Streamline Your Delivery Billing Format for Research and Development

Delivery billing format for Research and Development

good morning thank you for those who are starting to join us we'll give it a couple of minutes or a minute or so for everybody to to get online then we'll get started still a few more people trickling in this is the part where in our live workshops we would be offering you pastries and coffee and getting to know everybody so apologize for the lack of pastries all right pretty good turnout let's go ahead and get started so first i want to thank you for joining me in the arizona manufacturing extension partnership for our workshop today research and development tax credits with tony hannett from r d tax consulting first i want to start out by giving you a little bit of overview of the arizona manufacturing extension partnership kind of how we operate and how we help manufacturers in the community so our mission is to make every arizona manufacturer the most successful business it can be and here you can see our team on the consists of mostly advisors many of you may know one or more of us um and then our lead our our and our office staff so the way we're structured we're a partially federally funded program and we're overseen by nist national institute of standards technologies here in arizona the arizona commerce authority holds our grant so we work operationally through the arizona commerce authority and we work nicely with them they're very nice compliment to us and we complement them very well however our we are measured by nist and in the impacts that we bring to uh the clients that we serve the way we're measured is through surveys so once we do a project with you you'll be sent a survey through nist very brief 10 minutes and we ask that you fill that out as complete as possible sharing with us the impacts that we make your business whether it's cost savings increase sales things like that all of these surveys are rolled up across the us from all of the mep centers across the united states and here's the impacts from last fiscal year so basically 114 000 jobs created over 15 billion in new and retained sales 1.5 billion in cost savings and 4.5 billion in new client investments the biggest challenges that we see and that we see across the u.s for manufacturers are cost reductions employee recruitment and some cases that's that's even higher uh growth and product development and then also on that survey you'll see it towards the end they'll ask how we were to work with and across the nationwide network it's a it's an 85 net promoter score in arizona we're actually above 90. so we're very proud of that score we like to help that's why we do what we do and we appreciate the feedback that we get from our clients now how do we bring these impacts we offer an array of services with our relatively small team and our third party partners we can bring a variety of services including some of the ones you see here operationally continuous improvement lean staffing quality certifications in some cases we can uncover hidden costs and and to your in your business and bring value immediately through inventory optimization shipping service cost savings by using volume um and in business r d tax credit what we're here to talk about today many of you probably do have hidden cash in your business that we might be able to start to unlock today utility tax exemptions we help many clients realize that they shouldn't be paying state utility tax so that's a windfall of thousands if not tens of thousands of dollars for for some of our clients and then some of the other things you see here so i'll introduce tony here in just a second um if you have any questions please put them in the q a section and we'll get to them throughout the the program and then at the end if you feel like you want to learn a little bit more or see how it's specifically related to your business then just reach out to your client advisor or if you're not sure who that is just reach out to the arizona mep we'll connect you and set up a meeting with tony individually so that we can go over your your specifics so with that i'd like to introduce tony haneb good morning thank you i appreciate the uh the introduction jim so uh today i'll be talking uh uh repeatedly uh mentioning an r d tax credit study and uh i was given the attendee list prior to uh kind of do some homework learn a little bit about the companies in attendance and uh some of you uh will need i think r d tax credit studies some of you won't take an example uh was a scooter company i was very interested in i just bought a scooter from my son but um if it's a company like that that maybe has one or two products and isn't continuously innovating you can still claim the credits you don't need an outside firm like ours to help you with that uh what we do when we work with uh with the mep centers around the country is we're more than happy to sit down speak with your cpa give you some advice give them some advice and not charge you for this so this is not something that you necessarily have to pay for uh we don't just do this because we're nice guys we uh always like the opportunity to educate a cpa because they might have clients that can use an rd tax credit study so don't think they absolutely need an rd tax credit study to claim the credits um i will let's see here get into my slides so i always start with this slide this is kind of what uh i i've always thought of as as being r d growing up and i think a lot of people think it's people mixing bunsen burners mixing uh chemicals and such but uh what i hope to accomplish today is to uh show the participants that there's r and d qualifying activities that are pervasive through your organization so i'll start about talking about the history of the credit and why few companies are claiming them uh why i see it as a misnomer why uh why it's the same as a pencil letter of tin can just a poor name for something and i'll talk about the r d tax credit study and then i'll talk a little bit about the new cares act and how it's benefited the r d tax credit so the r d tax credit up until 2016 was a temporary part of the tax structure and so it would sunsets every couple years and then get rich radically reenacted and a lot of companies just didn't want to invest the time up front to uh to do a study because they never knew when the credit would go away so why did it become permanent this was something that was invented in the united states in 1980 and i just uh this was the last time i flew i took a photo of this this is hungary uh talking about its r d incentives so now there are r d tax credits and incentives in more than 30 countries in the world so this is something that there's a battle for intellectual property this is something that's not going to be going away anytime soon this is definitely a permanent part both parties support this tax credit in congress so it's still largely there's less than 35 000 companies claiming it in this entire country still largely something that the fortune 5000 rights write the code and their lobbyists write the code and they're the ones that benefit the most but what this star chart shows and this is from a nursing young study a few years back is you don't have to have 250 million in more in assets to be claiming the the big piece of the credits you could have be a very small company like i mentioned earlier not even need a tax credit study but claim the credit so there's 10 billion dollars that was given back last year as part of this credit on a federal level if you were to take this pie and cut it in half that represents a hundred multinationals taking half five billion of this tax credit so they're the ones that have the staff they're the ones that that are taking the large advantage of it the apples the microsoft's the certainly companies with a lot of innovation but a lot of lobby dollars as well for most companies uh it does involve some paperwork and it so some companies would rather spend uh uh a hundred hours in in making uh another hundred thousand dollars rather than trying to recoup another twenty or thirty thousand dollars in the credit now as you know a dollar for dollar tax credit is uh valued a lot more than a hundred thousand dollars in sales but um most companies just uh still don't want to spend a lot of time doing this so this is an investment of time for most companies the first year does take about 15 to 25 hours and it's mostly uh interviewing engineers and process people that first year to set up the system but the good news is after it's set up with this study in place in following years it's just uh the people that are involved in the process only spend 15 to 20 minutes basically filling out a one-page survey talking about their activities so in subsequent years it becomes uh it's an annuity there's really not that much work that is involved but there is an investment that first year to do a study this is not accounting work typically we work with uh with a cfo or a controller but they will spend some time getting some background financial information but it's mostly again it's the draftsman the engineers the technical sales people the people that are involved the uh the lien officers these are the people that uh that are doing the work for the credits and so it is a little bit of a disruption for your engineering staff so also um if it is a substantial enough tax credit the irs or the department of revenue they will send in an engineer not a cpa and so it's always good to have the engineers uh which we're a group of engineers we also have cpas on staff but it's always good to have the engineers providing the documentation to the irs rather than the financial people and this is why the manufacturing extension partnerships have a lot of experience with the r d tax credit because a lot of cpas they might visit their client once a year but often it's the other way around but often they're never out on the factory floor they never really have a firm grasp of the processes that go on in a manufacturing facility and so they may not realize what their clients do that qualify so this country is is full of butchers and and bakers and restaurant tours and uh these folks don't qualify for this credit it's it's the candlestick makers that's the uh the manufacturers that qualify and so if a cpa has 200 business clients they might have one that qualify and only the really the big four firms and some of the large regional firms is where we find cpas firms that have engineers on staff so uh other reasons it's um in the past it did not lower uh taxes below amt now for certain businesses uh under 50 million in revenue it does and also for startups even though i guess no one's paying income not income tax uh no one's paying payroll taxes right now um but this also for companies that don't owe federal taxes uh the federal portion can offset the fica taxes for certain companies that are and within a certain parameter within uh five years uh or less um and it has to be a certain size business it's pretty much done to incentivize startups and uh so yeah so so don't think that if you're having as as a lot of companies now uh aren't having the best year financially and might not be paying taxes on a federal level uh there is a federal portion that can offset payroll taxes for some companies uh the firm i work with i've been with them for 15 years that's all that we do this was started by back when there's a big six accounting firms we serve about one percent of uh us businesses claiming the credits which is uh still right around 400 clients or so and uh typically when i do this presentation it's uh it is uh in front of an audience i'm still learning the the zoom presentation style thank you for bearing with me uh and i'm typically teaching cpas uh professional education credits uh kind of getting them introduced to the credit so because i'm not teaching cpas i know there's a couple out there in the audience i need to uh cma i need to cover my behind so i should let you know that um this should not be construed as legal or taxes advice and please do consult an attorney or tax professional regarding your specific legal or tax situation so this was uh enacted under the reagan administration the whole idea at that time we uh we saw taiwan we saw korea it's a lot of countries that uh were starting to get some technological prowess and we wanted to keep our uh our high-tech jobs and and our technology here and one of the things that this credit is incentivized to do is to have businesses risk trying new things trying new processes uh maybe even entering a new line of business and for the first 20 years this credit it really was to uh it really was for r d it really was for uh for nobel prize kind of uh real science discovery of new information what happened in 2001 after the dot-com crash is uh uh we needed to supercharge this credit we had a lot of very educated people coming from india from china that suddenly were without a job and how do we retain this talent here one of the ways this was done was to um to change the law so it no longer had to be new to an organization i'm sorry new to the body of science had to be new to your organization so it doesn't matter if your competitor already has a process that you're trying to figure out as long as you're making an effort taking a risk to figure that process out that's the appropriateness of design that allowed real expansion of this credit and unfortunately we still use that old name r and d even though it's much more loosely defined in terms of the law in 2008 what had happened was um there was between 2001 and 2008 some unscrupulous uh uh businesses uh taking advantage of this credit so at that time it became a tier one designation meaning that every single time that a company was audited this credit had to be examined so we saw a lot more audits during this time between 2008 and 2012 when the tier system was dissolved so now every time a company gets audited um well if i knew why they chose the credit it's not necessarily the size but yes sometimes will a company have a small credit get audited sometimes it'll grab an enormous credit they get audited the the irs does not want to look at the uh at the r d tax credit portion of it in 2016 um as i mentioned earlier the amt was no longer a limitation for for businesses and less than 50 million in average gross receipts for the prior three years and then the fica this was for businesses again with less than 5 million in annual gross receipts and having grocery streets for no more than five years um almost seventy five hundred dollars per employee uh per year uh uh can be credited and i look at this uh you know for startup that's uh that could be a month's burn rate for for the high paying employees so unfortunately this uh the the the name r d tax credit it's uh it tends to uh to people shut the door i i can't tell you how many times i hear people saying we don't do r d our company doesn't do r d we don't have a lab but uh again it's it's a misnomer if um if i was uh if i if i could rename this tax credit uh i would call it the how to can we tax credits every time that uh that that you're sitting around in your organization having these how do we do this can we do this can we enter this market can we build this widget these are the kinds of activities and thoughts that occur this is what the credit is here to incentivize ultimately bringing and creating and retaining uh higher wage jobs in this country so what are the activities that qualify now it's basically product process and software development or improvement now a lot of the things that you're doing to build something to build it better to build it leaner these activities qualify and it's very important to note that this isn't just effort but thought as well and this becomes important because one of the ways that we measure this i'll get into this shortly is uh the amount of time that somebody is working and it's not necessarily for business owners uh and some certainly uh people that start businesses um the they they might be working on things way past that 40 hour work week and it's important to note that um it's the portion of time that you spend doing this not necessarily the portion of time that you're spending in front of a in front of a table or in front of a computer for uh for process development and continuous improvement there's it's it's amazing what uh what qualifies uh it's not just the the quality planning it's not just uh uh the uh working towards uh cgmp or fda approval the it's also uh kosher ce iso other different kinds of certifications and the efforts that you're putting forward into attaining these it's important to note that education does not qualify implementation does so if you're having a kaizen workshop some of that's going to qualify some of it the education part will not uh there is right now a bill in congress spearheaded by senator coons in in uh delaware that uh will uh if it goes through uh we'll see uh also uh they want to have some of the education portion qualify as well so this might become a more attractive tax credit uh as next year if this works if this passes i should say within most uh organizations the uh most of the money that's found in this credits is tied to wages of the individuals that are making the designs that are making the improvements that are making the software the engineers the draftsman the cnc programmers uh these are the individuals whose uh you take a portion when we do a study we come in and we interview these individuals that's why it takes some time to determine a defensible position of qualifying activities within that individual's yearly daily weekly time schedule we apply that towards their salary and the result is called the qualified research expenditure for that person's wages now the other portion is supplies and that is consumed uh materials consumed in creation of prototype so it's not for depreciable equipment but uh it's for the uh different types of it could be a metal if you're creating a prototype and qualifies as a prototype you can have not only the wages of the designers that are working on it qualify you could also have all of the costs of the metal be part of the qualified expenditure as well as the direct labor so for some businesses that have substantial prototype costs in a given year that could really boost their credit up if your company uses a lot of fixtures molds and jigs there's a tax court case i have up there that you could google it or i could send that to you that has really opened up a lot of mold costs for for certain manufacturers the third place is the contractors uh same criteria as the w-2 wages uh they have to be in the united states i should mention on all of this activity as secret to exist in the united states with uh the w uh with the contractors uh he only captured 35 65 of their costs the government considers 35 of that contractor's cost to be their overhead so a contractor that's often missed when when people are claiming the credit is the patent attorney so an example as a buy sell or patent litigation doesn't qualify but patent prosecution getting that patent from the patent search to all the other things uh that that are involved working with the patent office those kind of costs qualify again 65 percent of it qualif quality goes for the r d and 35 of it goes for that fancy uh office that the patent attorney is working so that 35 does not qualify but 65 of it does so always if you're able to bring someone in on an r d uh if you can bring them in on a w-2 you're going to have a larger benefit than if you're paying them on a 1099. so on the things that must be met there's four laws and i'm i have more information on towards the end that typically i'll uh i'll discuss with cpas but basically it has to be a permitted purpose is this something that is part of your business or is you doing something for someone else so if you are hiring somebody to make an iphone app for your business that's your r d the software company that's not their rnd so if you're um same thing that patent attorney can't claim the r d tax credit because that's not their business component they're making something for your business if you're paying them has to be technological in nature which the other three kind of fall in line uh a lot of engineers will tell me uh they they knew right away this was going to work it just took him two years to figure out how to do it there has to be that uncertainty at the start of uh of a project and you have to find different ways using the scientific method different ways to get to that end result that has to be that unknown so we've seen uh companies in the past uh try to claim uh like uh roofing contractors solar contractors uh they're doing a lot of these things they're they're having technological uh nature there there's some experimentation but there's really not that much uncertainty if it is a component that's been done if it's just the same thing and you're replicating it on a different roof there's not that method there's not enough uncertainty for the uh for the activity to qualify for the credit with software there has to be a little bit more requirements has to be more of a financial risk and has to be a higher threshold of innovation um there's also with this uh final regulations that came out recently um you have to divide the um internal use versus external use software so i i spend uh i have another hour presentation that i do for for cpas that are just on software this is for manufacturing i'd be happy to have to answer any questions about software offline but i think it's important to note that cnc programming is a qualified activity under software and then website design activities also qualify so a lot of businesses are paying a decent sum of money for a third party to create their websites for them and some of those costs will uh will qualify for the credits so the arizona and then the arizona department of commerce uh has uh is very knowledgeable about this i'm really happy to to work with them they um uh the the state r d tax credit it leverages off the uh the section 41 which is the federal and uh it's one of those things where there's different metrics that uh that are involved where some of our clients uh sometimes the arizona credits on a given year will exceed the federal credits and on the the very next year they'll have absolutely no arizona credit so it's not something that i ever try to uh excite people about i can guarantee you the federal credits the arizona hey there's there might be something for you there as well a great thing about the arizona is one of the few states that has a refundable tax credit for smaller businesses uh it it is uh it's uh our clients that that claim it it's great for them you're only getting seventy five percent of the business uh parties and five percent of the money but this is a check that's coming to you and typically these businesses that are are are trying for this credit they're not taxpayers so this is in a sense free money the the hard part is is uh they're spending between christmas and new year's trying to get all their paperwork done things that they're usually waiting for uh until they're you know march 15th at times to file uh it you have to really have everything ready so for example if you wanted to claim that the 2020 tax credit refundable tax credit you've got to get all the paperwork you know all your ducks lined up in a row for i can't remember what it's going to be this year january 2nd or 3rd where or 4th whatever the first business day of the year is and you've got to get it in there and that five million uh it gets it's taken up pretty quickly because there's a lot of businesses that do want that cash in flux at the start of the year here's an example of uh of a client that uh just to get an idea of this client does business in three states and just to give you an idea for their federal results uh those almost sixty one thousand the business ohio which uh definitely doesn't uh isn't as generous as as arizona as their ohio tax credit and then their arizona tax credit that year was uh you know looks like about 60 or so of their federal credit so it's definitely something that not all states have it california has a generous credits uh oregon washington no longer do idaho has one but it's it's nice it's uh it does help retain and attract businesses to your state so jim i uh uh hope you had maybe a couple questions that might have come up uh i want to take a little pause here drink some water see if there's any questions i can answer before i uh go on yeah we do have one question so far from brandon does not include equipment question mark we have a specific piece of equipment for some r d that we are doing okay so if the equipment it in general depreciable equipment does not qualify so um if a and typically equipment for r d doesn't qualify either um if the equipment was built in house uh then that would potentially qualify um another thing is if the equipment is owed owned by somebody else so they're taking a depreciation there may be potential for it to qualify but as a rule depreciable items do not qualify thank you tony should anyone else have any questions i kind of wanted to get uh through the uh through the meats of the credits and then kind of go on to what i find more exciting is how it applies in uh in different organizations and jim i yeah certainly if as questions come in um especially if it's relevant to a slide by all means uh uh let me know and i can try to answer on the spot okay there's one more question that just can mention the cost to hire would this include the fee to use a staffing agency uh no it's it's box 1w2 so um i'll have to be honest with you i'm not we work with a couple of staffing agencies but i don't believe that is part of the w-2 so if it's on if it's box one w-2 it will qualify but if you're paying uh separately for a staffing agency it will not uh and then companies that that that are doing payroll where they're the ones that are uh doing the um that you're kind of paying them to use their workers that's still going to be your r d and when we come to that circumstance we work closely with the company to make sure that uh all the information is passed through and the r d belongs to the company not to the agency that they're hiring okay thank you you bet so uh a couple of things to consider what is the next few slides uh just to help cement this in is this r and d or is this not so this certainly a guy mixing beakers looks like r d to me um architecture has a lot of uh activities that qualify so do mock-ups a lot of different mock-ups that you're doing whether it be the first run prototype or or a mock-up of something you're going to build those costs will qualify art unfortunately does not qualify things that are of artistic nature or seasonality flavors these type of things are not considered qualifying activities uh drafting absolutely qualifies whether it be on a computer or the old-fashioned way back of the napkin sketches not only qualify we've used those as uh when companies uh when the irs is inquiring on a company how did you come up with certain ideas we've actually had things like that to submit to them qualify as defense so these two people are welding same activity the one on the left is a beam on a building doesn't qualify that same welder if he's or she's working on on a prototype again that activity will qualify not only the design cost but the material and direct label direct labor will qualify uh these both have r d wine often you don't have an idea if a batch came out perfectly until years down the line certainly is r d and y but there's a lot more in beer poor size of the organization brewers are always doing test batches and those test batches are in essence prototypes of their product molds fixtures those are qualifying costs um the cnc machinist those costs associated with machining don't qualify the cnc programmer those costs do qualify a lot of organizations we work with they'll train across the floor where a lot of their mischievous will also have some programming time and knowledge so uh uh here's a case study that um kind of talks a lot about the the different things that i've been uh speaking with in the past and this is a uh third job actually on the fourth generation now of ownership i need to update these slides uh update uh up to 80 employees now um same owner but one added that there's five owners now with the sun it's just happened last year i should really update this uh and they work with uh one i think the late 80th largest regional firm in the country and they make metal buildings and from the outside looking at them it doesn't look like there might be a whole lot of r d there and their cba firm originally thought that was the case well we started working with them and realized that even though they're in rural oregon they're competing on projects as far away as alaska and as far away as uh they'd have clients in arizona and uh they do a lot of calculation they do a lot of uh pre-building in a way that makes them competitive and along way outside of what you would think is their region so another example of a storage building that they do and so they were really happy weren't was an enormous credit but uh you know it was uh uh north of uh uh of sixty 000 and uh so lo and behold they uh they were audited and this was in 2013 back when there was still that tier one issue so here's an example of the r d tax credit had nothing to do with him getting audited this was the owner was getting audited from his personal taxes went up to his corporation and went through and um ended up because there was a two-year-one issue at that time they had to the irs had to take a look at the credit so here's an er what i'd like to illustrate here is um it's kind of uh it goes kind of grants the grain of the thinking where the if a credit is large enough i mentioned earlier that the irs will bring in an engineer and for us when we're doing audit defense that can mean oh we can you know we got this uh you know five or six hours of our time and we've got this covered so um she uh yeah who was that she didn't have any experience or knowledge of the rules or guidance or the guidelines in essence what we ended up doing working with this irs agent was giving her about 20 hours of free education on the credits so the size of the credits sometimes the larger the credit the easier it is to deal with the people that are coming and examining it so hey tony yes sorry to interrupt we have another question here do you want to hold that or no perfect perfect segue please they're perfect so this is from beth we are a manufacturer of supplements we work on improving processes lean fda audits customer audits sqf nsf gmp etc we also do a lot of r d for our customers this includes formulation mixing base mixing based ingredients and then we have to pilot them to make sure that they work on our equipment do all of these activities qualify oh boy uh is it there let me see yeah if you click on the q a box you'll see the question as well hi beth nice to know that you've joined us um beth i i believe that uh we have been claiming those um and i can't i i apologize i'm clicking on it but uh uh could you restate that jim i'm sorry i i don't want to blatantly uh answer that all of them qualify when uh yeah there's a lot here so we are a manufacturer of supplements we work removing processes main fda audits customers sqf nsf g etc we also do a lot of r d for our customers this includes formulations mixing base ingredients and then we have to pilot them to make sure that they work on our equipment do all of these activities qualify uh i would think that some of the activities that wouldn't qualify beth and i i i i can certainly check with you and get back to you because i know we're working with you but i think some of the ones that that don't qualify in your organizations uh would be the ones that you're working with on your customers if you're expressly releasing that as your clients uh ip so uh for example if uh if you have a special formulation from a customer and you've under contract signed that you can't sell that formulation to another client that would lead us to believe that you're relinquishing that as your clients uh intellectual property all of the formulation all of the processes that are unique to your organization those are uh costs that you should be claiming for your r d tax credit oops i i i hope that's sufficient and beth i can i i can certainly follow up with you as well if there's a question i wasn't able to answer may i continue is there any uh another one jim no please continue okay sure so what does an r d tax credit accomplish uh study accomplish it's uh as i mentioned it's something that uh on your organization's side after that initial year there should be minimal involvement uh this uh this is something that people are filling out surveys there's maybe a little bit of project write-up but not a whole lot of work that needs to be done to continue getting this money from the uh uh from the federal and and state governments or saving money so also what it does is um it allows some business owners when they come in they before a study they have one way of looking at their r d costs in their organization after a study they really realized well this is my true r d budget um and uh what we've seen is often a business will become more lean with their r d expenses as a result of having a tax credit study done so ultimately you're doing it to save money on taxes but a lot of businesses will also find that they're saving money on r d from as a result of a study now we come in we work with a lot of defense contractors and uh they and many other businesses have project-based accounting where there's time tracking that uh that they use for their employees now time tracking is a great so it's kind of one of the legs of the stool in in audit defense if it's there we'd love to incorporate that into being able to track r d costs however what we find is a lot of money is left on the table if that's the only way that the r d is being tracked because it's only really being tracked at that level of the person entering the time tracking which it often does not include meetings uh it doesn't include things that might be done off the clock uh there's a lot of uh things that not only will a study capture these outside costs that aren't during time tracking but it's also going to be supportive which we're doing when we're speaking and interviewing this is employee testimony or documenting all the things that are going on within the organization and it's also very useful so when uh if a client is uh is audited and somebody that was doing the time tracking and the actual people are long gone working for another business or or started their own business um and they have no interest in speaking with the irs uh having that documentation that is a great way to defend the credit claim many years after an employees uh may have left the organization so here uh in the next two slides this is um this is a case study of uh the the company they make uh connectors for uh uh for unmanned aerial vehicles and so they were claiming the credits when we uh came in and their cpa had hired us because the cpa had had realized there was a lot of things that were being left on the table and when we uh first worked with them when we first saw their credit claim they were claiming their r d tax credit and what they considered their r d department they had they had their engineers and designers they had five people and that was only the r d claim was only for the salaries of those individuals so between those individuals they had a 500 000 payroll and they were claiming that uh a hundred percent of everything they uh they do was r d which technically uh can't really be substantiated but um essentially uh most uh substantially all of what they were doing was r d and so they were getting um about um that five hundred thousand dollars was their qualified research expenditure so as a as a rule the tax credits about six to seven and a half percent of qualified research expenditures so they're claiming around a thirty thirty two thousand dollar tax credit every year for the couple years before they had the study what they didn't realize is um they had a leader who uh was getting paid uh close to five hundred thousand dollars was the one that started the company very technically involved i called him uh 1985 bill gates before he was leading his foundation um so about half we determined we could defend half of that leader's position as r and d involvement because that individual was doing a lot of things in the lab with the engineers they had some very highly uh compensated um especially their vp of sales technical sales and so they had missed out these people that that wasn't their entire salary the salesperson was getting a obscene amount of money but a lot of it you know but a certain portion of that was qualified because those technical sales so these are qualifying costs that they missed prior to the study they have some people on their factory floor that have been there for a long time that were the ones that were making on-the-fly decisions a small portion of their time qualified and they were very heavily invested in lean where um one day um one day a month they were due lean and so um there was uh the the continuous improvement activities were able to find some money there for salaries so before the study they were getting a 30 000 tax credit and we were able to more than double that tax credit following the study again a lot of companies that's what they see on their r d and they'll do things like they will include appreciable equipment in there which uh which isn't qualified at all but um yeah it's typically when we see companies claiming the credit without a study then um there's a lot that's left on the table now again if you're that organization just has one or two people that are involved in sales and engineering you don't need a study um i'm more than happy to sit down with you and your cpa in an hour two hours time uh we could get you a couple thousand dollars and and and i don't charge for that kind of work so there's definitely opportunities here don't think you have to have a this kind of a staff if you're doing r d activities i'd like to see you get that credit so people uh often ask well geez well what do i need for documentation uh is this going to be onerous is there a lot of things that i need to create and no absolutely not if you're doing r d you already have what you need is contemporaneous documentation unless you've had a fire or a system crash or something like that which does indeed happen so on you know the the manuals that you keep the uh that you you know even the inventors books that uh any inventors talk to to keep notes on uh these are all things that exist in your organization uh it's important to note that um you need to identify and locate where the documents are you don't need to compile them uh in an audit that's when we'll do some compilation and things um and it's not something that you know most companies uh uh get audited once every 30 years or so so this isn't something you want to be prepared for this but it's not something that's uh that should be onerous um the the government does not want small businesses uh to uh believe it or not it's a drowning paperwork um so it's the identification there's compilations of a couple projects a year that you always want to keep notes on but it's not something you know the the employee testimony and i can't state that enough where we see companies getting into trouble is the cpa and the uh the cfo have a chat over the phone oh what do you think joe did this year oh what does susie do this year and that's kind of they come up with their credit that way and that's going to get thrown right out there has to be some support from the people that are doing the work that qualifies so the irs allows for use of best estimates for for past years on if your company is a startup uh there's different rules but uh most of the manufacturers here are a number of years old so typically um you'll need at least three years of past r d data sometimes further there's different ways to calculate the credits and it's always a cost benefit analysis of uh do you take a smaller credit with a little bit less work or do you take the largest possible credits and is it defensible going back to past years uh a couple of and i i i i know these will be available but these are two uh uh really good case studies i know there's a number of cpas that i believe signed up for this those are really good tax court cases to uh if you want to take a look and learn a little bit more on the methodology that um that is supported is there any uh questions in the meantime jim i'm gonna go in a couple case studies hey tony um no questions yet we only have about a little over five minutes left oh dear oh heads up so oh okay okay yeah i thought i had a little more time today so okay so um uh basically i i chose a couple of of examples here of uh and i'll run through them but of businesses that we work with that qualify on just based i know on the activities of some of the attendees but uh uh extrusion uh molding companies qualify we work with a lot of uh of companies that bend metal so whether it be sheet metal um would it be cnc machining rolling all of these companies um i love working with metal benders because they think that well we've we've been you know 5000 years we've been bending metal how is this r d but uh there's certainly a lot of it that qualifies got a lot of firearms manufacturers as well as companies that do cut and sew in in that industry as well um electronic manufacturers uh anyone that's doing printed circuit boards a lot of r d there a lot of r d in design of facilities and um different engineering services uh we work with a lot this is one of our larger clients this is a 4 000 employee business that uh it's great i get to drive down the street they have these in almost every town snorkel and extreme manufacturing they make snorkel lifts hey tony yes sir i apologize um we do actually this this goes to uh 10 30 so um if we need to revisit any of these or we'll oh no no no you just that's thank thank you i was just uh corrected on the side here no that's all good no i want to leave a good 15 minutes for q a good thank you you scared me there so appreciate that so um this is a an example of a business that um has a periodically uh enormous um uh prototype costs they do a lot uh they do ferries uh they're they're ship builders so um they were uh they worked uh two years three years ago with uh building a um a a boat for the israeli military and they had i think 20 million or so just in qualifying expenditures on one boat because it's never been done before and so that was about a six hundred thousand dollar tax credit for just that one vessel so um yeah and in other years or credits not nearly as high but yeah every once in a while they work on a project that qualifies where you're again getting that material cost and the direct labor not just the engineering costs that qualify uh we do a lot of work with companies in in aerospace a number of uh of clients in in the phoenix area uh and around the country that um a lot uh there's um so much substantiation that goes on that so much paperwork that goes on that a lot of the reporting that's part of your process validation is also partly qualifying in in these uh in airspace uh work with a lot of different uh vehicle manufacturers this is a fun one to work with and then again uh process equipment um it's you'll have businesses that they're not just doing the individual tanks and such but they're they're designing how it all fits together so there's a lot of engineering costs and also at times prototype prototype costs in these businesses just some other different examples companies that are specialty equipment manufacturers association businesses uh they have a lot of r d what happens is uh every year a couple years uh whether it be jeep or ford or dodge chevy they'll change their vehicles and on that giving year anything after market to fit the vehicle has to be changed also so their innovation is driven by other businesses and the needs and demands and evolution of other businesses so so if your business and and you know this company they thought well yeah this is this is an r d this is what we do every day but the you might look at your own business and then and look at it that same way if your business is reliant on keeping up with other industries you're probably doing things that are qualified for the r d tax credit uh here's just some examples of some documentation of uh of how and this is proprietary to a client so it's a little bit fuzzy but uh basically just kind of going through and this is an example of the surveys that this client that we've constructed for this client and it goes basically from product conceptualization all the way through through validation through patentability if they have it the different meetings that are involved and basically this is the way that they document it per their employee and then when we take that we take it into the different employees these are the people's names they each filled out a survey and then we have this you know we narrow this down uh somebody in software is doing you know the bulk of their time of qualifying this technical sales person there you know a lot of what uh what she does is is just client support but a lot she also goes out and meets and figures out the needs comes back speaks with their engineering department and and their software department this is a hardware software business and uh and so a portion of her time qualifies as well president is still highly involved in leading it and uh then the graphic artist and this is important again i noted earlier that art doesn't qualify however sometimes when the graphic artists in this particular case they're doing packaging design so most of what this graphic artist does doesn't qualify when they're getting it and doing the math and getting it to go on to a package so about 20 percent about uh a couple hours a day pretty much or maybe hour to a day of this person's time is involved in activities that qualify uh let's see oh this is uh this is an example of software i mentioned earlier uh where we have to have something what's something that's customer facing that will qualify something that's internal won't qualify so when we work with software companies there's uh uh there's that extra step in software portions of it will qualify portions will not these are all just kind of different documents that you know the project that we when we complete we give all of this documentation for our clients and then the clients can use this uh year after year to uh to defend their credit and and claim the credits uh in their company boy i uh my my voice was probably only expecting an hour gym as well so here's some examples of uh of what gets companies in trouble another tax court case for your cpas basically outlining how not to do a study um there has to be that documentation that exists uh has to be contemporaneous to the time of it existing and um basically yes without a system in place without that study for a lot of organizations this is overly burdensome now i spoke of this earlier use of estimates without employee testimony this again this is that example of the business owner and the cpa guessing on what their employees are doing as far as r d now one thing that i like to urge all businesses that are claiming the credit to do is as part of their exit interviews when an employee leaves an organization to have them sit down and spend that 15 minutes and to fill out a survey and saying yes this is what i did for this organization during this time because once that employee leaves the irs comes in they'll ask they don't they won't want to just talk to the employees that are there now they'll want to take a look at past years and say well where is that person now how do we how do we get that information and if you don't have this testimony in written form your ability to defend that r d is substantially decreased there has to be a nexus you have to point link the qualified expenditures and the business components now what uh we had a couple years ago um we had a number of audits where on i think the irs i guess had a memo where there was some abuse of production based versus prototype waste and so we were working with some food processors and we ended up just advising all the food processors to take still shots of where their prototype waste was and where the production waste horse that just put up a couple cameras and none of them were audited in subsequent years but if they did they would have actual physical not physical but digital documentation of what their substantiates costs were so it can be important especially if your prototype waste is substantial to uh to document that in a way outside of just a ledger now uh a number of years ago uh another case study happened and that's shammy versus commissioner uh that was a tax court case pardon me and uh what that was was a businessman had uh bought a beauty company and this gentleman did not have any scientific knowledge but was paying himself several million dollars a year in salary and um got audited and it was all overturned and so we had a subsequent couple audits of our clients anyone with the role ceo or president right away the irs would overturn that saying well no this person is an executive they they're not doing r d but you know the fact is a lot of our clients they're they're smaller businesses and the the founders are the ones that came up with the idea and are still heavily involved in it so um i would uh we always try to to tone down the ceo's role and the percentage uh just to make it more believable unfortunately because uh someone that comes in that audits your organization we always look at this as an audit's inevitably going to get take place even though very few of our audit clients get audited but um someone with the card of ceo you're going to have to sit down and you know make sure that that you're not over exaggerating that at all because the uh the person on the other end that's auditing you will will probably want to throw that out just because of what's happened with other people taking advantage of that role so with the cares act that just came in um it allows a hundred percent of nols um for 18 and 19 and 20 to be carried back five years used to be just 80 so in essence what this does is it opens up r d opportunities to go back as far as 2013. so um what happens then if you claim an r d tax credit when you amend that return it'll increase your taxable income but if you have that nol to offset it that's going to actually be able to wipe that out as well now the um what will happen if you um if you uh go back and you uh say uh let's probably a better way to let's see so so so basically um if you haven't been claiming it in past years and you apply that no carry back it can also apply significant benefits so what happens is the um even if you can't use the r d tax credit five years back uh if you uh you can take that tax credit and then carry it forward and even if you uh you can use your net operating losses to reduce your taxes for past years and keep the rd tax credit because the arnie tax credit the great thing about it is it carries forward for 20 years so this is something that it's an unusual circumstance for most businesses but um the um uh here's here's an example it's unusual uh you know if you have the thing is uh right now it's unusual but uh you know in 2021 uh we're going to have some losses in businesses what you're going to be able to do is take these losses carry them back and not only will you be able to take those um those losses to reduce taxes in past years you can free up these r d tax credits and carry them forward to be used in future years if they're not used in past years already so this is something that again our um i think is very notable to uh to uh to highlight this opportunity uh we take care of the rd tax credit this is something that uh you want to discuss with your cpa because they're going to be the ones that know best how this applies into your uh circumstance so um jim i wanted to to kind of leave the rest uh of the time up for questions um i did kind of rush through a couple of those slides when i thought i didn't have time uh what i've left in the last the slides are mostly things that i want businesses to take back the kind of questions that they might want to ask themselves to know whether or not they have qualifying activities but uh um i can go through these or if there's questions that that the attendees had i think that might be a more uh opportune use of our time okay um a couple of questions here so how about t deadlines as far as the federal and the arizona r d tax credits uh well that that that depends on the um the calendar year uh is it a 12 31 year end or is it a different year end but for example right now we're still rushing where uh for some clients we just started a project uh uh last week with uh doing 2019 taxes um you know they have a september 15th deadline and so you know at this time we we don't typically like to do projects this late in the year but you know what's unusual now with uh you know with covid uh is that you know with our business it's very important to uh to be there in person but um for the calculation of the credit it's not necessary so we're spending a lot of time doing interviews by telephone interviews by zoom and you know we're helping businesses now that are uh you know that are filing their taxes here in a month and in a couple days and then once it's safe to travel again we're coming in and we're doing the substantiation part so uh there's two there's two parts of a study you know one part is the calculation which um you know doesn't take an enormous amount of effort only you know it takes you know some time but then we're going to come back in and interview the people in person see the documentation and uh and and kick the tires as it were that you know we would typically spend one or two days on site with our clients but uh um you know it's a lot of people are you know basically you have up until the end of your filing date but uh you know it takes us a couple of weeks to put things together so we're still starting some projects right now for for september 15th uh deadline for for 2019 but for 2020 it's yeah we've got plenty of time okay thank you tony and one other thing can you explain how you're going to initially do all of the investigation putting everything together how that works going forward in terms of developing a process sure sure so uh the way that a study works there's uh there's the financial component where where we send out a list of documents to that we require for our clients um basically that's payroll information uh trial balances uh patent history and uh we then put together a framework for the project and then once uh org chart and once we have this framework together we do the series of interviews and we usually like to do this you know it's been by by by zoom or conference call that uh you know the best uh scenario is in a conference room but we get together are usually kind of the the heads of of the head of engineering head of sales if you've got a um the cfo or controller the plant manager kind of get a group of people around together the c-level team and do a kickoff meeting to kind of develop a baseline understanding of how the r d flows within that particular organization and then from there on uh we go and we'll either interview groups of people sometimes all we need to do is interview one person in a team if they have a really good grasp of what everyone's doing and uh and then you know usually we're uh i always want to say on site even though it's it's been virtual a lot of late um but you know we we try to kind of get the the the flow of everything done in one or two days uh interviewing the people uh then we go back we start tying things together there's usually uh one or two follow-up calls there's um there's always someone ducking our meetings that we finally get through and uh and then we have uh we roll out the surveys which we have people take a one-page survey um if if it's necessary there might be enough support there from from time tracking but often we want to get this survey in as well and then we tie everything together and we we do we kind of spend 20 minutes or so going over everything on a high level we prepare them the documentation that we send to their cpas uh and that's a two-page uh two pages of instructions the cpa puts it on their uh return and um and we're good to go now um if uh ever this happens um you know if the company gets audited and someone wants to take a look from the irs or state of arizona at uh at their documentation then we sit down and uh we're the ones that uh spend whether it be uh 10 hours or 30 and uh go through with everything with the uh taxing authorities that that part is uh you know sometimes we'll need a little bit of a explanation from uh from one of the engineers on this uh on the client's team but that's typically something that we do uh face to face with or over the phone with with taxing authorities so basically the the the bulk of the effort is that first year and then in subsequent years we do everything off-site we we send three emails that one includes the surveys the other two it's just kind of some guided project reporting that usually takes about an hour to an hour and a half uh for someone in our clients to do and then we're also every year getting the uh payroll information w2 of the people involved in the uh in the rd process okay thanks and then how long is the uh engagement period uh we engage with our clients for four years and what we do uh when we release the the basically we're under contract we're uh creating our clients intellectual property and what we want to do is we want to be with them through all open tax years so for example if we engage with the client in 2020 when we disengage with them in 2023 all of their open tax years are under our methodology so if they were ever audited it's very defensible so um and then when we release it uh the the the client runs with it and you know to be honest with you uh most of our clients uh stay with us they say thank you we're uh we're we're you know we're not gonna pay anyone for for any of this and then um you know come february the year there they they they call us and say look we really haven't been keeping up can you can you can you keep going with us so it's uh we've got a lot of long term clients and it all depends on you know some our clients grow real fast and um they um they end up you know it makes sense for them to hire someone at times in-house to uh just to take care of all this okay and then a question here um how much do your services cost and how does how does the payment work in terms of when when would they pay uh so um for us uh we do there's no upfront fees no hidden fees uh we take a portion we take uh 35 of the credit that we're able to uh define for a client uh and then our costs are tax deductible also so from a cash flow level uh cash flow basis um if we find a client uh a hundred dollars they're keeping eighty dollars for the benefit after they've paid uh after they've paid us so they're basically it's basically it's kind of an 80 20 split and then the other thing also is uh we guarantee a cash flow positive engagement for our clients so uh we have the option if for some reason uh you know they're maybe they buy a large piece of equipment and uh that offsets their taxes or or god forbid a pandemic comes around and changes our economy and that offsets their taxes and they're not uh not owing taxes on a giving year these tax credits carry forward 20 years we'll say you don't have to pay us until you use these tax credits sometime in the future so that way it's always you know they're not paying something paying us for something that they're not using and that also makes sense for for startups and such if they're not going to use the credits right away yeah that sounds great um and then how about um you mentioned carrying forward what about going back in past years and and capturing missed opportunities for our before so uh the credits also carry back one year so you could use them for for past years but um what you're talking about i think is um amending returns correct what's uh you know what we do that we uh we uh we never uh we never uh i should say we never force a client to do that what we do is uh as part of the study we will let a client know here are what your potential benefits would have been if you would be if you amend returns and claim these credits we also share with them the risks um for example we might say well look uh uh if you you know you can amend 20 2019 and 18 but in 17 well some of your key people are gone it'd be really hard to defend this we wouldn't advise you to do that we also share with them the that on a go forward basis uh the there's no increase in audit risk uh in an audit rate this is just a two page form on your tax return gets read by a computer just like the rest of it going back when you're amending returns uh your it gets sent to a special office for human review and about hal