www.mcmcpa.com stephen m. lukinovich, cpa, cva, pfs wally s. brown, cpa
TRANSCRIPT
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Stephen M. Lukinovich, CPA, CVA, PFSWally S. Brown, CPA
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» Energy consumption˃ Buildings represent 39% of US primary energy use
» Electricity consumption˃ Buildings represent 70% of US consumption
» Water use˃ Buildings use 12% of ALL potable water
» Use of materials˃ Buildings represent 40% of raw materials GLOBALLY
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» Energy Efficient Commercial Building Deduction˃ EPAct (Energy Policy Act)
» Section 179D deduction adopted in 2005 and extended to 12/31/2014
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• Energy efficient commercial building deduction– Owner or lessee of commercial building located in
the United Stateso Installs energy efficient property
– Lighting - 60₵/sq foot– HVAC - 60₵/sq foot– Building Envelope - 60₵/sq foot
o Must improve on standard by 50%o Obtain a certificationo Inspected and certified by “qualified”
individualsNOTES:
1)Multi-family buildings 4 stories or more above ground2)"Primary Designers” of government buildings – free
non-cash tax deduction – Section 179D3)Deduction in retrofit cannot be greater than cost
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» DOE goal to incentivize green design in government building sector
» Includes: Federal - offices, military bases, court houses, post office State - offices, transportation facilities, state universities,
court houses City - offices, schools, town halls, police, fire, libraries
» “Primary Designers” Includes architect, engineers, contractors, environmental
consultants or energy services providers
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» Whole building deduction ($1.80/SF)˃ 50% reduction below standard (ASHRAE 90.1 2001)
» Permanent and interim rules to gain partial deductions» Other technical requirements
˃ Minimum lighting˃ Bi-level switching
» Independent certification˃ IRS - approved software required in most
cases
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» Announced by IRS in December 2010» Applies for prior year missed §179D˃ Now available for more than 3 previous tax years
» Do not amend prior-year tax returns» Reflect prior year § 179D deductions missed on
current year tax return - Form 3115, § 481(a) full year deduction - Federal, AMT and State
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» Originally enacted as part of Economic Recovery Tax Act of ‘81 to provide an incentive for increased research funding
» Used primarily by large Fortune 1000 companies» Extended/Altered at least 15 times; currently extended through
12/31/2014; Further extensions expected» Governed by Internal Revenue Code Section 41 (20% credit on qualifying
expenditures) and Section 174 (defining research and experimentation expenditures)
» Traditional definition vs. current tax definition ˃ Traditional – focused on discovery˃ Tax – 4 requirements
– New or improved business component– Technological in nature– Elimination of uncertainty– Process of experimentation
» Reported on form 6765 – Credit for Increasing Research Activities
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» R & D is only for companies that are inventing something new˃ Improving or modifying as existing product or
improving a manufacturing process» Only for companies with test tubes, laboratories
and white lab coats» Only for large companies» Won’t help with state taxes˃ 38 states have R&D credits or similar incentives
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1. New or improved business component˃ Eligible activity must relate to a new process
or product with the intent to improve:+ Function+ Performance+ Reliability+ Quality+ Durability
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2. Technological in Nature˃ Eligible activity must rely on principles of hard
sciences:+ Physical+ Chemical+ Biological+ Computer+ Engineering
˃ Does not apply to soft sciences: Economics, Psychology, Management Sciences
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3. Elimination of Uncertainty˃ Eligible activity must seek to discover
information to eliminate uncertainty related to:+ Capability – can we produce this?+ Process – how?+ Final Design – what will it be/ look like?
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4. Process of Experimentation˃ Eligible activity involves the following
experimentation:+ Evaluation of a process and its alternatives+ Testing, analyzing or confirming hypothesis+ Refining or discarding hypothesis as determined
appropriate+ Includes modeling, simulation, trial & error
testing
*Note: A successful outcome is not required – Failed R&D is R&D!
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» Wages* - includes partnership earnings subject to S/E tax
» Supply costs» 65% of Contract Research costs paid to external
providers*Wages include salary and wages of those who are
participating in the R&D activity as well as a portion of those individuals that provide direct support and direct supervision
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» Determining the amount of credit» There are 2 ½ methods (alternatives) for calculating
the credit» Regular Credit» Reduced Credit Method – same as Regular Credit
with a twist» Alternative Simplified Credit – once elected, this
method applies to current and all future years
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» Calculated as 20% of Qualifying Research Expenditures (“QRE”) in excess of the company’s fixed base percentage; not to exceed 50% of current year QRE’s
» The fixed-based percentage is determined by dividing aggregate qualified research expenses by aggregate gross receipts for base tax periods, which are determined as based upon when the company was formed
» The fixed-based percentage cannot exceed 16%˃ It is 3% for start-up companies
» Reduce deductible expense by amount of credit
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» Same as Regular Credit Method, except rate is 13% rather than 20%, and no add-back to income is required
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QRE’s – Year 1 - $ 950,000 Year 2 - $1,000,000 Year 3 - $1,050,000 Year 4 - $1,000,000Fixed Base Percentage (Start-up) = 3% (Column 1)Fixed Base Percentage (Maximum) = 16% (Column 2)
Average Gross Receipts $5,000,000 $5,000,000 X FBP % 3% 16%
$150,000 $800,000
QRE’s $1,100,000 $1,100,000 Less: Final Base Amount (150,000) (800,000)
$950,000 $300,000
Limited to 50% of QRE’s $550,000 $300,000 Reduced Credit – 20% $110,000 $60,000 Reduced Credit – 13% $71,500 $39,000
Assumptions: $5 Million Gross Revenues in each of years 1-4
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» Calculated as 14% of QRE’s in excess of 50% of the net average QRE’s for the previous 3 years
» If no QRE’s were recognized in any of the previous 3 years, the credit is a straight 6% of current year QRE’s
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» Same Assumptions
Current Year QRE’s $1,100,000 Less: 50% of Previous 3 year average (500,000) (.95M = 1M +1.05M) / 6
Amount subject to credit $600,000
Limited to 50% of QRE’s $550,000
Alternative Simplified Credit - 14% $84,000
Current Year QRE’s $1,100,000 Less: 50% of Previous 3 year avg. (500,000) (.95M + 1M +1.05M) / 6
Amount subject to credit $600,000
Alternative Simplified Credit - 14% $84,000
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» Active participant / owner» Not generally in AMT situation» Have positive net taxable income» As a rule of thumb, generally need to have over
$1 Million wages for eligible participants
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Examples of eligible activities and innovations include the following:»Determining alternate materials with which to construct a structure or parts of a structure (must be a new concept to the taxpayer)»Determining alternate means of assembling and/or fastening component parts of a structure (must be a new concept to the taxpayer)»Improving acoustical qualities of structure»Developing alternative water flow / plumbing systems»Developing alternative electricity conduction systems»Developing or improving lighting within a structure
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» Improving or developing alternative ventilation for a structure
» Improving or determining alternative heating and cooling systems
» Determining alternative structural design» Developing processes or equipment for the extraction of
natural elements from another substance, or the development of processes and equipment to convert the extracted materials.
» Developing a pilot plant to investigate the concepts of a model or process
» Toxic waste and other waste disposal processes integrated into the structure
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» Integrating product and material transportation systems into the functional design of the structure
» Environmental impact studies» Integration costs related to designing multiple co-
dependent features, where the technical uncertainty may only be eliminated by designing the related components
» Implementation of counter-terrorism capabilities» Environmental design» Sustainable design
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» Space utilization» New materials» New technology» CAD modeling» Design testing» Special use design» Harsh environment design & testing
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» Stephen M. Lukinovich˃ [email protected]
» Wally S. Brown˃ [email protected]
» www.mcmcpa.com» 502.749.1900