10 Questions: Increase cash flow with the R&D Tax Credit
In the July 24, 2019 installment of the CohnReznick National Tax Webinar Series, members of our National Tax Practice reviewed ways to increase cash flow with the Research & Development (R&D) Tax Credit. During this webinar, they reminded our attendees that American businesses that design and develop new or improved products and processes can earn substantial tax savings through the R&D Tax Credit. In addition, our team reviewed:
- Ways to increase cash flow and immediately reduce current year regular tax liability, AMT, or FICA
- Using the credit to gain significant savings through a multiyear analysis
- How to gain permanent tax savings and a reduction of your overall effective tax rate
- How the R&D Tax Credit can be claimed in addition to any tax deduction taken for R&D expenses
- Other enhancements made to the R&D Tax Credit that you may not be aware of
Q. Does the implementation of a new ERP system qualify for the R&D tax credit?A. Implementation of ERP systems may qualify for the R&D credit if the taxpayer is involved in software development. Generally, ERP systems are often installed under a third-party contract. This contract would need to be reviewed to ensure the taxpayer is eligible to claim expenses for the R&D credit.
Q. Do I need to produce the GPS tracking device/software or do I qualify for credit for purchasing and implementing the GPS tracking to make my logistics more efficient?A. Purchasing and installing a GPS tracking device/software may not necessarily qualify for the R&D credit. However, development efforts related to implementation (software design) may qualify.
Q. How could I (do I need to) prove my 1099 contractor performed the work in the U.S.?A. The best way to show if qualified services were performed within the U.S. is through contemporaneous documentation.
Q. I'm confused on the comment that it is OK if you are paid for your R&D. I'm a subcontractor and if I am doing R&D on behalf of a customer and being paid for it, are you saying that qualifies for the credit – I get paid whether successful or not?A. The best place to start is to have your contracts reviewed by an R&D tax credit professional. Contracts and the R&D tax credit are too complex to address here.
Q. Is there a benefit to an LLC organized as a partnership once we no longer qualify for the payroll tax credit? I don't want to calculate something that will not benefit the company.A. Understanding if a company can utilize the R&D tax credit is complex and requires professional advice. We recommend having your returns reviewed by an R&D tax credit professional.
Q. Do you have examples for government contractors involved in software and hardware engineering?A. Several of our clients develop software and hardware under contract for the U.S. government. Examples include software as a service, unique AI software program development, and embedded software in existing and prototype hardware. To discuss further, please contact us.
Q. What is the look-back period to take the R & D tax credit?A. In general, a corporate return can be amended within three years of the date the original return was due. Depending on the return, other factors may allow the capture of R&D tax credits beyond three years.
Q. What if you're reimbursed via a U.S. government contract? Would those related expenses qualify?A. The R&D tax credit becomes more complex when contracts are involved. There are rules that must be clearly met to ensure the taxpayer has the “rights and risk.” We recommend any contract be reviewed to ensure the taxpayer is eligible to claim expenses for the R&D credit.
Q. If a U.S. entity pays a foreign vendor for work used in the development of R&D, does that spend qualify, or is it excluded?A. The R&D tax credit is a U.S.-based activity credit. The qualified services need to be performed in the U.S. to qualify for this tax credit.
Q. What types of companies will have an R&D credit for more than the taxes owed from the operation life cycle of the company?A. The R&D tax credit can often be more than the tax liability of a company in any given year. Unused R&D tax credits can be carried forward 20 years until utilized. It's best to consult your tax return preparer or your R&D tax credit professional for specific details.
Bonus Q. Does this apply for LLC?A. The R&D tax credit is available to corporations and pass-throughs.
Subject matter expertise
CPA, Partner, Manufacturing and Distribution Industry – Co-Leader
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On-Demand Webinar: Increasing Cash Flow with the R&D Tax Credit
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.