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
Black Line Group – Confidential

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
Black Line Group – Confidential

4. History of the R&D Tax Credit
R&D Tax Credit has a history over 35 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 – Confidential

5. An opportunity there for the asking
It is estimated that the amount of credits claimed by businesses each year has risen to nearly
$9 billion
Black Line Group – Confidential

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
Black Line Group – Confidential

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
Black Line Group – Confidential

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 technical 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
Black Line Group – Confidential

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
Black Line Group – Confidential

10. 2nd R&D Test for Qualification
Technical 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
Black Line Group – Confidential

12. 4th R&D Test for Qualification
Technological 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
Black Line Group – Confidential

13. $61,000+ Federal & State Tax Credits for 2015
Case Study #1
Precision Machine Manufacturer for the Aerospace, Defense, and Mining Industries
$61,000+ Federal & State Tax Credits for 2015
$125,000+ Total Federal & State Tax Credits Identified
Goal- To develop a process and manufacture snow making equipment for a customer
Technical uncertainty- They were unsure how to develop a reliable process for manufacturing large volumes of the snow making equipment
Experimentation- They tried using the same process as an existing older product, using a state-of-the-art Swiss Screw Machine, and splitting the turning and milling processes between two machines before finding a solution
Black Line Group – Confidential

14. Manufacturer of Precision Machined Components and Assemblies
Case Study #2
Manufacturer of Precision Machined Components and Assemblies
$36,000+ Federal & State Tax Credits for 2015
$178,000+ Total Federal & State Tax Credits Identified
Goal- To develop programs and work holding devices for CNC lathes and mills to produce parts to print specifications
Technical uncertainty- The part print called for a very fine surface finish; they were unsure how to achieve this finish
Experimentation- They tried changing the speeds and feeds in the CNC program, changing the CNC program to leave different amounts of material for the finish cut, and using a different milling cutter before finding a solution
Black Line Group – Confidential

15. Precision Machining, Die Cast and Tooling Manufacturer
Case Study #3
Precision Machining, Die Cast and Tooling Manufacturer
$108,000+ Federal & State Tax Credits for 2015
$278,000+ Total Federal & State Tax Credits Identified
Goal- To design and build a new casting die to produce a 10 speed transmission case housing
Technical uncertainty- They were venting the die through vent blocks and the clearances needed to be adjusted; they were unsure what amount of clearance would work
Experimentation- They experimented with eliminating all of the clearance between the slides and making them “steel to steel,” and with maintaining a clearance of .001” to .002” in order to find an alternative that worked
Black Line Group – Confidential

16. $207,000+ Federal & State Tax Credits for 2015
Case Study #4
Manufacturer of Aerospace, Semiconductor, and Medical Machined Components
$207,000+ Federal & State Tax Credits for 2015
$691,000+ Total Federal & State Tax Credits Identified
Goal- To develop a manufacturing process for a multipart aluminum brazement
Technical uncertainty- How to prevent internal burrs from forming within the gas chamber cavities after brazing
Experimentation- They tried using pre-braze machining and developing a fixturing concept to pressurize the internal cavity of the part in order to find a solution
~$25,000 for federal and ~$31,000 for state for 2008
Black Line Group – Confidential

17. Manufacturer of Orthopedic Surgical Instruments
Case Study #5
Manufacturer of Orthopedic Surgical Instruments
$240,000+ Federal & State Tax Credits for 2015
$407,000+ Total Federal & State Tax Credits Identified
Goal- To develop a lateral inserter instrument for a customer
Technical uncertainty- How to prevent the part from warping and/or twisting during machining
Experimentation- The first parts they produced were severely distorted, so they experimented with multiple alterations to the CNC program before finding a solution
Black Line Group – Confidential

18. Machining and Tooling Services
Case Study #6
Machining and Tooling Services
$134,000+ Federal & State Tax Credits for 2015
$726,000+ Total Federal & State Tax Credits Identified
Goal- To design a fixture that would install left-hand and right-hand parts as pairs on the end product
Technical uncertainty- How to design the fixture in a way that would ensure the left-hand and right-hand parts could not be accidentally loaded into the wrong location
Experimentation- They experimented with using guides and poka yoke devices, and with air sensing technology that would feed back a signal to the machining center to verify the part was properly seated
Black Line Group – Confidential

19. Mold Design and Manufacturing Company
Case Study #7
Mold Design and Manufacturing Company
$98,000+ Federal & State Tax Credits Identified for 2015
$534,000+ Total Federal & State Tax Credits Identified
Goal- To design a mold closer press to open and close a much larger mold than previous designs
Technical uncertainty- They were unsure how to design the press to support the weight of the mold
Experimentation- They experimented with utilizing larger support rods, adding shims and redowelling to correct the platen position, and adding a new support bar with adjustment screws in order to find a solution
Black Line Group – Confidential

20. Designer & Builder of Carbide Compaction Tooling
Case Study #8
Designer & Builder of Carbide Compaction Tooling
$199,000+ Federal and State Tax Credits for 2015
$1,020,000+ Total Federal and State Tax Credits Identified
Goal- To design and build a machine that could groove and cut pipe in under a minute for a customer
Technical uncertainty- They were unsure how to achieve a cut-off end of the part that was accurate and resulted in a smooth surface finish
Experimentation- They tried using a saw blade with cutting teeth at a straight angle cut, a blade with cutting teeth at an alternating left/right tooth angle, and with different blade thicknesses
Black Line Group – Confidential

21. $605,000+ Federal and State Tax Credits for 2015
Case Study #9
Precision Machining, Stamping and Tooling for the Medical, Automotive, Aerospace, and Oil & Gas Exploration Industries
$605,000+ Federal and State Tax Credits for 2015
$1,607,000+ Total Federal and State Tax Credits Identified
Goal- To create interlocking cobalt steel laminations for a customer
Technical uncertainty- How to design the laminations to prevent the cobalt steel material from cracking or detaching
Experimentation- They experimented with varying the heights and angles of the interlocking feature to find a position that worked
Black Line Group – Confidential

22. 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 of either your own design or your clients?
Have you recently applied for and/or received patents?
Black Line Group – Confidential

23. 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
Black Line Group – Confidential

24. 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
Black Line Group – Confidential

25. Maximizing the R&D Tax Credit
Calculation/DIY Approach
Identify costs internally and give to CPA to calculate
Almost always results in getting less than is due with little documentation
Study Approach
Process is led by an expert
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 small/medium size CPA firms do not to specialize in the R&D Tax Credit/Partner with R&D Tax Credit Specialist
Black Line Group – Confidential

26. PMA/One Voice helped lead charge lobbying Congress
Legislative Guidance
LEGISLATION:
Protecting Americans from Tax Hikes (PATH) Act of 2015 was signed into law on Friday, December 18, 2015
Made the Research and Development Tax Credit (“R&D”) permanent for the first time in the credit’s 35 year history!  
Extended retroactive to January 1st, 2015
PMA/One Voice helped lead charge lobbying Congress
Black Line Group – Confidential

27. The Big Changes!!!
Eligible Small Businesses may claim the credit against the Alternative Minimum Tax (AMT)!!!
Average sales of less than $50 million over the prior three tax years
For tax years beginning after December 31, 2015
Certain Start-Up Companies may offset employer’s FICA Payroll Tax liabilities with the credit.
Annual sales of less than $5 million  
The credit may not exceed $250,000 per year
Can’t claim for more than 5 years
Black Line Group – Confidential

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
Tax returns from “open” tax years can be amended for unclaimed R&D tax Credits
R&D Credits CAN NOW reduce federal tax below the TMT/AMT for 2016!!!
Credits can be carried back 1 year and carried forward 20 years
Most states have state R&D Tax Credits
Binders will spin upon clicking
Black Line Group – Confidential

30. Evaluate whether it makes sense to go back to prior years
Action Steps
Evaluate/re-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? (Cannot apply credits against AMT in years prior to 2016)
Can the claim be adequately documented?
Put in place a methodology/process for utilizing the R&D Tax Credit going forward
If you are currently claiming the R&D Tax Credit, validate that the current process accurately reflects what is taking place within your company and maximizes your opportunity
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. One Last Thought
“Our company has been claiming R&D Tax Credits for a number of years through an internal process where we identified the R&D costs as we understood them.  We would then give that cost number to our CPA firm, who would then calculate the credit amount due to us.  We had known of Black Line Group through our companies’ memberships in a couple of the same manufacturing associations and decided to engage Black Line Group for assistance with our R&D Tax Credit claim.  As a result of their deeper knowledge and expertise of what truly qualifies as “R&D”, our company’s credit amount was significantly larger than what we claimed on our own, and our processes and documentation to support our claim are substantially better.  Our ROI from working with Black Line Group is measured in enhanced cash flow and has been very meaningful.  The process has more than paid for itself many times over.” 
Jeffrey M. Mattiuz, CFO - Oberg Industries, Inc.
Black Line Group – Confidential

33. 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