Everything You Need to Know About R&D Tax Credits

Presented by Lloyed Lobo & Alex Popa    

OUTLINE

▪  Overview of the R&D Tax Program ▪  Benefits ▪  Qualification Criteria ▪  Case Study ▪  IRS Requirements ▪  Do’s and Don’ts ▪  Q&A

R&D Tax Overview

WHAT IS R&D Tax Credit? ▪  General business tax credit for businesses

that incur R&D costs in the US ▪  Established in 1981, made permanent in

2015 ▪  Credit can be claimed on all open tax years

(typically 3)

How Can You Use It? ▪  Carry back to the previous year ▪  Current tax year or carried forward up to 20

years ▪  Payroll taxes up to $250k/year (additional

criteria) ▪  Alternative Minimum Tax (additional criteria)

But I’m not profitable...

You can offset payroll taxes of up to $250k per year if you: ▪  Have revenues for 5 years or less ▪  Have $5m or less in revenue for the tax year ▪  Are not a tax exempt organization under 501 Additional credits can be carried forward.

But I’m not profitable...

You can offset AMT if you have less than $50 million in average revenue for the 3 preceding years. Find out what your AMT is.

APPLICABLE INDUSTRIES

What Can I Claim?

▪  US employee salaries ▪  US subcontractors costs ▪  Materials consumed in R&D

How Much Can I Recover? ▪  Federal

6% of eligible expenditures or 14% of half of the average R&D expenditures over the past

three years. If expenditures remain constant over a three year period, this method results in a 10% credit

▪  State

Differs from state to state California is 15% of eligible expenditures, calculated as

15% of half of the average R&D expenditures over the past three years

How Do I Qualify?

1.  New or improved business component

2.  Technological uncertainty 3.  Systematic process 4.  Technological in nature

How Do I Qualify? 5 questions to determine if you qualify: 1.  Was there a scientific or a technological

uncertainty that could not be removed by standard practice/engineering?

2.  Did the effort involve formulating a hypothesis

specifically aimed at reducing or eliminating the uncertainty?

Continued…

How Do I Qualify? 3.  Was the adopted procedure consistent with the

total discipline of the scientific method, including formulating, testing, and modifying the hypothesis?

4.  Did the process result in a scientific or

technological advancement? 5.  Was a record of the hypothesis tested and

results kept as the work progressed?

CASE STUDY

CASE STUDY

▪  Software startup with operations in California

▪  7 developers (1 front-end, 6 back-end)

▪  Salaries are $150K per year and ~80% of time is eligible

CASE STUDY

▪  Front end development typically not eligible ▪  Eligible expenditure pool for salaries would be ~$840k

▪  Federal portion → ~$50k, California portion → $63k

▪  Total R&D tax credits received are $113k

Could be ~$122k+ if 3 years of consistent R&D spend.

IRS REQUIREMENTS

WHEN TO CLAIM?

•  Must be specified, elected, and filed on the original 2016 tax return before you can begin to offset payroll taxes in 2017

•  March 15: S-Corps with Dec YE. Others need to claim by the

15th day of the 3rd month following the end of the tax year •  April 15: C-Corps with Dec YE. Others need to claim within

3.5 months following the end of the tax year •  You can request a 6 month extension

TECHNICAL DOCUMENTATION ▪  Have been documented at the time the work was

completed ▪  Highlight technical obstacles or challenges ▪  Be dated

TECHNICAL DOCUMENTATION

Most important thing is to document the technical challenges/obstacles as the work progresses.

▪  Capture: the problem and the iterations undertaken to attempt to resolve the problem

▪  What are the different hypotheses and how was each hypothesis tested?

▪  For a typical software project, only the major technical challenges/obstacles encountered by the team in a month need to be documented -- not every little problem.

TIME TRACKING ▪  Track time by project and activity ▪  Track all activities, including non-R&D ▪  Any type of system can be used (or excel if you don’t have

one) ▪  Time sheets can be entered daily or weekly and at half or

quarter day intervals

IRS REVIEWS

R&D Tax Review ≠ Tax Audit Multiple types of Reviews: ▪  Technical ▪  Financial ▪  Technical & Financial

THE DO’S AND DON’TS

THE DO’s

Do: ▪  Pay yourself and staff ▪  Start time tracking and proper

documentation now ▪  Incorporate your company

THE DON’T’S

Don’t: ▪  Underestimate the importance

of documentation ▪  Focus on the business

opportunity ▪  Leave R&D claims until the last

minute

OUR PROCESS

Lloyed Lobo 650-452-5009 llobo@boastcapital.com BoastCapital.com | @BoastCapital