While most of the literature you read on the R&D tax credit focuses on the federal credit, there are tax incentives given by most states for R&D activities. Many of these state credits are not as lucrative as the federal credit but they lack tax nuances such as AMT limitations, NOL carry forwards, ... Therefore, some companies that cannot use a federal credit may still have tax to offset on the state level. ANd these credits can be substantial. My home state of Indiana, for example, has a credit that is more lucrative than the federal credit.
The question becomes, how do you know if the states you conduct R&D in have state R&D tax credits? State tax websites are hard to navigate and some college tax departments have summaries of credits but they do not provide the whole picture (forget knowing if the information is reliable). Well, hopefully you use Hull & Knarr to get this information. We have been collecting information from the states and we are posting it on our website, www.hullandknarr.com, within the next week. You will be able to get information on how the credit is calculated, carry forward and back years, credit expiration dates, and any special instructions for pre-filing applications. With the sourcing links you should be able to get yourself in the right direction for filing a state credit to either further supplement your federal R&D claims or benefit from a credit that is previously been unavailable.
I will keep you posted for when the interactive map with the information goes live. If you have questions now feel free to send them my way. Cheers.
Patrick
Showing posts with label Start-up Companies. Show all posts
Showing posts with label Start-up Companies. Show all posts
Monday, January 11, 2010
Thursday, January 7, 2010
Start-up Companies and R&D Tax Credits
Just the other day a client sent me some information regarding a company he started with some other people within the last year. The company is small but revenue is quickly growing in this first year. And while they were are not profitable, yet, he understands the Federal R&D Tax Credit can be carried forward 20 years.
His question was, is the cost benefit there for me to perform a R&D Tax Credit study? After looking at the numbers, my recommendation was no. Start-up companies have too many other issues to deal with without me asking them for a bunch of information that will not benefit them for a year or two. Especially when the tax returns are open for amendment for 3 more years. But, that did not mean they should not take action now.
Since the IRS Tier 1 directive in April 2007, IRS Field agents are looking for more contemporaneous engineering and accounting documentation to substantiate claims. This means they want to see engineering notes, sketches, calculations, testing data, drawings, ... And they want to see some method of tying employee time to the qualified research activities associated with these documents. This means contemporaneous time tracking data. Ahhhhhhhhh!
The ideal method of tracking time for the credit would be to have each person's time tracked by project by task. But this is not realistic for most companies because it does not match their corporate culture. The IRS and the tax courts understand this.
After explaining this to my client's start-up, we have begun the process of incorporating Employee Time Allocation Questionnaires to be completed every month. This meets the IRS requirements and minimizes the intrusion on the company's time. In addition to tracking time, the company now understands the importance of keeping all of their engineering documentation no matter how dirty and sloppy it may be.
As a result of taking a few simple steps, this company now has the tools to substantiate a significant R&D Tax Credit in the future and they are reducing the money and man hour expense of performing the eventual R&D Tax Credit Study within the next year or two.
So this is a call out to all accounting firms, companies, employees, ... If you are associated with a start-up company that is performing R&D take action and call someone that can give you some help to do the same things that my client has done. Anybody that you consult should not charge you any money for this help because it will not take long and they should look at it as trying to grow a relationship with you. And you can use this opportunity to see if the person you are consulting is looking out for you. I hope this helps someone.
His question was, is the cost benefit there for me to perform a R&D Tax Credit study? After looking at the numbers, my recommendation was no. Start-up companies have too many other issues to deal with without me asking them for a bunch of information that will not benefit them for a year or two. Especially when the tax returns are open for amendment for 3 more years. But, that did not mean they should not take action now.
Since the IRS Tier 1 directive in April 2007, IRS Field agents are looking for more contemporaneous engineering and accounting documentation to substantiate claims. This means they want to see engineering notes, sketches, calculations, testing data, drawings, ... And they want to see some method of tying employee time to the qualified research activities associated with these documents. This means contemporaneous time tracking data. Ahhhhhhhhh!
The ideal method of tracking time for the credit would be to have each person's time tracked by project by task. But this is not realistic for most companies because it does not match their corporate culture. The IRS and the tax courts understand this.
After explaining this to my client's start-up, we have begun the process of incorporating Employee Time Allocation Questionnaires to be completed every month. This meets the IRS requirements and minimizes the intrusion on the company's time. In addition to tracking time, the company now understands the importance of keeping all of their engineering documentation no matter how dirty and sloppy it may be.
As a result of taking a few simple steps, this company now has the tools to substantiate a significant R&D Tax Credit in the future and they are reducing the money and man hour expense of performing the eventual R&D Tax Credit Study within the next year or two.
So this is a call out to all accounting firms, companies, employees, ... If you are associated with a start-up company that is performing R&D take action and call someone that can give you some help to do the same things that my client has done. Anybody that you consult should not charge you any money for this help because it will not take long and they should look at it as trying to grow a relationship with you. And you can use this opportunity to see if the person you are consulting is looking out for you. I hope this helps someone.
Subscribe to:
Posts (Atom)
Posts
.jpg)