Black Line Group – Confidential2 Seminar Agenda The R&D Tax Credit - It’s found money –The...

Black Line Group – Confidential2

Seminar AgendaSeminar Agenda

• The R&D Tax Credit - It’s found money– The story behind the credit

– Who gets to use it

• From $15,000 to $3,500,000– Real Stories. Real Businesses. Real Money.

The 64 Million dollar question: How can you take advantage of this credit?

Getting Down To Business – What you need to do to use the R&D Tax Credit


The Difference between aThe Difference between aTax creditTax credit vs. vs. Tax DeductionTax Deduction

Credit = dollar for dollar reduction in the amount of

taxes paid

Deduction = income on which you do not pay tax


What is the R&D Tax Credit?What is the R&D Tax Credit?

• A tax incentive provided by the U.S. government to encourage businesses to invest in activities within the U.S. that will provide for product and process improvements and/or the introduction of new products or processes

Applicable to C-Corps, S-Corps, LLC’s Partnerships, Sole Proprietorships and Joint Ventures


History of the R&D Tax CreditHistory of the R&D Tax Credit

• R&D Tax Credit has a historyover 24 years

• Used by the majority of Fortune 1000 companies

• Much legislative activity

The tax credit is a valid tax planning opportunity which is permitted under IRC §41 and §174.


An opportunity there for the askingAn opportunity there for the asking

• Small to medium sized companies represent 98% of the companies in the US but only 7% of the R&D tax credit claims1

7%[1] Joint Committee on Taxation calculation from Internal revenue Service, Statistics of Income and Data


Where is the R&D?Where is the R&D?

• Qualified R&D spending takes place in many areas within a business, not just an R&D or Engineering department


Get credit for yourGet credit for yourinvestment in your businessinvestment in your business

• R&D spending includes:– Internal labor (i.e. salaries, wages, bonus)

• Direct research

• Direct supervision of research

• Direct support of research

– Supply costs (prototype costs, lab supplies, etc)

– External labor (contractor payments)


Activities that are R&D FriendlyActivities that are R&D Friendly

• To qualify as a legitimate R&D activity, it must be:– Conducted for a permitted purpose– Intended to resolve technological uncertainties – Involve a process of experimentation– Use a permitted science

Any new OR improved product, process or software development initiative has potential for R&D tax credit qualification


11stst R&D Test for Qualification R&D Test for Qualification

Permitted Purpose Test:

“What is the goal of this project?”EVOLUTIONARY DEVELOPMENT


22ndnd R&D Test for Qualification R&D Test for Qualification

Technological Uncertainty Test:

“What is not known at the outset of the project?”


33rdrd R&D Test for Qualification R&D Test for Qualification

Process of Experimentation Test:

“What was done to eliminate the uncertainties?”

FAILURE IS REWARDED


44thth R&D Test for Qualification R&D Test for Qualification

Technological in Nature Test:

“What science is being relied upon

as you perform the activity?”


Case Study #1Case Study #1

Precision Metal Stamper

$165,000+ Tax Credits Identified• Goal- To create a new product, a miniature flat wire, to be

used for the medical industry.• Technical uncertainty- To discover a process to deburr the

wire with an extremely high level of precision. Uncertainty related to whether they would be able to meet cost constraints.

• Experimentation- Evaluated several alternative processes to minimize burrs during the stamping process. Also evaluated several deburring processes as well.



Specialized Molding Medical Company$265,000+ Tax Credits Identified • Goal- To design an electronic scalpel for surgical use.• Technical uncertainty- Discovering a molding design

which would provide adequate sealing and prevent electrical leakage out of the product and bodily fluids leakage into the product during surgery.

• Experimentation- Evaluated several molding designs, including over-molding and sonic welding until they found a solution with the best seal characteristics.



Metal Stamping Manufacturer$310,000+ Tax Credits Identified• Goal- To develop a new protection basket used in computer

servers’ line cards.• Technical uncertainty- How to develop the stamping

methodology to punch the basket’s air pockets without damaging the basket. They also had stringent production efficiency requirements placed upon them from their customer.

• Experimentation-– Evaluated several alternative stamping processes until

they discovered one which would allow for fast and damage-free punching.



Custom Injection-Mold Products Manufacturer$165,000+ Tax Credits Identified• Goal- To create a new process for injection-mold ATV

bumper. • Technical uncertainty- Difficulty with ATV mold design,

such as the gating and injection processes, due to the unusual shape of the bumper (shaped like an “A”). Additional challenges with temperature variation, mold over-fill, and structural integrity of the bumper.

• Experimentation- Performed iterative testing with gate configurations (number of gates and positioning), material evaluation, and temperature variations to eliminate inconsistent forming.



Precision Machining & Metal Stamping$165,000+ Tax Benefit$70,000+ increase in refunds from prior years claims • Goal- To create the manufacturing process for a micro- miniature component used in the medical industry. • Technical uncertainty- The product was extremely small,

and because of its medical application, required stringent dimensional tolerances of it’s inter-fitting components to be met, while working within cost constraints.

• Experimentation- Evaluated different stamp forming methods, material types for the product, and created several prototypes to discover the best method to meet the dimensional tolerance requirements.


Precision Gasket CompanyPrecision Gasket Company(Specialty manufacturing company. (Specialty manufacturing company.

Everything is customizedEverything is customized))

• Permitted Purpose– Pump Manufacturer requested technical support to

extend life of Peristaltic Pump Tube and keep from fatiguing

– Customer goal to obtain 40 hours of “life before failure”– Evaluate design options incorporating second

component to provide support to flexible tubing


Precision Gasket CompanyPrecision Gasket Company

• Technical Uncertainty– Support strap concept has never been implemented.– Wrong material thickness and shape could cause poor

pump performance and tubing to fail prematurely.– How to best mount strap at each end so strap also

meets design life goal.


Precision Gasket CompanyPrecision Gasket Company• Process of Experimentation

– Material Sourcing Process• various strap samples• Not many suppliers• Try to avoid buying custom material

– Shape Development Process• Made over 10 shape modifications• Strap would “walk away” from tube

– Fabricated prototypes and delivered to customer for testing• Strap material frayed when it was cut• Used heat to melt the material together to keep from fraying• Needed to sew edge to create ridge to keep tube centered


If you can answer If you can answer YESYES to these…. to these….

• Do you have an R&D, product development or design department?

• Do you provide design, engineering, or testing services to your customers?

• Are you a software development company

or in the business of manufacturing a product?

• Have you recently applied for and/or received patents?


Examples of “Qualifying Activities”Examples of “Qualifying Activities”• Develop new, improved or more reliable products, processes or

formulas• Develop prototypes and models including computer generated models• Design tools, jobs, molds and dies• Develop or apply for patents• Perform certification testing• Conduct testing of new concepts and technology• Develop new technology• Attempt using new materials• Perform environmental testing• Add new equipment• Automate/streamline production process or manufacturing process• Develop software or hardware• Improve or build new manufacturing facilities


Maximizing the R&D Tax CreditMaximizing the R&D Tax Credit

Who has the expertise to maximize the R&D tax credit?• Calculation vs. Study Approach• Most CPAs choose not to specialize in the R&D Tax Credit

area• Boutique R&D Firms Partnering with your existing CPA


Will filing an R&D TaxWill filing an R&D Tax Credit trigger a tax audit? Credit trigger a tax audit?

Filing an amended return for an R&D Tax Credit does not automatically trigger an audit.

Exception: If you have a credit in excess

of $1 million


Recent DevelopmentsRecent Developments

• LEGISLATION:– Credit has always been included in temporary tax bills

and has been extended 11 times since 1981– The credit expired 12/31/05– Proposal currently in Congress to extend the R&D tax

credit for two years through December 31st 2007

• REGULATIONS:– Final regulations were issued in December 2003


Reading The Small PrintReading The Small Print

• Determination of “open” years for amended R&D tax credits is contingent on usability of the credit (GBC rules)

• R&D Credits can not reduce federal tax below the TMT

• Credits can be carried back 1 year and carried forward 20 years

• 280C Election – The election to take the reduced credit as opposed to reducing deductions by the amount of the credit


What We Need To DetermineWhat We Need To Determine

• If the company can generate a meaningful R&D Tax Credit– Amount of “qualified spending”– Base-period spending

• If and when the credits can be used– AMT– Number of shareholders


Getting started…Getting started…What you need to doWhat you need to do

1. Identify and Understand the Opportunity

2. Accumulate and Document the Methodology and Results

3. Perform the Calculation/Amend Returns


The Bottom Line…The Bottom Line…

1. Substantial R&D tax credit savings going unclaimed

2. This is a valid tax planning opportunity – NOT a tax shelter

3. Even if you are claiming the R&D tax credit, you may be leaving dollars on the table


Don’t hesitate to contact us after the seminarwith any additional questions

Scott [email protected]

(763) 550-0111

3030 Harbor Lane Suite 216Plymouth MN 55447

Black Line Group – Confidential2 Seminar Agenda The R&D Tax Credit - It’s found money –The...

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