- Real Estate
- Food & Drink
Nov. 26, 2018
This paid piece is sponsored by Eide Bailly LLP.
By Jim Donovan, CPA, partner
Is your business constantly developing or improving products? Are you building new prototypes? Maybe you are modifying your production process, streamlining internal processes or developing software? Successful companies invest in innovation to stay competitive. These activities are considered research and development and may be eligible for generous R&D incentive programs. These incentives provide an immediate source of cash and reduction in the current-year tax, are sources for permanent tax savings and financial statement benefits. And they increase the market value, cash flow and company ROI.
Sioux Falls is a hot bed of activity for research and development – especially in industries such as manufacturing, agriculture, engineering/construction, technology/software and life sciences. Many business owners in nearly every industry are unaware that federal and state R&D tax-credit programs even exist.
The R&D tax credit is a government-sponsored benefit that provides cash incentives for companies conducting R&D in the United States. Intended as a way to keep U.S. companies competitive in the global market, the R&D tax incentive is one of the most lucrative tax credits available. Believe it or not, only one out of 20 small to medium-sized companies take full advantage of this tax credit.
Eide Bailly performs more than 200 R&D engagements each year. We closely review all business activities and determine which areas are eligible to take advantage of R&D incentives. We take the time to understand your organization, so you can take full advantage of qualifying credits. Our clients feel peace of mind knowing that we bring a thorough knowledge of tax laws and regulations to every interaction with them.
Our process is a three-step process. First, we have a general feasibility call to answer questions and better understand the R&D activities. This is a complimentary analysis during the pre-engagement phase. If agreed upon, we generally perform a phase 1 assessment, which involves meeting with the company, discussing the credit rules and what activities qualify, and working through an initial calculation to estimate the federal and state R&D credit benefit for all open tax years. Phase 1 is typically performed at a nominal fee and involves an investment by the Eide Bailly team. After phase 1 is complete, we work with the company to determine the scope of phase 2, and, for a fixed fee, we perfect the credit numbers through additional interviews and review of available information and document the qualified activities through write-ups and the collection of contemporaneous documentation around the qualified activities.
In general, the company will need two types of documentation. To compute the credit, the company will provide wages for individuals involved in the R&D, as well as a percentage of time they spend doing R&D activities. Time tracking can be helpful but is not a requirement. Estimates are acceptable for determining the amount of R&D time. The company also will provide total supply costs and third-party contractor costs related to the R&D. The information will be gathered for the current year as well as prior years to compute the credit.
In phase 2, we collect contemporaneous documentation to support the qualified activities. The company generally will provide the following types of documents: project charters, PowerPoint presentations, design documents, emails discussing technical challenges, drawing iterations or test reports to support their R&D activities. Our process utilizes the documents the company already generates and adds additional support through the interview process.
We have countless examples of how we have helped our clients claim the R&D credit. From LLCs, LLPs, C corporations and S corporations, Eide Bailly’s R&D team has years of experience in assisting organizations to reward their day-to-day efforts of producing an improved product.
Here are some examples of how Eide Bailly has worked with clients to take advantage of these incentives:
A general contractor working on commercial, governmental and industrial projects recently concluded a three-year R&D study. The R&D study resulted in $130,000 in state and federal credits. The contractor worked on several large design-build projects each year and performed most of these projects on a fixed-price basis. The work in the pre-construction phase included preliminary design and constructability issues. The general contractor had $500,000 to $1 million of qualified expenses in each year and has an annual revenue of $50 million.
A manufacturer with over $45 million in annual revenue is focused on the design and engineering of new precision-cutting products through the use of new raw materials and the development of new manufacturing processes. The qualified activities resulted in federal and state credits totaling more than $120,000.
A mechanical contractor designing and installing mechanical systems for various office, municipality and medical facilities with $20 million in annual revenue recently claimed $60,000 federal and state R&D credits. The mechanical contractor had more than $600,000 of qualified expenses as its employees were assessing constructability issues, value engineering and providing mechanical design services.
The R&D credit eligibility is much broader than many companies realize and applies not only to product development but also to activities and operations such as new software development, manufacturing processes, quality enhancement and environmental improvements.
Recently issued government regulations mean more industries now qualify for the R&D tax incentive than ever before. And the R&D tax-credit regulations allow eligible taxpayers to look back to open tax years – usually three years plus the current year – for possible research credits that were never claimed.
Find out how your business can turn R&D expenses into tax savings!
Request a free feasibility call to discover the potential tax benefit to your organization. Click here to learn more.
Is your business constantly developing or improving products? Are you building new prototypes? Modifying your production process, streamlining internal processes or developing software? You could be eligible for tax savings.