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PropertyofLumsden&McCormick,LLC 1

FEDERAL, STATE AND LOCAL TAX INCENTIVES MANUFACTURERS SHOULD BE AWARE OF

FREE MONEY FOR MANUFACTURERS

PRESENTORS

Joel Marsh, CPA TAX MANAGER

Courtland “Cory” Van Deusen, V, CPA TAX PARTNER

Brian Kern, CPA TAX PRINCIPAL

PRESENTATION TOPICS •  Research & Development – Federal R&D Credits – NYS R&D Incentives

•  New York State – Excelsior program –  Investment Tax Credit – Employment Incentive Credit – 0% Corporate Tax Rate

•  Other credits and incentives including the Consolidated Funding Application

RESEARCH & DEVELOPMENT TAX CREDITS

Joel Marsh, CPA


OVERVIEW

•  Federal R&D Tax Credits (IRC §41) –  Identifying eligible activities

•  What’s new for 2016 •  New York State R&D Incentives •  Foreign considerations

2012 CORPORATE R&D CREDITS BY INDUSTRY

NumberofCredits

AverageCredit

Manufacturing 6,219 $1,060,428

Professional,scienBfic&technicalservices 5,280 $213,421

InformaBon 1,583 $1,104,054

Wholesale&retailtrade 1,071 $718,284

Management 403 $211,365

Financeandinsurance 304 $745,211

ConstrucBon 240 $100,308

Mining 81 $982,889

UBliBes 67 $770,746

Agriculture,forestry 59 $139,644

Source: IRS SOI Tax Stats - 2012

FEDERAL R&D ELIGIBILITY

1.  Develop or improve – functionality, performance, reliability, processes, software, techniques, etc.

2.   Uncertainty – methodology, capability 3.   Experimentation – evaluation of potential

alternatives 4.   Technological – engineering, physical,

biological, or computer sciences

FEDERAL R&D ELIGIBILITY

•  Work must be performed in the U.S. •  Funded research does not qualify – R&D expenditures may appear to be funded

research – analysis of contracts recommended

•  The level of technological advancement does not matter

•  Success is not mandatory – failure can qualify •  Duplicating what others have done can qualify – Reverse engineering does not qualify


R&D ACTIVITY MISCONCEPTIONS •  White lab coats and test tubes are not required •  Trying to build what customers design often

qualifies •  Are you trying to make anything more efficient,

faster, cheaper? •  Are you paying for engineering, software

development, or scientific services? •  Are you attempting to improve your

manufacturing process using scientific techniques?

NON-QUALIFIED ACTIVITIES

•  Research conducted after initiating commercial production of a product – Data collection, quality control, trials

•  Research to adapt an existing product to a particular customer’s specifications

•  Surveys and studies •  Research involving social sciences, arts, or

humanities

QUALIFIED RESEARCH EXPENSES (QRES) •  Taxable wages: –  Employees actively performing qualified research

•  Engineers, scientists, computer programmers, etc.

– Direct supervision of employees performing R&D – Direct support of employees performing R&D

•  Supplies used in R&D •  Contract research (100%, 75%, or 65% of cost) •  Rental/lease of computers used in qualified

research (cloud-computing)

BENEFIT

•  Up to 9.1% of QREs available as general business credit – Actual benefit generally 4% - 6% of QREs – Unused credits carryback 1 year, carryforward

20 years

•  Flow-through entities – offsets owners’ personal income tax attributable to business – New for 2016 – potentially offset AMT


2016 CHANGES TO R&D

•  Federal R&D credit has been permanently extended by the PATH Act of 2015

•  R&D credits can now offset AMT for “Eligible Small Businesses” – Less than $50 million average gross receipts

over previous 3 years – Credits generated prior to 2016 being carried

forward cannot offset AMT

2016 CHANGES TO R&D

•  R&D Credits are now “refundable” for Qualified Small Businesses”: –  Cannot have had gross receipts for more than 5 years

(no gross receipts prior to 2012) and

–  Have less than $5 million in gross receipts in 2016

•  Can offset the employer portion of FICA, up to $250,000 each year –  Credit will be claimed on the 2016 payroll tax return,

and will offset quarterly payroll taxes in 2017

ALTERNATIVE SIMPLIFIED CREDIT (ASC) •  You don’t have to be increasing R&D

spending every year!

Year QREs ASCAvailable

2016 210,000 $14,700

2015 210,000

2014 210,000

2013 210,000

ALTERNATIVE SIMPLIFIED CREDIT (ASC) •  Even if R&D spending is inconsistent, credits

can still be available:

Year QREs ASCAvailable

2016 190,000 $12,133

2015 230,000

2014 210,000

2013 180,000


THE R&D STUDY PROCESS

•  Phase 1 – Initial conference call with L&M and third parties, if necessary – no cost

•  Phase 2 – Cost benefit analysis to determine estimated value of study

•  Phase 3 – On-site visits, interviews with key personnel, obtain documentation, calculate QREs and R&D credit

NEW YORK STATE INCENTIVES •  R&D Investment Tax Credit on fixed asset

purchases used in R&D (useful life of 4+ years)

•  C corporations – 9% of cost •  S-corporations – 7% of cost •  Partnerships and sole proprietors – 7% of cost

–  ITC is refundable for qualified new businesses •  Generally in business less than 5 years

•  NYS sales tax exemption

FOREIGN R&D INCENTIVES

•  Many foreign countries have similar R&D tax credits – Canada – tax credit ranging from 15% - 35%

depending on structure, etc. – United Kingdom – enhanced deduction

effectively resulting in a credit of 10% - 45% – Japan – tax credit ranging from 8% - 12%

NEW YORK STATE TAX INCENTIVES

Brian Kern, CPA


EXCELSIOR JOBS PROGRAM •  Manufacturing define as “the process of working raw

materials into products suitable for use or which gives new shapes, new quality or new combinations to matter which has already gone through some artificial process by the use of machinery, tools, appliances or some other similar equipment

•  Does not include an operation that involves only the assembly of components, provided, however, the assembly of motor vehicles or other high value-added products shall be considered manufacturing

EXCELSIOR JOBS PROGRAM •  Jobs Tax Credit

–  Maximum of 6.85% of wages per “net new job”

•  Investment Tax Credit –  Maximum of 2% of qualified investments

•  Research and Development Tax Credit –  Maximum of 50% of the Federal Research and Development Credit

•  Real Property Tax Credit –  Maximum of 50% the first year declining by 5% in subsequent years

JOBS GROWTH TRACK 75%

INVESTMENT TRACK 25%


NYS INVESTMENT TAX CREDIT •  NYS credit on investment of qualified

tangible personal property, including buildings and structural components

•  Credit ranges from 4% to 9% of investment base

INVESTMENT TAX CREDIT •  Eligibility – Any business that has placed qualified property

in service during the tax year that is located within New York State

•  Refundable? – Only for “new businesses” – Unused credit can be carried forward for 15 tax

years

INVESTMENT TAX CREDIT QUALIFYING PROPERTY •  Qualifying property includes tangible property,

buildings, and structural components within New York State – Must be depreciable with a useful life > 3 years –  Acquired by purchase, constructed or reconstructed – Used principally in producing goods by

manufacturing, processing, assembling, refining, and extracting (also mining, farming, agriculture, etc.) or;

–  Is research and development property

INVESTMENT TAX CREDIT NEW BUSINESS •  Any corporation except: – 50% of voting stock is owner by a taxpayer

subject to corporation franchise tax, transportation tax, agricultural franchise tax, utility tax, or insurance franchise tax

– Substantially similar in operation and ownership to a business entity taxable or previously taxable in New York State

– A corporation that has been subject to franchise tax for a period greater than 5 years


INVESTMENT TAX CREDIT QUALIFYING PROPERTY •  Qualifying property does not include: – Property leased to others – Retail equipment, office furniture, and office

equipment – Excavating and road building equipment – Public warehouses used to store the taxpayer’s

goods – Electricity-generating equipment

INVESTMENT TAX CREDIT DEFINITIONS •  Manufacturing under ITC regulations –  Process of working raw materials into wares suitable for

use, or giving new shapes, new qualities, or new combinations to matter that already has gone through some artificial process by the use of machinery, tools, appliances, and other similar equipment

•  Property used in the production of goods –  Machinery, equipment, or other tangible property

principally used in the repair and service of other machinery, equipment, or other tangible property used principally in the production of goods.

INVESTMENT TAX CREDIT DEFINITIONS •  Research and Development property –  Property used for research and development in the

experimental or laboratory sense, but not for the ordinary testing or inspection of materials or products for quality control, efficiency surveys, management studies, consumer surveys, advertising promotions, or for research in connection with literary, historical, or similar projects.

INVESTMENT TAX CREDIT DEFINITIONS •  Investment Credit Base – Cost/Basis of qualified tangible property,

including buildings and structural components placed in service within the tax year

– Less any related nonqualified nonrecourse financing

– Less amount expensed under IRC 179


INVESTMENT TAX CREDIT RATES •  ITC on qualified property

–  5% on first $350,000,000 of investment credit base –  4% on excess –  4% for S-Corps

•  ITC on R&D property (optional rate) –  9% –  7% for S-Corps –  Excluded from future potential EIC calculation

•  Limited to NYS minimum tax •  15 year carryforward

EMPLOYMENT INCENTIVE CREDIT •  Eligibility – Must have taken ITC in 1 of previous 2 tax years – Must have increased employment by at least 1%

from employment base year

•  Employment Base Year – Year prior to the year in which the related ITC

was taken

EMPLOYMENT INCENTIVE CREDIT •  Calculation

Amount of investment credit base upon which original investment tax credit was allowed

(excluding R&D property at optional rate)

X

Applicable rate (as determined by % of employment increase)

EMPLOYMENT INCENTIVE CREDIT •  Rates

–  1.5% if net employment increased between 1% - 2% –  2% if net employment increased between 2% - 3% –  2.5% if net employment increased 3% or greater

•  Limited to NYS minimum tax

•  15 year carryforward for C corporation •  10 year carryforward for S-Corp shareholders •  Refunded for “new businesses”


NYS MANUFACTURERS 0% TAX RATE •  Must be principally engaged in

manufacturing activities •  Greater than 50% of gross receipts are

derived from receipts for the sale of goods produced by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture, or commercial fishing

NYS MANUFACTURERS 0% TAX RATE •  Must have tangible property in NYS used by the

taxpayer in production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture, or commercial fishing, and either: – The adjusted basis of that property for federal

income tax purposes is at least $1,000,000 at the close of the tax year; or

– All of the real and personal property is located in NYS

NYS MANUFACTURERS 0% TAX RATE •  2016 Rates –  0% Business Income Tax Rate –  0.106% Capital Tax Rate –  NYS Fixed Dollar Minimum Tax Table

NewYorkReceipts MinimumTax

Notmorethan$100,000 $21

$100,001-$250,000 $63

$250,001-$500,000 $148

$500,001-$1,000,000 $423

$1,000,001-$5,000,000 $1,269

$5,000,001-$25,000,000 $2,961

$25,000,001+ $4,230

NYS MANUFACTURERS REAL PROPERTY TAX CREDIT •  20% tax credit allowed for property located

in NYS that is: – owned or leased by the manufacturer, and – Principally used during the tax year for

manufacturing, etc.

•  Taxes must be paid by the taxpayer in the year the taxes become a lien on the real property


NYS MANUFACTURERS REAL PROPERTY TAX CREDIT •  C-Corporation – allowable credit cannot reduce

tax amount to below fixed dollar minimum •  Flow-through/Individual – refundable tax credit •  Taxes paid under leases from related parties

are not eligible for the credit •  Refunds may be taxable for Federal purposes •  Must addback to taxable income the amount

claimed as a credit

TAX PLANNING OPPORTUNITIES •  Utilize bonus depreciation to maximize the NYS ITC and EIC

credits on capital investments •  Analyze NYS tax exposure to determine timing and potential

benefit of capital purchases •  Decouple from Federal S-Corporation status to take

advantage of the New York State 0% tax rate for qualified manufacturers

•  Separate manufacturing business from other activities to meet the NYS qualified manufacturing definition

OTHER CREDITS AND INCENTIVES INCLUDING THE CFA

Cory Van Deusen, CPA

BUSINESS DEVELOPMENT INCENTIVE BASICS/OVERVIEW

•  Federal, State and Local

•  Tax Credits, Grants, Abatements & Others

•  As of Right Versus an Application

•  But For Requirement


START-UP NY ELIGIBILITY

ELIGIBLE BUSINESSES •  New business •  NYS Incubator Graduate •  Previously moved out of NYS

(before 6/1/13) •  Expansion leading to job

creation

INELIGIBLE BUSINESSES •  Retail/Wholesale •  Restaurants •  Real Estate Brokers •  Law Firms •  Medical or Dental Practices •  Real Estate Management •  Hospitality •  Financial Services •  Personal Services •  Administrative Support Services •  Accounting Firms •  Utility Providers •  Electricity Generation & Distribution

WHERE DO I START?

•  Professional with business development incentive experience

•  START-UP NY website – http://startup.ny.gov/

•  Empire State Development – FAQ’s, Business, Employer and Employee

Fact Sheets – http://www.esd.ny.gov/

BUSINESS INCUBATORS & INNOVATION HOT SPOTS •  WNY Innovation Hot Spot Locations –  Harrison Place Business Center, UB Technology

Incubator, UB BioSciences Incubator, BNMC Innovation Center, Z80 Incubator Labs, Fredonia Technology Incubator and Ceramics Corridor Innovation Center

–  http://www.wnyinnovationhotspot.com/ •  Benefits Include: –  Operating grants –  No business income tax for five years.

•  Only subject to the fixed dollar minimum tax. •  Combined with Start-Up NY 15 years of benefits are available

–  Refund of 4% New York State Sales Tax for sixty months.

EXCELSIOR VERSUS START-UP NY

EXCELSIOR •  Minimum job creation

•  Refundable tax credits –  Benefits received even during

loss years

•  Eligible for other NYS tax credits

•  Suited for existing businesses

•  Address not applicable

START-UP NY •  Create one job

•  No income taxes –  Must have profits to benefit

•  Not eligible for other NYS tax credits

•  Hurdles for existing businesses

•  Address specific


OTHER NYS CREDITS •  Consolidated Funding Application

–  Process –  Programs

•  Film Tax Credits –  Film Production Credit –  Post Production Credit –  Certification is required

•  Beer/Wine & Spirits Credits –  Beer Production Credit

•  Expanded to other types of Alcohol starting 1/1/2016

•  Brownfields – extended through 3/31/2026 –  New caps (higher caps for manufacturers) and restrictions

•  Historic Rehabilitation

FEDERAL CREDITS

•  Work Opportunity Tax Credit – Targeted employees – State DOL – File 30 days after hire date – https://labor.ny.gov/businessservices/edsu/

edsu%20wotc.shtm

LOCAL INCENTIVES •  IDA benefits

•  485 exclusions

•  NYS department of labor training grants

•  Erie County PIVOT Program – Manufacturing, Hospitality, Childcare, Customer

Service, Healthcare and Janitorial – Wages can be covered for up to 6 months while you

train the new employee

•  Energy incentives

43NORTH Buffalo’s Global Business Plan Competition

•  Stimulate entrepreneurial activity •  $5M in prizes –  Top prize $1M

•  All industries except hospitality and retail •  Requirements of winners –  Locate in Buffalo Niagara for at least one year – 5% equity stake provided to 43 North, LLC to provide

funds for future competitions/reinvestment •  Finals in October •  www.43North.org


QUESTIONS?

CONTACT INFORMATION

Lumsden McCormick Cyclorama Building 369 Franklin Street Buffalo, NY 14202 www.LumsdenCPA.com [email protected] [email protected] [email protected]

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