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Billing sample for Research and Development

JJ the CPA here hope you're doing well before I go through R&D big subject I want to tell you about my partnership with Western CPE and they have a series on their YouTube channel called dear Western and I am answering questions for those that are emailing those to Dear western western cp.com and so you'll find videos on their platform that you're not going to find on my channel related to these questions that are coming in so for a rare treat if we could call it that on this subject I am now showing you this video that you will find on their platform and with those videos they go a little something like this JJ the CPA here hope you're doing well this just in hot off the press dear Western if a business does not want to take the R&D tax credit can they expense those costs instead well I'm going to tell you this is a loaded question and actual A variation of the question that we got because this right here has so many components to it I'm going to admit to you I don't act alone I bring in a great friend of mine Michael to help me with a much larger company than my CPA firm because there's so much to this now with that being said we're going to run through the basics But to answer this question here it is you no longer can expense R&D costs so the answer is actually no but if you don't want to take the R&D credit you can then amortise them but to be clear if you don't take the credit you got to advertise it now let's start breaking this down right now got the Whiteboard up here for us we've got two things we're dealing with here we've got R&D the tax credit I want you to note that that is under IRC 41 meaning internal revenue code section 41 why is that important because I want to really differentiate it from the R&D of expense and don't be confused that we're expensing it but under 174 that Internal Revenue code that's where those rules come into play so I've got a line down the middle to break these out again we're going through the Basics what do you got to do get with a tax professional tax professionals I don't know if you should act alone if you do hey more power to you I love it don't worry we're going to go through a little bit here to help so with the R&D credit it is a permanent law it is a tax credit that is a dollar for dooll reduction in tax so typically if you were going well which way would I want to go if I do have a choice I would say most of the time you would want to take the credit now yes there could be circumstances that you'd go otherwise but all things being equal in general a credit typically nine times out of 10 is more valuable to you than amortization Andor an expense so with this what if you missed it because now I'm going to tell you some stuff you're going to go whoa JJ I wish I would have known I've got to take advantage of this so if you missed it you can go retroactive back three years nothing special to the credit on that that's just how long you have to go back and amend the tax return So if you think it applies figure it out right away to determine if you can go back and amend so with this this is on form 6765 why did I tell you the form number well I'm going to tell you this right now as a Tax Advisor I love looking at the instructions to these forms it's typically my goto my first point of reference because it's going to tell me all the other places to go and all the things that come into play now real quick let's go back over here on the R&D under Section 174 beginning 1122 so January 1st of 22 we must advertise meaning it's required we must advertise it it's over five years yeah if you're a foreign entity you definitely need to get with an advisor there's different rules on that can't cover everything but five years you're going to amortize that and you start with the midpoint what does that mean well check this out if you are advertising those costs but again you can't expense them you got to amortize them okay you got credit or amortization but here it is whatever you spend throughout the year doesn't matter if it's in January February March April May June July August September October November December if we're now talking a a calendar year- end business right so what's mid year for that July 1 mid year halfway through through the year you're going to take all the costs throughout that year you're going to add those together Andor do them in separate line items but the beginning date of the amortization okay is the midpoint of the year so it would be July 1st in my example for a calendar year why is that important well because you're not going to start the amortization when the expense the cost was incurred or paid for depending on your basis of accounting so that's key there and you don't have to wait until you produce income from the R&D to start the amortization so that's also new and nice so with this 174 and 41 but I want you to note this real quick very key and the reason I pay attention to the 41 as well as the 174 is it kind of helps me keep these things straight so section 41 cost so costs that qualify for the credit okay what those costs are 99.99 probably every every time you know there's always that 0.001 right but section 41 cost those costs are going to qualify for R&D okay they're going to qualify for R&D why do that matter well more just to say if you have these costs and you decide not to do the credit well if it goes under 41 it's going to fall under 174 when you look at those um uh descriptions and or qualifications definitions so the big thing though to note here is that because of cost qualifies under 174 doesn't mean that it automatically qualifies for 41 right so if it's a expense here it's a cost it qualifies under 174 doesn't mean it's going to qualify for the credit so where would you start why am I going through that well I would start by going through the cost to go okay what are all the costs that qualify for 41 and then of the other costs that you're considering go okay well if they don't qualify for 41 do they qualify for 174 now you have the two categories why is that important well because here's the thing the IRS requires that if you have R&D going on you don't get to decide if you want to credit or advertise in the sense of going well do I get to ignore it let me be clear on that you don't get to ignore it you don't get to go well I don't know much about it I don't need a credit we're not going to advertise we're just going to ride it all off we're just going to expense it we're not going to worry about it but if the IRS were to come in they'd say well regardless of any of that if you're required if you have R&D then you've got to decide what are you doing with it because you can't just write it off mean expensive so with all of this there's four factors that come into play to get this tax credit which is 6 to8 % of the qualifying cost which is mostly payroll so there's a four-part test that we're looking at here in terms of it qualifying for the credit it must be a permitted purpose must be technological in nature it must eliminate uncertainty and there must be a process of experimentation whoa that was handy so if you're in the first five years and you're under 5 million in gross receipts then you can get this as a payroll tax credit the five and five rule if you don't have any income taxes because you're in the early years so you look at IRS notices 24 and2 2363 Revenue procedure 2311 2308 but I'm going to give you a link to the IRS page that has all of this including the forms information the latest on this so with that being said thanks for sticking with me and if you've got any questions email them to dear westernwestern cp.com okay so that's how it works check out Western cpe's YouTube page please subscribe let them know you came from me check out the videos that are over there to answer the questions that are sent to Western CPE and with that check out also seminars whether it's on demand I might be coming to your with Western CPE all right hey thanks for tuning in I'd love it if you'd subscribe and then don't you ever forget you've never met a CPA quite like me you have a great one I'm liking this Amanda put this together for me super handy so yeah if you got any questions related to this you got a scenario I'm going to say hey Michael got a great CPA friend he can help help us out with a great company I'd consider him a national expert yeah still trying to work on the lighting here appreciate you