Effortlessly Manage Your Internet Connection Billing Format for Research and Development

Internet connection billing format for Research and Development

to 20 for for going over the presentation and 10 minutes for Q&A so just stop me at any point if we're getting close um to time if we need to cut a little bit shorter but um it's a pleasure to have you all online and virtually Emet you all um Michael and I were able to get in contact UM through his work actually with Leighton in the R&D credit me and him were able to really deep dive um into you know May understanding more of the organization um further and see you know what offerings and education we can share with you all so when it comes to the research and development you know tax credit it's it impacts more Industries than not um so thank you again Michael for setting this up and excited to go over this presentation uh my name is Taylor I am part of our partnership division here so I work with CPA firms law firms and then various industry Partners throughout the country and basically a connector educating on what we have to offer adding to their Capital stack and thus adding to businesses future growth um I'll let Savannah and Megan introduce themselves hi everyone it's a pleasure to meet you all um so Taylor pulled me in here just to talk a little bit about the R&D credit I've been here at Leighton now for about five years um I'm a senior consultant and assistant team lead lead here my background is originally in chemical engineering um which is as you imagin why I work primarily on the R&D tax credit and other Innovation incentives such as grants and orphan drug tax credits and things um so it's a pleasure to be here and meet with you all and I'm excited to to walk through this and address any questions you all might have and then I'm Megan I'm the partnership uh marketing manager so I'm kind of helping behind the scenes but I'm excited to hear you guys speak and learn even more about R&D on that note go to the next page so just a little bit of background I figured for just the sake of Education talk a little bit about Leighton and then we're going to be deep diving into what is R&D tax credit um and the intricacies that follow in there and then some um applicable examples as well and we can follow with the Q&A because I'm sure you all will have plenty of questions at the end but Leighton we have been around uh for 26 years now we're a global company um actually starting out in Innovation so we started out with this R&D tax credit that's really our bread and butter um so we have Tax Consultants technical consultants phds so on so forth inhouse to be able to not only speak the industry lingo and know all these technical terms but then also piece that together with the tax side to this again add more you know funds and strategies to the businesses for future growth so so um we've done quite a lot of work in supporting various Industries and um we luckily have such a great team here so alongside the R&D taxt credit we do have a couple of other Specialties and happy to answer any questions um you know post this conversation as well but we do the Energy Efficiency incentive so if you own a commercial or Residential Building uh cost segregation again going along with the real estate aspect state and local tax say you're going to trade shows or remote employees so on and so forth in that regard and then grants and incentives another big one for Innovation and adding funds to one's company and with that being said I'll pass it over to Savannah to talk about R&D and a big one with 174 I'm G come in um so I wanted to briefly address this before I get into the R&D tax credit and really the purpose of of highlighting this IRS Section 174 requirement is it's more than likely that a lot of you all have been impacted by these regulatory changes that were put in place in 2022 um so for those of you who might not be familiar or who maybe aren't as aware of the kind of tax positions um section 174 is essentially a change that occurred in 2022 and onward that requires research expenses technically R&E expenses to be amortized and capitalized over a fiveyear period so you aren't able to realize the full amount of any of those expenses um that were spent towards research in the first year in which they were spent now it has to be over five years um so so the research expenses that are relevant to section 174 and likely your CPAs are doing this or your accountants or if you guys are the accountants you're already doing this um but it can include things like patent filings uh any rent costs utility costs wages supplies any portion of those expenses that was spent towards research now need to be amortised over five years um um so the impact that this is having with a lot of our clients a lot of the businesses that I speak with is it's essentially causing companies to see an increase in taxable income and this is resulting in increased tax liability usually within the first three to four years of having to advertise or capitalize these expenses so the reason I want to highlight this is this is a compliance regulation right so companies just have to be doing this if you're doing even anything remotely related to research then this is something that you're going to have to be doing so the R&D tax credit can actually be used to alleviate this impact so there were no changes made to the R&D tax credit it's remained the same and it's a permanent tax credit I'll talk a little bit more about it um however it's important to note that this is a this is kind of a tool that can be leveraged um to help companies not realize that full tax liability or that full tax increase as a result of the the tcja now the R&D tax credit uh was established in 1981 and its purpose is to reduce income tax liability um for companies that are performing research so some states have also implemented an tax credit of their own California has one of the more lucrative ones where it's essentially double the federal tax credit uh and you are able to claim both the federal and the state so we at Leighton identify the federal and then look at which states the activities are being performed and see if there are any eligible research tax credits in those states where we will also identify calculate substantiate um those State ta state tax credits so a lot of businesses are really unaware that um they're eligible to claim the research and development tax credit that's something we run into quite often I think that businesses and business owners tend to have this idea that when you hear R&D it's like in a lab with like beakers and you have to be doing kind of pure research when that's not actually the case um so the IRS has set out its own framework to Define what research and development is and how you qualify for this tax credit which I'll be going over uh so hopefully that can kind of Enlighten you all and and show that businesses that might not even think they are eligible are probably eligible so the way that the R&D tax credit is used or the way that it is benefited as I already said it's an income tax liability um tax credit so it's a dollar for dooll offset of whatever tax you owe you owe 100k tax at the corporate level then you get a 50k Credit in that year you're just going to owe 50k um and one of the great kind of benefits of the R&D tax credit is that it can be carried forward for up to 20 years so if you're in losses or maybe you have an AMT issue whatever that might be where you may not be able to use the credit in the year in which the research was done you are able to bank those credits and roll them forward so that's a strategy that a lot of lot of our companies or a lot of our clients use uh very often and one of the reasons is that it does increase your business valuation could be useful if you plan on selling obviously is extremely useful if you don't plan on selling because you're going to be directly benefiting from that uh but really alleviating that tax burden kind of enables companies to free up some more of the cash in in the current year or in the year in which they're claiming the credit there is a three-year look back as well so that is just based on the irs's uh regulation that you can't amend a tax return more than three years back so right now we can look from 2021 to 2023 and then 2024 in January uh to see or identify if there were any eligible research activities and thus you can amend and get a credit for all of those years in which research was being done so we have been as Taylor said working in this industry for quite a long time um we have been an international company research and development tax credits are present in just a multitude of different countries but here in the US we have a strong team uh with various backgrounds so we have a few people that have accounting backgrounds or obviously we have a whole accounting team um Devon is our tax team leader there we work in life sciences and agriculture so pharmaceutical industry biotech Tech Allison is our manager in that industry and she has a chemical engineering background like myself ignasio he has a civil engineering background so his team works a lot with material science engineering aerospace engineering um architecture engineering we also have our SVP that I just wanted to highlight because I know um this organization that that you guys are a part of might do a lot with Aerospace our senior vice president actually has a PhD in aerospace engineering so I think he would be ecstatic just to know that we are having these conversations with you guys we also have in-house Council that helps with audit defense of Regulation so Jen Bolton she's been working in the R&D tax credit um from a legal perspective for about 30 years and then myself and Matt is also an attorney in house so they can help with any of those issues that come up during filing with the IRS so there are over 65 different industries that are eligible to claim the R&D tax credit obviously I'm not going to list all of these out but as you can see this just highlights how enormous and how beneficial this credit is and how many different Industries impacts um you know engineering software biotech pharmaceutical Material Science simple manufacturers like who are doing process improvements just an entire array of Industries are eligible to claim the R&D tax credit so what is research I think that's kind of one of the key questions right that we'll probably all hear today to learn and the way that the IRS uh kind of defines it is different than how most people would think of as research um so they have four criteria that they use to determine whether certain activities are research and development activities and we call that the four part test so in the industry in the niche tax credit industry if you ever hear anyone say you know do they pass the four-part test this is what they're going to be referencing um so the first part of this is that the business or the company needs to have what they call a newer improved product technique formula process software whatever that might be it's called a business component so um anything that is what you're working to improve upon in your business or anything that's developed that's new can also be included as a business component the second Criterion is that the activities being performed need to be technological in nature so they need to be rooted in the hard Sciences so any activities that are related to engineering biology chemistry uh software like anything that's root in the hard Sciences is going to meet that se um that second Criterion what we're trying to avoid there is let's say a sociology study right that's that's not a hard science so we're probably not going to be able to include that uh and they won't be eligible for the R&D tax credit the third Criterion is that there has to be a process of experimentation so this the the key principle here is that you have to have one or more alternative that's being evaluated an example I like to use is manufacturing because it demonstrates kind of what it's talking about here pretty easily when you are manufacturing anything right you are going to have to do some sort of test run or water run or first batch in order to determine if you're meeting your kpis in order to determine if you have that final product quality you're looking for maybe you're trying to improve the efficiency of the manufacturing process or the efficiency of surface coating let's say um and you're playing around with various thicknesses or various materials various mixtures if you have to iterate through even one of those processes that's going to be a process of experimentation so that kind of trial and error process that you're going through is considered a process of experimentation in terms of the IRS criteria and finally the last and most important Criterion in my opinion is is that there has to be some form of technical uncertainty involved in the project so it can be something you can Google right you can't just find the answer to it it's not something that's readily available there has to be something like you know what's the optimal speed that we're going to run this at we don't know we have to do a process of experimentation to figure it out um you know what's the optimal size or optimal material to use that's an uncertainty and so highlighting those challenges or those uncertainties that you guys have faced that's going to fulfill that final Criterion so each project has to meet all four of these so that's definitely something that's important to keep in mind but we go through each year uh with our clients and essentially just talk to them about their business and we'll pull out those business components or those projects that we think are eligible for the R&D tax credit now when it comes to actually calculating the credit right we have that first step which is we would talk to you we would have someone in your industry so someone with a Material Science Background someone with a mechanical engineering background would talk to you about your R&D projects and once we identify the eligible projects in each year we would then move to the calculation portion and so Leighton takes a dual approach like we have a technical person and then we have a financial person on it and the financial person would be looking at four different expenses or expense buckets where we can pull those research expenses from so we are able to look at salaries so W2 employees that have participated in the research activities and that could be anyone who's directly performing them if you have Engineers working on them it could be someone who's directly supporting them so maybe some sort of associate engineer um and it can also be people directly supervising them so maybe like an operations officer or something along those lines we also look at subcontractors so if you guys have anyone coming in and you're paying them at 1099 or maybe you're paying a laboratory or some third party to do testing that's required for your research project we are able to include the cost of those outside contractors however there is a haircut at 65% includ all that means is for a W2 employee if they're 100% R&D then we can include 100% of their salary however if a subcontractor is 100% R&D we can only include 65% of their payment um and that's just because the IRS wants to make everyone hire people instead of using subcontractors so the third cost category is supplies and materials so any raw materials that are used and consumed in the research are able to be included so if you have to buy a batch of a certain chemical or a batch of maybe a certain metal um if you have to buy some new smaller hand tools new bolts wrenches whatever those might be and those are getting consumed in the process or they're going to be a part of that final product then we can include the cost of those supplies in the calculation of the credit we can also include and this is a rare one but maybe becoming more popular as AI uh develops is externally leased computers so what we usually mean here and you see this more in the software industry is cloud computing software like Microsoft Azure um where they're performing complex modeling or complex calculations in the cloud essentially and that's being used for research for software development um kind of rare in other Industries but not completely completely unseen so the way the credit is actually calculated after we determine the projects we get those expenses and we get that allocation the way we actually get those numbers is we would look at the employees and let's say in 2023 you guys had two projects then we would say Okay approximately how much of this person's time was spent on this project in 2023 and if you said 30% of their time was spent on R&D then we would include 30% of their salary as a qualified research expenditure now as I already said although most expenses can be claimed up to 100% contract research is only at 65% and the final calculation or the final number once you gather all those qres using that methodology so 30% of this Supply category 40% of this person's wage 100% of this contractor was all towards R&D we sum all of those expenses and the credit usually ends up being somewhere around 7 to 10% of those qres qualified research expenditures it's is what that stands for um it does vary because technically the R&D credit uses a basee analysis which means your current credit in this year depends on how much research you were doing in the prior years that's why it's not like a solid just 10% straight up uh however I like to always say it comes out to about 10% um with a little variance so the R&D tax credit as I already mentioned is an incredible credit that can be used to offset income tax liability however the IRS kind of came up with an alternative usage for the R&D tax credits that are identified um and the purpose of this is to benefit small businesses maybe startups or companies that just started and and are in losses you know they don't really have tax liability so they can't make use of the credit however if you think about it the majority of research for a lot of businesses is happening in that first five years right so the payroll credit is a subset of R&D credit and there's some criteria that you have to meet 250k um is the maximum that you can use and it offsets payroll tax liability so you have to be a small business you have to have below five million in gross receipts per year um and you have to be within your first five years of gross receipts generation and if you meet that then you can use your credits against payroll so I know we're running on time a little bit here so I might just skim through these we have some required documents the documents that Leon gathers typically tax returns W2s 1099s and then any pnls or draft returns for the current year and again I'm not going to run through all of this but this is a little bit of a demonstration of what our process looks like so we have an initial conversation we then talk to the Consultants we determine if you're going to be eligible we have the engagement which is just going to be inperson texting phone um really whatever suits your needs we kind of cater it to you we put together an a technical report that details our process and that can be used for substantiation in case of an audit which Leighton does provide audit defense for the credits that we identify um we then deliver draft tax form so your CPAs literally just have to copy and paste into the real form everything's already prepared for you we then will walk through all of our findings the tax forms the process we filing any any final questions your CPA might have uh and after that you'll file or you'll amend your returns and we would do this year-over-year so I've Been Working for with businesses for like seven years on on these R&D tax credits and it's something you can just continuously claim as long as you're doing research a few case studies so for the manufacturing industry you know for this company we were able to identify 167k in credit for one year uh company size is about 34 employees and then the engineering industry so this was more um kind of Robotics engineering and we were able to qualify 35% of their time they had about 50 employees 80k credit for one year 210k total for three years so significant tax savings you know and I think that's it awesome thank you so I know we went over quite a lot of questions uh sorry quite a lot of information but I know we're you know getting up at 4 o'clock here but if there's time for a few minutes for any questions you want to to go over please feel free to frish out would happy to go over them I'm also always happy if you know Taylor can share my email so if you guys do have any questions like would this qualify you know does this count as R&D anything like that I'm always happy to just jump on a call or just answer via email whatever makes you guys most comfortable um but if you have any now feel free to raise your hand or just shout it out I don't have any questions because I've been working with you guys for years and lot of much needed tax credits so no questions for me of course I'd also offer again to my colleagues on the call that if any questions come to you later on and you want to ask me of course you can reach out to the team at Leighton but I'm happy to explain from a really practical sense how we handle um tallying all of our R&D work over the course of the year and I even learned something through this I had not been putting in the expenses for all the patent work that we do uh so I'm GNA start start making an a point to include that in our expenses good yeah again I know we covered a lot so what I'll do is is I will share the recording um and then I will also share the presentations