Discover the Perfect Tax Bill Format for Research and Development

Tax bill format for Research and Development

hello and welcome to this session in which we will discuss the research credit from the name of the credit research credit it's designed it's aimed to encourage to entice taxpayers and Company to invest in related research and development activities the reason is is to improve the economy improve technology improve the discovery of new businesses and processes so a credit is available to taxpayers for qualifying expenses related to research and development so you spend money on research and development we will give you some sort of a credit an incentive to to help you in this process also known as business related research and experimentation the aim is to promote research and research credit is composed of three components incremental research activities credit a basic research credit and an energy research credit so we have different type of credit we'll discuss each one of them separately starting with incremental research credit before we proceed seed any further I have a public announcement about my company forehead lectures.com forehead accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses my CPA material is aligned with your CPA review course such as Becker Roger Wiley gleam miles my accounting courses are aligned with your accounting courses broken down by chapter and topics my resources consist of lectures multiple choice questions true false questions as well as exercises go ahead start your free trial today the incremental research credit provides 20 percent for the amount of eligible research expenses however the 20 applies to the amount that exceeds What's called the base amount the base amount is giving or the company will determine what the base amount is you don't have to worry about the base amount the base amount will be given for us but any amount you spend above a base amount simply put you are spending quite a bit of money on research and development the government is going to give you a credit research expenditure qualify if they are aimed at an uncovering mean discovering new technological information for the use in developing or improved business component of the taxpayer so the purpose has to be for that purpose if the research is performed in-house in other words you are using your employees you are using your equipment well the expenses are all expenses are eligible as long as they are qualified research expenses if you are Outsourcing this process Outsourcing means you are paying an outside party consultant and that's very common in the research industry for example my work my wife work at jnj and they do use outside resources to conduct their research some of the research if that's the case only 65 percent of the amount paid is eligible for the credit so you cannot count 100 of the amount you paid for Outsider Insider yes people of the company now incremental research credit you have to be aware that this credit cannot be claimed for certain activities what are they once you reach commercial production you can no longer you can no longer claim the credit and this should make sense because you already reach commercial production you're no longer in the research stage any surveys and studies such as market research testing routine data collection that's doesn't qualify research that's conducted outside the U.S Puerto Rico and U.S territories that's not considered that's not considered for the incremental research and research and social scientists Sciences arts or Humanities is not let's take a look at a quick example just to see how they do the computation John eligible uh incur eligible research expenses of 200 000 that's how much John spent the base amount we're going to assume is a hundred thousand so what's gonna happen we're gonna take the amount above the base amount which is a hundred thousand above the base amount multiplied by 20 percent and the research credit is 100 at 20 percent of a hundred thousand is twenty thousand and that's the research Credit Now how what can you do with this research credit the taxpayer can select from three options the first option is to use the full credit and reduce the expense deduction for research expenses by 100 of the credit so one way to do it let's say you would say okay I spent two hundred thousand twenty thousand average toward the credit therefore I'm gonna take a tax deduction of one hundred and eighty thousand remember there's a difference between the credit and the deduction the credit reduces your taxes dollar for a dollar your tax bill the deduction reduce your taxable income and the higher your tax rate the higher your tax rate the more benefit is the deduction because it's gonna reduce a higher higher uh tax rate or the second option is to retain the full expense deduction and what you do this or you can do is you say okay I'm going to take the full deduction two hundred thousand if that's the case what's going to happen to the credit you're going to have to reduce the credit by 21 why 21 we're going to assume the corporate the corporate tax rate is 21 as as of today so we're going to use 21 there for you the credit will be only 15 800 which is taken the 2020 000 which is the full credit multiplied by 21 percent and reduce this amount which will become fifteen thousand eight hundred or the third option is to use the full credit now and and amortize the remaining amount so you can take the full credit now take the two hundred thousand and rather than reduce it now expense it over 60 months which is five years which it means forty thousand dollar of deduction for the next four years so companies do have various options basic research credit and this basic research credit is for Corporation not as not as Corporation not personal service companies those are corporation which is when we say Corporation C corporations are eligible for additional credit of twenty percent of basic research payment again made above a base amount this credit is not available for individuals basic research payment refer to cash payment made to qualify research organization like University tax exempt organization and the primary focus is scientific research basic research is is an original inquiry aiming at advancing scientific knowledge without any specific commercial objective this is how we design basic research you're not looking for to commercialize that this thing you are looking to maybe discover some new technology basic research again in social science Sciences Arts Humanities as well as basic research conducted outside the US are not eligible for this basic research again remember what's the purpose of these credits the purpose of these credits is for the government for the Congress to entice certain activities so this is a line with the Congress aim of using the credit to promote domestic high-tech research the basic research calculation is based on expenditure exceeding again a base amount basic research expense do not exceed the base amount may still qualify for the incremental research activity credit so if it doesn't qualify for this you might be able to use it for the incremental blue Corporation pays 100 000 to research organization for basic research blue space amount for the basic research is 90. so which is the amount above is 30 000 multiplied by 20 will get a six thousand the ninety thousand dollar base for the basic research can also be considered expenses for the purpose of the incremental research activity so maybe you can use that 90 000 to get the incremental research activities the last research is the energy research and the Energy Research is what is to entice individuals as Stone price companies is to entice consumer to find alternative energy resources rather than rather than relying on fossil fuel and a good example will be Tesla the company Tesla the car electric car the Energy Research credit was created to encourage more energy research taxpayer can receive a credit of 20 percent of the expenses paid or incurred for Energy Research through an energy Consortium so basically those are the three research what should you do now go to forehead lectures whether you are an accounting student CPA candidate enrolled agent look at additional resource courses for various credits that's going to help you understand this topic better study hard good luck and of course stay safe