As part of our annual fall tax seminar series, TCG President Michael Krajcer and I had the recent opportunity to meet with dozens of CPAs and industry professionals located throughout Ohio, Michigan and Pennsylvania.
During our ‘road show’, we were able to educate and share information on the history of the Research and Development Tax credit, the rules and requirements for claiming it, and best of all, provide insight on all of the recent favorable changes to it – permanency, alternative minimum tax and payroll tax offsets – just to name a few.
Of course, with all the material we covered, we received some great questions along the way. Here are just a few of our favorites:
- I used to work for a large software development company. In the past we took 95% of the wages of software developers dedicated fully to R&D, but eliminated 5% of wages to accommodate for administrative activities. Was this correct? While the reasoning here is absolutely logical, under the “Substantially All” rule, if 80% or more of an individual’s time is spent on qualifying R&D activities, 100% of wages can and should be allocated toward the Qualifying Research Expenditures (QREs).
- In regards to wage QREs, is it ever appropriate to include time from finance or tax staff? In our experience, we’ve never encountered a situation where an individual in a finance role was close enough to the R&D effort to be includible. Thus, it’s always been our firm’s decision to exclude these individuals.
- Can a self-employed person claim the R&D tax credit? As long as the individual is conducting credit eligible activities, as defined by IRC Sec. 41.
- Can food manufacturers qualify for the credit? Yes – In fact, there are no restrictions on the type of businesses that can qualify for the credit. The determination will be based upon whether or not the business is conducting qualified research activities as defined by IRC Sec 41.
- If R&D expense has been capitalized for book purposes, can it be included in QRE for credit purposes? The book treatment may be different for tax purposes. The company should treat the expense as IRC Section 174 expense for tax purposes, which will allow it to be included in the R&D credit calculation.
- If capitalized, can R&D incurred for internally developed equipment qualify for the credit? Yes, but the expense should be bifurcated and expensed under IRC Section 174, which will allow it to be credit eligible.
- Do you have to reduce the deduction for the expenses claimed in the R&D credit calculation? Generally there is a deduction reduction requirement under IRC Sec. 280C. However that can be avoided by claiming a reduced credit amount on an originally filed return.
- In regard to the new payroll tax offset provision, would a change in business entity type provide a new opportunity to meet the 5 year window of eligibility? The new payroll tax offset provision was designed specifically to benefit startup businesses. Even if a business were to change entity type, the original tax history would follow.
So there you have it, a quick roundup of some of our favorite questions from 2017.