacturing process for the double body spring configuration. The process required several steps and it was unsure if the material would flow correctly
Experimentation- Tested different design dimensions for the spring, including diameter, weight of material, as well as fixture designs
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15. Precision Metal Fabricator
Case Study #3
Precision Metal Fabricator
$82, Federal Tax Credits Identified
$86, State Tax Credits Identified
$493,000+ Total Credits Identified
Goal- To develop a fixture to mimic bolts and mounting surfaces of car to help reduce false failures during the inspection process
Technical uncertainty- What design and materials could be used for the fixture so the it reduced testing times while meeting performance and quality requirements
Experimentation- Evaluated alternative designs, materials, positions and rotated measurements until a solution was discovered
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16. Precision Metal Fabricator
Case Study #4
Precision Metal Fabricator
$44, Federal Tax Credits Identified
$56, State Tax Credits Identified
Goal- To develop new tooling that could withstand extreme stamping pressures while generating a part with the correct flatness necessary to meet quality requirements
Technical uncertainty- What design could be used to generate the correct flatness and dimensions necessary for successful sealing on the assembly
Experimentation- Evaluated alternative designs and materials, specifically improving the counterbore of the tooling where the die roll is activated
Black Line Group – Confidential

17. Precision Metal Fabricator
Case Study #5
Precision Metal Fabricator
$69, Federal Tax Credits Identified
$212,000+ Total Federal and State Tax Credits Identified
Goal- To develop a component that would meet weight and crash/safety requirements for the automotive industry
Technical uncertainty- How to manufacture the part from a two piece welded assembly, using various fastener combinations so that customer and hydro form specifications were achieved
Experimentation- Evaluated alternative designs and materials, specifically experimenting with the hydro form wall thicknesses until a product was produced that met quality and functionality requirements
Black Line Group – Confidential

18. Metal Stamping and Fabrication
Case Study #6
Metal Stamping and Fabrication
$46,000+ Federal Credits Identified for 2012
$161,000+ Total Credits Identified
Goal- To improve the functionality, performance and design for an electrical vehicle motor
Technical uncertainty- What materials and tool designs could be used to manufacture an interlocked mechanism that was revolutionary to the industry
Experimentation- Evaluated different design placements of the interlock tool, including a double interlock, an additional path of interlocks and inserting a double end lamination. Each design was assessed until the most efficient and uniform one was discovered
Black Line Group – Confidential

19. Metal Stamping/Tooling/Component Manufacturer
Case Study #7
Metal Stamping/Tooling/Component Manufacturer
$52, Federal Tax Credits Identified
$12, State Tax Credits Identified
$264,000+ Total Federal and State Tax Credits Identified
Goal- To develop a new product for the coal mining industry that would be functional in high stress environments while meeting quality and durability requirements
Technical uncertainty- Unsure of where the bolt preload force could be applied in order to exceed industry standards to make a superior product over ones currently on the market
Experimentation- Evaluated durability and the point of onset buckling on different designs and models until a solution was discovered
Black Line Group – Confidential

20. Metal Stamping / Molding Manufacturer
Case Study #8
Metal Stamping / Molding Manufacturer
$266,000 + Federal & State Tax Credits for 2012
$1,798,000 + Total Tax Credits Identified
Goal- To develop and manufacture a part using stamping techniques that use a staging bar method to deliver a zero defect part
Technical uncertainty- The company was technically challenged with designing and molding the part at an elevated 300 degree F temperature. They were also unsure what design would meet a 45 second cycle time within the quality requirements set forth by the customer
Experimentation- They evaluated alternate loading methods, including possibly automating the process. Alternative stamping methods and mold and press timing was evaluated in order to determine how to meet the correct temperature and design requirements
~$25,000 for federal and ~$31,000 for state for 2008
Black Line Group – Confidential

21. 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 manufacturing a product or in the business of software/technology development?
Have you recently applied for and/or received patents?
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22. Examples of “Qualifying Activities”
Develop new, improved or more reliable products, processes or formulas
Develop prototypes and models including computer generated models
Design tools, jigs, 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
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23. What We Need To Determine
If the company can generate a meaningful R&D Tax Credit
If and when the credits can be used
Can you document your Qualified Research Expenditures
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24. Maximizing the R&D Tax Credit
Who has the expertise to maximize the R&D tax credit?
Calculation vs. Study Approach
Educate company/employees about definition of R&D
Identify ALL Amounts for the Form 6765
Documentation of the activities and costs that go onto the Form 6765
Most CPAs do not to specialize in the R&D Tax Credit
R&D Firms Partner with your existing CPA firm
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25. Many states have R&D Tax Credits
Legislative Guidance
LEGISLATION:
Credit has always been included in temporary tax bills and has expired and been extended 15 times since 1981
American Taxpayer Relief Act of 2012 Extends the credit retroactively back to January, 1st of 2012 and through December 31, 2013
Many states have R&D Tax Credits
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26. 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
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27. What Documentation Is Necessary To Sustain A Credit?
“Audit Technique Guide for Research Credit Claims” issued in May 2008
Establish nexus between QREs and QRAs
Implement a project tracking approach to support the wages associated with R&D
Track supply costs by project for expenses which are consumed or “used up” during the development process (at a minimum place into an account designated specifically for R&D expenses)
Document the development process not just the end result
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28. What Documentation Is Necessary To Sustain A Credit?
Retain research activity documentation, such as:
Communications which show failures, problems, or concerns encountered during the development
Product or Project Specifications, Descriptions, or Proposals
Technical Reports / Test Reports and Results
Documentation of alternative supplies/materials/technology evaluated
Project Diagrams/Drawings/Pictures including older versions and conceptual drawings which differ from the final product
Issue Logs / Meeting Minutes /Flowcharts or Time Schedules / Schedules of Releases
Patent Applications or Abstracts
Contractual Agreements with Consultants and Customers
Black Line Group – Confidential

29. 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/AMT
Credits can be carried back 1 year and carried forward 20 years
Binders will spin upon clicking
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30. Evaluate whether it makes sense to go back to prior years
Action Steps
At a minimum, evaluate the R&D Tax Credit opportunity for the current tax year
Evaluate whether it makes sense to go back to prior years
Can tax credits be used?
Can the claim be adequately documented?
Put in place a methodology/process for utilizing the R&D Tax Credit going forward
Black Line Group – Confidential

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

32. Don’t hesitate to contact us after the seminar with any additional questions
Scott Schmidt
(763)
3030 Harbor Lane Suite 216
Plymouth MN 55447
Black Line Group – Confidential