An End-of-Year Checklist for Minimizing Your Business Tax Burden in 2018

As the year quickly draws to a close, the time has come for businesses to start the onerous process of preparing for tax season. Although the end of the year tends to be hectic, it is crucial to begin gathering paperwork and planning strategies in order to reduce your business’s 2018 tax burden. Recent changes to federal tax law—most notably the Tax Cuts and Jobs Act (also known as tax reform)—have made it particularly important for businesses to carefully examine the tax savings opportunities available to them.

As you review your records in preparation for tax season, ensure that your business has taken the following steps in an effort to minimize taxes: 

  • Verify that you have claimed the §179D deduction for energy efficiency projects completed in 2017. Section 179D of the tax code offers commercial building owners and primary designers—such as architects and engineers who develop qualifying projects for public buildings—a deduction of up to $1.80 per square foot for energy-efficient improvements to a building’s envelope, lighting, or HVAC systems. As a “tax extender,” the §179D deduction expired on December 31, 2016, but was retroactively renewed only for projects completed in 2017 by the Bipartisan Budget Act. While this popular incentive could potentially be renewed again in the future, commercial building owners and designers should act swiftly to claim it for eligible projects completed last year. 
  • Ensure that your business is properly classified for maximum savings under the Tax Cuts and Jobs Act. The new tax law grants pass-through entities—including sole proprietorships, S-corporations, and partnerships—a substantial deduction of up to 20 percent. While this will be a boon to many small and mid-sized businesses, the deduction is not available to certain service-based businesses, such as law firms, accounting firms, and medical practices, with taxable income over $315,000. In addition, the Tax Cuts and Jobs Act lowered the corporate tax rate from 35 to 21 percent. Therefore, businesses should work with their tax advisors to determine whether it is more advantageous for them to be classified as C-corporations or pass-through entities. 
  • Determine whether your business may be eligible for the Research and Development (R&D) Tax Credit. The Protecting Americans from Tax Hikes (PATH) Act of 2015 permanently added the R&D Credit to the tax code and expanded its utility for smaller and newer businesses by allowing them to apply the credit toward their payroll tax burdens. In light of these changes, businesses in a wide variety of industries—ranging from architecture and engineering to construction and manufacturing—should examine their project records and consult a tax expert to determine whether they may be eligible for this lucrative credit. Claiming the R&D Credit requires thorough documentation of qualifying activities, so it is best to begin the preparation process in advance of tax season. However, the effort may be more than worthwhile—businesses routinely receive six-figure tax savings through the R&D Credit.
  • Take advantage of expanded bonus depreciation. The concept of bonus depreciation allows businesses to depreciate a certain percentage of the cost of new business property during the year it is placed into service, and then depreciate the remainder of the cost over the property’s useful life. However, through tax year 2022, the Tax Cuts and Jobs Act will allow businesses to deduct 100 percent of the cost of eligible property during its first year in service. This will yield more substantial and immediate tax savings than depreciating the property over a longer period of time. 
  • Consider investing in Opportunity Zones. Added to the tax code by the Tax Cuts and Jobs Act, Opportunity Zones are economically distressed communities in which certain investments may qualify for favorable tax treatment. With a goal of spurring economic development and job growth in these communities, the new tax law allows investors to defer capital gains taxes owed when they invest in Qualified Opportunity Funds (“O-Funds”). O-Funds are partnerships or corporations established to facilitate investment in qualified property located in Opportunity Zones. Investors are permitted to defer tax on prior gains invested in an O-Fund until December 31, 2026 or the date when the fund is sold or exchanged—whichever is earlier. Investors do not need to live, work, or have businesses in Opportunity Zones in order to take advantage of the tax benefits of investing in O-Funds. For more information, visit https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions. 
  • Determine whether your business is eligible for the new employer credit for paid family and medical leave. Another opportunity for tax savings enacted by the Tax Cuts and Jobs Act is §45S of the tax code, which grants employers a credit equal to a percentage of wages paid to qualifying employees on family or medical leave. If the employer pays at least 50 percent of the employee’s regular pay, the credit equals 12.5 percent of wages paid during family and medical leave; this amount increases by 0.25 percent for each subsequent percentage point over half the employee’s regular pay. Employers that continue to pay employees 100 percent of their wages while on leave may receive the maximum tax credit of 25 percent of wages. To qualify for the credit, employers must have a written policy in place describing various aspects of the paid leave policy. Employers should read IRS Notice 2018-71, which provides more in-depth information on the paid family and medical leave tax credit, and review their workforce policies to determine whether they may qualify for the credit in 2018 or upcoming tax years.
  • Ensure that your business is compliant with state sales tax laws. Businesses that sell goods out of state have always contended with a confusing patchwork of sales tax rates and exemptions among the country’s more than 10,000 jurisdictions. However, in light of the Supreme Court’s recent decision in South Dakota v. Wayfair, numerous businesses are now facing a costly compliance burden. In Wayfair, the Court ruled that states may require online retailers to collect sales tax on internet purchases—even if the retailer lacks any physical presence, such as a factory or office, within the state. In the months since the Wayfair decision, several states have enacted legislation requiring out-of-state sellers to collect sales tax if they meet certain criteria. Given these changes, businesses that conduct sales transactions with customers in multiple states should ask their tax advisors about pursuing a nexus review. At Capital Review Group, our nexus reviews are designed to identify a client’s past, present, and potential future sales tax collection responsibilities. We can help you formulate a plan to mitigate tax liabilities, ensure compliance with changing state laws, and implement systems and processes to monitor sales transactions completed in various states. 
  • Consider conducting a cost segregation study. In addition to the §179D deduction, one of the most powerful ways for commercial building owners to reduce their tax burdens is through the IRS-approved strategy of cost segregation. Real property is usually depreciated over 39 years, while tangible personal property is depreciated over five, seven, or fifteen years. A cost segregation study examines a parcel of real property and divides it into personal property assets—thus enabling the building’s owners to minimize taxes and boost cash flow through accelerated depreciation deductions.
  • Examine your hiring practices and determine whether you may qualify for the Work Opportunity Tax Credit (WOTC). For any business, the workforce is one of its most valuable assets—and one of its greatest ongoing expenses. WOTC grants employers an opportunity to offset some of the costs of hiring by providing a tax credit of up to $9,600 for each qualifying employee hired from a target group, as defined by the Department of Labor. These groups include veterans, recipients of government assistance, and summer youth workers. Employers must act quickly if they believe that they have made a WOTC-eligible hire: initial paperwork must be filed with the state workforce agency within 28 days of the new employee’s start date. The PATH Act extended WOTC through December 31, 2019, so now is the time for employers to review their hiring practices and determine whether they may qualify for WOTC with recent or future hires.

As your business prepares for tax season, one of the most important steps you can take is to work with an experienced tax professional to ensure that you are maximizing savings. At Capital Review Group, we work with businesses and their tax or financial advisors to claim all available tax incentives and provide guidance in light of changing laws, including the shifting landscape of state sales tax laws. Act now to begin planning for tax season—contact CRG today at 877-666-5539 to schedule a pro bono analysis!

10 Frequently Asked Questions About the Research and Development (R&D) Tax Credit

From manufacturing companies streamlining processes to architecture firms developing innovative building plans, businesses in a wide variety of industries routinely conduct research and development (R&D) activities. Unfortunately, however, many of these businesses do not realize that they may qualify for the R&D Tax Credit, a dollar-for-dollar federal tax credit that offers a powerful way for business taxpayers to boost their net profits. 

While businesses that successfully claim the R&D Credit may save hundreds of thousands of dollars in taxes, this valuable incentive is widely misunderstood. Here are answers to ten frequently asked questions to help demystify the R&D Credit:

  1. What is the R&D Tax Credit?

Also known as the Research and Experimentation (R&E) Tax Credit or the credit for increasing research activities, the federal R&D Credit was created in 1981 with the goal of encouraging American businesses to innovate. This incentive is available to business taxpayers that incur qualified research expenses (QREs) in the process of conducting qualified research activities, such as the development of new or improved products, processes, or software. 

  1. Will the R&D Credit be available in future tax years?

Yes. For many years, the R&D Credit was not a permanent part of the tax code. It lapsed every few years but was almost always renewed by Congress due to its widespread popularity. However, this pattern created uncertainty, which impaired the utility of the credit for both taxpayers and society as a whole—when there was doubt about whether or not the credit would be renewed, businesses were less likely to pursue costly innovative activities. Fortunately, the Protecting Americans from Tax Hikes (PATH) Act of 2015 permanently added the R&D Credit to the tax code, so businesses can rely on its existence now and in the future. 

  1. Isn’t the R&D Credit only for companies that engage in scientific research or develop revolutionary new products?

No! One of the most common and damaging misconceptions about the R&D Credit is that it is only available to scientists in white lab coats or high-tech companies creating the next major breakthrough. In reality, the R&D Credit rewards businesses of all sizes in a wide range of industries, including architecture, engineering, manufacturing, and construction.

  1. What types of activities qualify for the R&D Credit?

Just as businesses in several different industries may be eligible for the R&D Credit, a wide variety of activities could be considered qualified research. A few examples include: pursuing green building initiatives; developing models or prototypes; evaluating new materials or design concepts; and improving tools, machinery, or equipment used in the manufacturing process. To be considered qualified research, an activity must satisfy each prong of the following four-part test:

    • The activity must be intended to create new or improve the existing functionality of a business component.
    • The taxpayer must seek to eliminate uncertainty about the activity.
    • In attempting to eliminate the uncertainty, the taxpayer undertakes a process of experimentation designed to evaluate one or more alternatives.
    • The process of experimentation is scientific in nature and relies on physics, biology, engineering, or computer science. 
  1. Are there certain types of research activities that do not qualify for the R&D Credit?

Yes, there are several activities that are specifically excluded from the credit. For example, businesses generally may not claim the R&D Credit for activities conducted outside the U.S., the routine testing of products or materials for quality control purposes, research in non-scientific disciplines like the arts, humanities, or social sciences, and activities conducted solely with the goal of improving a product’s aesthetic appeal. 

  1. Is it worthwhile for businesses that do not have significant income tax liabilities in the current year to pursue the R&D Credit?

Yes, many businesses with lower income tax burdens may still be able to take advantage of the R&D Credit. In addition to making the credit a permanent part of the tax code, the PATH Act expanded its availability to smaller businesses and start-ups. Specifically, the new law allowed businesses that have been in operation for fewer than six years, have gross receipts of $5 million or less in the current tax year, and did not have any gross receipts in the previous five years to apply up to $250,000 per year of R&D Credits against their payroll tax liabilities. Taxpayers may also carry the credit back for up to three years and forward for up to 20 years in order to reduce their tax burdens as needed. 

  1. Does the alternative minimum tax (AMT) limit a taxpayer’s ability to take advantage of the R&D Credit? 

The AMT was designed to prevent taxpayers from eroding their tax burdens by requiring them to pay tax at a designated minimum rate, regardless of available credits and deductions. However, recent changes have reduced AMT limitations for both businesses and individuals, so many taxpayers now face fewer restrictions when claiming the R&D Credit and other incentives. Businesses are advised to consult a tax professional in order to determine whether their credits will be limited by the AMT. 

  1. What are QREs under the R&D Credit?

Qualified research expenses (QREs) are expenses that a business incurs in conducting qualified research under the R&D Credit. QREs include amounts paid for supplies, wages paid to employees who engage in qualified research or those who directly supervise or support these employees, and amounts paid to third parties who are under contract to perform R&D activities. The credit amount that a taxpayer receives equals a percentage of QREs over a certain base amount, up to a net thirteen percent of QREs. 

  1. Are R&D Credits available at the state level? 

Yes. Several states offer businesses tax credits for engaging in R&D activities, and most of these states follow the federal guidelines for determining what constitutes qualified research. Therefore, businesses may be able to claim both state and federal R&D Credits without much additional effort. At Capital Review Group, we have found that savings through state R&D Credits are often more substantial than savings at the federal level. For example, we recently worked with a mid-sized engineering firm in Phoenix that qualified for substantial state and federal R&D Credits. Based on activities like testing different design concepts, developing environmentally friendly plans, and complying with complicated building codes, the firm was able to save up to $152,000 per year in federal R&D Tax Credits and up to $234,000 per year in Arizona R&D Credits. 

  1. What should businesses do if they think they may be eligible for the R&D Credit? 

Claiming the R&D Credit is a complex process that requires thorough documentation—but if their claims are successful, businesses will be able to significantly reduce their tax burdens, thus freeing up capital to reinvest in their operations and future growth initiatives. Necessary documentation may include employee time sheets, payroll records, state and federal tax returns, and project lists. In order to assess potential eligibility and maximize savings under state and federal R&D Credits, businesses should consult experienced tax professionals like the team at Capital Review Group. At CRG, we have helped businesses in a variety of industries significantly boost their bottom lines through the R&D Credit. 

Need additional information on the R&D Credit or think that your business may qualify? Contact CRG today at 877-666-5539 to schedule a pro bono analysis!

Supreme Court Rules that States May Require Online Retailers to Collect Sales Tax

On June 21, the Supreme Court issued a ruling that overturned a 26 year-old precedent and will impose a costly compliance burden on numerous businesses that sell goods online. The Court’s 5-4 decision in South Dakota v. Wayfair held that states may require online retailers to collect sales taxes on internet purchases—even if the retailer does not have a physical presence, such as a factory, office or store, in the state. As a result, countless businesses may now need to keep track of the varying sales tax rates and rules among the nation’s more than 10,000 jurisdictions, and collect and remit such taxes for online sales. 

The Wayfair decision reverses Quill v. North Dakota, which the Supreme Court decided in 1992—before the explosion of e-commerce. In Quill, the Court held that a state’s taxing authority did not extend to businesses that had no physical presence within the state, so it would be unconstitutional to require out-of-state sellers to collect and remit sales taxes. However, as online shopping has surged in popularity, it has become increasingly common for businesses to make hundreds of thousands of dollars in sales to customers located in states to which they have no physical nexus. As a result, states have been unable to collect up to $13.4 billion per year in sales tax revenue, according to a study by the Government Accounting Office. In addition, traditional brick-and-mortar stores have complained that it is unfair that they are required to collect sales tax, while their customers can often purchase the same products from online retailers and avoid such taxes. 

The Wayfair case arose when South Dakota violated Quill by enacting a law that required businesses, regardless of their location, to collect and remit sales taxes if they made $100,000 or more in sales or at least 200 transactions per year to South Dakota residents. In essence, South Dakota’s law mandated sales tax collection for businesses with merely an economic nexus to the state, rather than a physical presence. By the time the case reached the Supreme Court, South Dakota had been joined by 41 other states, as well as brick-and-mortar retailers seeking a more level playing field. The Court agreed with their argument that Quill’s physical presence requirement no longer applies in the age of online shopping, and noted that South Dakota’s law does not unduly burden interstate commerce. However, the Court indicated that more complex or far-reaching state sales tax laws may be problematic. 

States are already responding to the decision

With states now having the freedom to tax all online transactions, businesses must stay tuned for new sales tax legislation in each state where they sell goods. Several states have passed “economic nexus” laws similar to South Dakota’s; in some states, these laws may have already taken effect, while other states will need several months to establish systems for taxing remote sales. In addition, Congress may step in to create a national framework for state taxation of online sales—some businesses, as well as the dissent in Wayfair, have advocated for this solution.

As of July 2018, states that have responded to the Wayfair decision include: 

    • Hawaii. Hawaii passed Act 41, which states that a person or business will be subject to Hawaii’s general excise tax (GET) if, in the current or preceding calendar year, they have gross income of $100,000 or more in sales, or they have entered into 200 or more separate transactions in Hawaii. Act 41 went into effect on July 1, 2018 and will not be applied retroactively. 
    • Idaho. The Idaho State Tax Commission announced that although it is still awaiting possible Congressional action, it has implemented House Bill 578. Effective July 1, this new law requires out-of-state retailers to collect sales tax on sales to Idaho customers—but only if they have an agreement with an Idaho retailer to refer customers to the out-of-state retailer for a commission, and their sales to customers in Idaho exceeded $10,000 in the previous year. 
    • Iowa. In May 2018, Iowa Governor Kim Reynolds signed Senate File 2417, which includes provisions identical to the South Dakota law. Specifically, it requires out-of-state retailers to collect Iowa sales tax if they have $100,000 or more in sales or make 200 or more transactions within the state. Senate File 2417 also requires marketplaces with multiple sellers to collect sales tax. This new law will take effect on January 1, 2019 and will not apply retroactively. 
    • Maryland . Although Maryland has not yet enacted a law governing sales tax collection for out-of-state businesses, the State Comptroller has issued a tax alert stating that it will collect sales tax as broadly as it is permitted to do so under the Constitution. The Comptroller’s office will provide additional guidance as further developments occur following Wayfair. 
    • North Dakota. On October 1, 2018, North Dakota will begin requiring out-of-state sellers to collect sales tax—unless they meet the same $100,000 or 200 transaction small seller exception that has been adopted by South Dakota and other states.
    • Wisconsin. The Wisconsin Department of Revenue issued a Statement of Scope declaring that it will begin collecting sales tax from out-of-state sellers in accordance with Wayfair on October 1, 2018. Wisconsin will also follow South Dakota’s small seller exception.

What does the Wayfair decision mean for businesses that sell goods and/or provide  taxable services from out of state? 

As businesses await state and/or Congressional action on this issue, now is the time to act to determine what impact this decision may have on your business.    

The first thing that you or your clients should consider is a nexus review. By conducting a review of the company’s tax footprint, a nexus review will help to determine whether your business has past, present, and potential future exposure. At CRG, our reviews often identify past sales tax collection responsibilities where a company exceeded the scope of the previous Constitutional protections. These amounts could be significant and there is generally no statute of limitations for non-filed returns. In addition, an online service and/or software may be subject to sales tax in another state even if it is not taxable in the home state. A company may also have additional income filing requirements. 

Once completed, a plan can be tailored to mitigate past, present, and future liabilities. One solution may be to enter into binding agreements with states to limit look-back periods and eliminate penalties and interest. Amnesty programs may also be an option if there are prior unpaid tax liabilities.

Options for future filings can also be addressed as a result of the nexus review. For example, the team at CRG can help you implement systems and processes to monitor the number and dollar value of transactions made in each state. This will allow you to determine whether you must collect sales taxes in states with economic nexus laws similar to the one passed in South Dakota. We will also guide you in understanding and abiding by the tax rates, exemptions, and any special rules that may apply in states where you or your clients make sales.

At CRG, we are experienced in helping businesses in a variety of industries understand the complex sales tax systems to which they are subject and ensure that they collect and remit accurate amounts. Contact CRG today to learn more. 

(Sources: http://www.cpapracticeadvisor.com/news/12417886/us-supreme-court-rules-in-favor-of-south-dakota-in-wayfair-sales-tax-case, https://www.practicalecommerce.com/sales-tax-expert-impact-supreme-courts-wayfair-decision, https://www.accountexnetwork.com/blog/2018/06/change-is-in-the-air-preparing-for-south-dakota-v-wayfair/, https://www.forbes.com/sites/greatspeculations/2018/06/26/dissecting-supreme-courts-internet-sales-tax-decision/#fbcd8053fbee). 

Capital Review Group Continues to Provide Tax Incentive Consulting Under New Leadership

The team at Capital Review Group (CRG) is pleased to announce that Jordan Taylor, CPA will serve as the company’s new CEO, taking over the reigns from Marky Moore. Ms. Moore founded CRG in 2004 to provide critical tax and specialty services to professional advisors, clients and institutional partners. In the years since, she has grown CRG into a leading national incentive/tax advisory firm that develops customized strategies to help clients drastically reduce their tax burdens. As the company enters a new chapter under Mr. Taylor’s leadership, Ms. Moore will continue to be with CRG during the transition and to offer her vast expertise by serving as a consultant to CRG.

“I am excited for the opportunity to lead CRG into the next phase of an amazing legacy created by Marky,” said Mr. Taylor. “Following Marky as CEO won’t be easy to do, but I’m up for the challenge.”

As a Certified Sustainable Building Advisor and an Accredited Professional for the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED AP/BD&C), Ms. Moore has been instrumental in establishing CRG as a leading provider of tax services for architects, engineers, and commercial building owners. Specifically, the company offers services in Cost Segregation, the Tangible Property Regulations, certification for the §179D deduction, business tax credits, specialty construction/engineering consulting, and more. Expanding on these services, CRG is continuing to master new ways to help clients optimize their financial health. In addition to her professional success in spearheading CRG, Ms. Moore has demonstrated her expertise as a featured speaker in the industry and the author of several articles for major industry publications. 

“Marky was a visionary in the tax incentive arena well before many of our competitors existed,” noted Mr. Taylor. “She led CRG with the highest level of integrity and an eye toward providing the absolute best support for our advisor partners and clients. Her transition out of CRG is well-deserved.”

CRG is based in Phoenix, Arizona and serves clients nationwide, with a focus on those located throughout the Western U.S. and Texas. Contact us at https://www.capitalreviewgroup.com/contact/ to learn more about what we offer or to schedule a pro bono analysis.

Completed Energy Efficiency Projects in 2017? Act Now to Take Advantage of the §179D Deduction!

Since its enactment under the Energy Policy Act of 2005 (“EPAct”), the §179D deduction has been a powerful tool for promoting sustainability while saving commercial building owners and primary designers thousands of dollars in taxes. However, this important incentive has never been a permanent part of the tax code and has traditionally expired at the end of each year. Most recently, the §179D deduction expired on December 31, 2016, sparking widespread uncertainty over whether Congress would act to renew it. 

After months of speculation, the recently enacted Bipartisan Budget Act of 2018 renewed the §179D deduction retroactively for energy-efficient projects completed last year. Therefore, eligible taxpayers may now claim the deduction for projects completed through December 31, 2017. Although this renewal is short-term, Capital Review Group is pleased to announce that we have bolstered our resources for helping our clients claim this valuable incentive. 

What is the §179D Deduction?

Section 179D of the tax code incentivizes energy efficiency measures in public and commercial buildings by providing a deduction of up to $1.80 per square foot. Specifically, the §179D deduction is worth up to $0.60 per square foot for improvements to lighting systems, $0.60 per square foot for the building envelope, and $0.60 per square foot for HVAC systems. This deduction is available to commercial building owners who install qualifying energy efficiency measures, as well as the primary designers—including architects, engineers, and contractors—of such measures in buildings owned by local, state, or federal governments.

Taxpayers may claim the $179D deduction for qualifying measures implemented in new buildings and retrofits to existing buildings. However, construction completed in 2016 or later must meet or exceed the standards enumerated in ASHRAE 90.1-2007. Energy-efficient building projects must also be certified by a qualified third party, such as CRG, to ensure that they satisfy all the requirements of §179D. 

What’s Next for the §179D Deduction?

At this time, Congress has not taken action to extend the §179D deduction for 2018 or future years. Due to the deduction’s widespread popularity, however, future extensions are possible. In the meantime, commercial building owners and primary designers who completed energy efficiency projects in 2017 should act swiftly to seize this powerful incentive while it is available. 

As CRG continues to expand our services in order to help our clients minimize their tax burdens, we are available to assist with certifying §179D projects and navigating the process of claiming the deduction. Contact the team of tax experts at CRG today by calling 877-666-5539 or visiting https://www.capitalreviewgroup.com/contact/!

Unlock the Overlooked Power of the Research and Development (R&D) Tax Credit

The Research and Development (R&D) Tax Credit saves businesses billions of dollars each year, yet less than ten percent of those savings are seized by small-to-medium-sized companies. Also known as the Research and Experimentation (R&E) Credit, the credit for increasing research activities, or simply the research tax credit, this valuable incentive is riddled with misconceptions that unfortunately cause many eligible businesses to leave substantial tax savings on the table each year.

What is the R&D Credit?

The R&D Tax Credit was developed in 1981 with the goal of stimulating innovation and technological advancement within the U.S. by helping businesses offset the high costs of research and development.  After years of expiring and having to be renewed on an almost annual basis, the R&D Credit was finally made a permanent part of the tax code in 2015 as part of the Protecting Americans from Tax Hikes (PATH) Act.  The PATH Act also expanded the credit, making it more available to smaller and newer businesses.

Who is eligible for the R&D Credit?

The R&D Credit is underutilized by many eligible businesses that erroneously assume that their activities will not qualify.  Many taxpayers associate the words “research and development” with highly scientific or technological pursuits, or assume that the credit only applies to large corporations.  In reality, the credit is available to businesses of all sizes that are engaged in a wide range of specializations, including architecture, engineering, construction, and manufacturing.  Additionally, shareholders in S-corporations and similar types of pass-through entities may be eligible to claim the R&D Credit.

What types of activities qualify?

Qualified research activities are defined by a four-part test:

  • The goal of the activity must be to create new or improve the existing functionality of a business component.  
  • The taxpayer must intend to eliminate some uncertainty about the project.
  • In attempting to eliminate the uncertainty, the taxpayer must conduct a process of experimentation.
  • The process of experimentation must be technological in nature and fundamentally rely on the principles of the physical or biological sciences, engineering, or computer science.

Examples of common activities that qualify for the R&D Credit include: developing architectural designs; pursuing state, federal, or industry certifications; green building initiatives for contractors; devising a more efficient or sustainable manufacturing process; environmental testing; and developing prototypes or models.

How does it work?

The R&D Credit is calculated on the basis of qualified research expenses (QREs), which include wages paid to employees who engage in R&D activities and amounts paid for supplies used in such activities.  Depending on which method of calculation the taxpayer uses, the credit amounts to a percentage of QREs over a certain base amount.  The credit is somewhat flexible: a business may elect to carry it back one year or forward twenty years as needed.

What else should businesses know about the R&D Credit?

The PATH Act of 2015 created an opportunity for newer businesses and those without significant income tax liabilities to benefit from the R&D Credit.  Businesses that have been in operation for less than six years and have $5 million or less in gross receipts for the current tax year and no gross receipts for the previous five years may now use the R&D Credit against their payroll tax liabilities.  They may claim up to $250,000 in R&D Credits, but the credit amount may not exceed the company’s payroll tax burden in a given quarter.  However, excess credits may be carried forward for use in future quarters.

In addition to the federal R&D Credit, most states offer some type of tax incentive for research and development.  Some of these feature rates that are even more generous than that offered by the federal credit.  Businesses seeking to claim state or federal R&D Credits should be prepared to show thorough documentation of qualifying activities, including plans, diagrams, and time sheets.

Wondering whether your firm’s projects may qualify for the R&D Credit? Call CRG today at 877-666-5539 to speak with one of our tax experts and schedule a pro bono analysis! 

(Sources: http://www.journalofaccountancy.com/issues/2010/mar/20092122, http://www.ipc.org/3.0_Industry/3.3_Gov_Relations/2008/tax_credit_whitepaper08.pdf, http://www.businessweek.com/small-business/the-rampd-tax-credit-explained-for-small-business-08162011.html, http://bipartisanpolicy.org/blog/what-research-and-experimentation-tax-credit/, http://nydailyrecord.com/blog/2015/04/20/commentary-rd-tax-credits-add-to-benefits-of-green-building).

Tax and Financial Advisors—Don’t Miss These 7 Overlooked Steps in Maximizing Savings for Your Business Clients

As a tax or financial advisor, your mission is to aid clients on their journeys to optimal financial well-being. For your business clients, proper tax planning forms an integral part of an overall financial strategy designed to maximize profitability. However, frequent changes in state and federal tax law can make it difficult to maintain a clear understanding of the applicable tax incentives and strategies that will enable you to reduce your business clients’ tax burdens.

In light of the sweeping changes brought about by the Tax Cuts and Jobs Act—the momentous tax reform law enacted in December 2017—now is the time for tax and financial professionals to reevaluate the savings opportunities available to businesses. Here are seven important—and often overlooked—steps to take in order to help your business clients maximize their tax savings:

  1. Determine whether your client has designed, constructed, or installed energy-efficient building measures.

The §179D deduction, which was recently renewed for tax year 2017 by the Bipartisan Budget Act of 2018, offers businesses that own their commercial buildings tax savings of up to $1.80 per square foot for qualifying energy efficiency measures, such as upgrades to lighting, HVAC systems, or the building envelope. This deduction is also available to primary designers, including architects, engineers, or contractors, of energy-efficient measures in government buildings. Although this popular incentive has not yet been extended for 2018 or subsequent years, businesses that completed qualifying projects in 2017 may claim significant tax savings through the §179D deduction.

  1. Consider a cost segregation study.

Another powerful way for commercial building owners to save on taxes is through the IRS-approved strategy of cost segregation, which yields accelerated depreciation deductions by simply reclassifying certain property assets. Generally, real property is depreciated over a period of 39 years, while personal property is depreciated over five, seven, or fifteen years. Therefore, taxpayers can reap the benefits of depreciation deductions more quickly with personal property assets.

A cost segregation study—which is typically performed by a qualified third party with engineering experience—divides a piece of real property into personal property assets. This enables the building owners to claim accelerated depreciation deductions, which reduces the owner’s tax burden and boosts cash flow.

  1. Review project records to determine whether the business qualifies for the Research and Development (R&D) Tax Credit.

The R&D Tax Credit—which was made a permanent part of the tax code by the PATH Act of 2015—is one of the most lucrative tax incentives for businesses. However, it is often overlooked due to the mistaken assumption that it is only available to businesses involved in high-tech or scientific research. In reality, this credit applies to a vast range of activities conducted by businesses in numerous different industries. Examples of industries that may benefit from the R&D Credit range from architecture and engineering to manufacturing and the military/defense industry.

The R&D Credit has entered an era of expanded usefulness for many businesses since the Tax Cuts and Jobs Act repealed the corporate alternative minimum tax (AMT). The AMT required businesses to pay taxes at a rate of at least 20 percent, regardless of credits or deductions for which they qualified. Businesses may now take full advantage of the R&D Credit and other incentives without having to worry about this much-maligned limitation. Therefore, now is a better time than ever to review your clients’ project records—regardless of their industry—and determine whether this valuable incentive may be available to them at the federal and/or state level.

  1. Maximize bonus depreciation for business property.

Bonus depreciation allows taxpayers to immediately deduct a certain percentage of the purchase price of business property, and then depreciate the remainder of the cost over the asset’s useful life. Through 2022, the Tax Cuts and Jobs Act has permitted businesses to deduct 100 percent of the cost during the property’s first year in service. Tax and financial advisors should ensure that their business clients take advantage of this expanded bonus depreciation in order to seize more substantial and immediate tax savings.

  1. Assess the client’s hiring practices.

Another incentive that is often overlooked by businesses is the Work Opportunity Tax Credit (WOTC), which allows employers to seize tax savings of up to $9,600 for each qualifying employee hired from a target group. Target groups include certain veterans, summer youth employees, and recipients of food stamps and other forms of government assistance. While claiming WOTC requires strict observance of deadlines (initial paperwork must be filed with the state workforce agency within 28 days of a qualifying hire’s start date), this widely beneficial incentive offers a powerful way for businesses to offset the costs of growing their workforces.

  1. Review sales tax records for overpayments and seek a refund, if necessary.

State and local sales tax rates change frequently and vary from jurisdiction to jurisdiction, making it easy for business taxpayers to become confused and pay the incorrect amounts. This is a particularly common problem among businesses that sell goods out of state. Fortunately, when businesses pay more in sales taxes than necessary, they can avoid unnecessary losses by identifying their overpayments and claiming a refund. If your business clients are subject to sales taxes, be sure to review their sales transactions and tax records.

  1. Leverage the expertise of other tax professionals.

Due to the changing nature of tax law, the best way to ensure that you are seizing all possible savings opportunities for your clients is to partner with other professionals who make it their business to keep abreast of the latest tax news. For example, the tax experts at Capital Review Group (CRG) stay up to date on new laws and IRS regulations affecting businesses. We strive to build collaborative relationships with CPAs, CFPs, CFOs, attorneys, and other tax and financial professionals, providing advisory support as we help them maximize savings for clients.

Wondering whether you are taking all steps necessary to minimize your business clients’ tax burdens? Find out with a pro bono analysis from CRG! Contact us online today or by calling 877-666-5539.

What Do Businesses Need to Know About Tax Reform?

As 2018 begins and businesses plan for the months ahead, they will have to take into consideration drastic new changes to U.S. tax law. After months of Congressional debate, President Trump signed the Tax Cuts and Jobs Act into law on December 22, and all provisions went into effect on January 1. This law, which contains over $1.4 trillion in tax cuts for individuals and businesses, represents the most significant overhaul of the tax code in more than 30 years.

Despite the several major changes ushered in by the new law, other key provisions that are crucial to business taxpayers remain intact. For example, the Research and Development (R&D) Tax Credit is still a permanent part of the tax code as it was added under the PATH Act of 2015, and cost segregation remains available as a tax-saving strategy for commercial building owners. Furthermore, the Tax Cuts and Jobs Act does not address the §179D deduction for energy-efficient commercial buildings. The §179D deduction expired at the end of 2016, and although several bills have been introduced proposing its renewal, Congress has not taken action to pass any of these bills. At Capital Review Group, we are staying tuned for any news on §179D and will post an update if this valuable incentive is renewed.

One of the stated goals of the Tax Cuts and Jobs Act is to stimulate the economy, hiring, and wage growth by alleviating the tax burden on businesses. In pursuit of this goal, the law includes several provisions that will bring sweeping changes for business taxpayers, from small businesses to large corporations. Here are some of the most important provisions:

    • Lower corporate tax rate. Previously, corporations with over $10 million of annual income were taxed at a rate of 35 percent. In recognition of the fact that this was far higher than corporate tax rates in many other developed countries, the new law has permanently lowered corporate taxes to a flat rate of 21 percent.
    • Corporate AMT repealed. The law eliminates the alternative minimum tax (AMT) for businesses. Designed to prevent high-income taxpayers from whittling away their tax burdens with credits and deductions, the corporate AMT required businesses to pay taxes at a rate of at least 20 percent—regardless of any incentives for which they qualified. Although the new tax law retains an AMT for individuals, businesses will no longer need to worry about this long-detested barrier to minimizing their tax burdens.
    • Expanded bonus depreciation. Previously, the concept of bonus depreciation allowed business taxpayers to depreciate a certain percentage of the cost of new business property during the year it was placed into service, and then depreciate the remainder over the property’s useful life. This enabled businesses to seize more substantial and immediate tax savings than they would if they depreciated the item’s cost in equal proportions over the course of its useful life. However, from now through 2022, the new tax law will permit businesses to immediately deduct 100 percent of the cost of eligible property during the year it is placed into service. In subsequent years, the maximum amount of bonus depreciation allowed up-front will reduce gradually: 80 percent will be allowed in 2023, 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026. In addition, the new law eliminates the restriction that bonus depreciation is only available for brand-new property.
    • Expanded use of the cash method of accounting. The new law will increase the number of business taxpayers that use the cash method of accounting by authorizing its use for businesses with $25 million or less in average annual gross receipts for the three previous tax years.
    • Deduction for pass-through entities. The law grants pass-through entities—which encompass many small businesses, like S-corporations, partnerships, and sole proprietorships—a tax deduction of up to 20 percent. Although this deduction will be a boon to most smaller businesses, it is not available to those that provide services (such as law firms and medical practices) and earn $315,000 or more per year.
    • Changes to the taxation of foreign profits. In addition to facing a higher-than-average corporate tax rate, American businesses have traditionally dealt with another costly obstacle: U.S. taxation of profits earned abroad. In shifting to a more territorial tax system—or one in which a company is only taxed on income earned within a country’s borders—the new law will exempt American businesses from taxation on most future profits earned in other countries. The law also addresses the issue of stockpiled foreign cash, which many companies have accrued over the years as a way to avoid the high U.S. corporate tax rate. This cash will now be subject to a mandatory, one-time tax of 15.5 percent upon repatriation to the U.S.
    • Increased §179 expensing. Section 179 of the tax code allows businesses to deduct the purchase price—up to a specified amount—of certain types of equipment, furniture, software, vehicles, or other items used for business purposes. Previously, businesses could claim a maximum §179 deduction of $500,000 for up to $2 million of qualifying purchases (with both amounts indexed for inflation). In addition to expanding the definition of §179 property, the new tax law raises the maximum deduction to $1 million for up to $2.5 million of qualifying assets.

With these sweeping changes and many more now in place under the Tax Cuts and Jobs Act, businesses must be aware of the new opportunities and potential pitfalls that could impact their bottom lines. At Capital Review Group, our team of tax experts stays updated on the latest changes in tax law. We will provide guidance for your business or your clients’ businesses, ensuring that all available opportunities for tax savings are maximized. Contact CRG today to schedule a pro bono analysis!

(Sources: https://www.journalofaccountancy.com/news/2017/dec/tax-reform-bill-changes-for-businesses-201718071.html, https://www.congress.gov/bill/115th-congress/house-bill/1?q=%7B%22search%22%3A%5B%22hr+1%22%5D%7D&r=1, https://www.businessnewsdaily.com/10357-small-business-tax-reform-changes.html).

Tax Savings Opportunities for California Businesses

With a goal of spurring the economy and helping businesses thrive in California, the state has created several incentives and other opportunities for businesses to greatly reduce their tax burdens. These lucrative opportunities—which are often overlooked by business taxpayers—include the California Competes Tax Credit, grants for training employees, and the partial sales and use tax exemption for manufacturing and R&D equipment.

California Competes Tax Credit

Designed to attract and retain business, the California Competes Tax Credit is available to organizations that would like to come, stay, or grow in California. Eligible businesses may use the credit against their state income or franchise taxes. For fiscal year 2017-2018, the state has made over $230 million available through the California Competes Tax Credit, with 25 percent reserved for small businesses (defined as those with less than $2 million in revenue). As a result, businesses of all sizes may save tens or hundreds of thousands of dollars through this credit.

Applying for the California Competes Tax Credit is a competitive process, and eligibility is based on certain milestones related to hiring and investment activities. GO-Biz, the agency that negotiates the tax credit agreements, examines applicants based on 11 different factors, including the number of jobs that an applicant creates or retains, employee compensation, and the applicant’s opportunities for future growth. Recipients of the California Competes Tax Credit are subject to required reporting and oversight by GO-Biz.

The upcoming application periods for 2018 are as follows:

  • January 2 through January 22, 2018
  • March 5 through March 26, 2018

California Training Grants

Another way in which California supports the success of in-state businesses is by providing grant funding to offset the costs of training new and existing employees. Small businesses may receive $26 per training hour, while larger businesses are eligible for grants of $18 per hour. Qualifying training includes many activities that businesses perform in the course of their normal operations, such as classes, learning luncheons, and new employee onboarding.

To receive a training grant, a business must have a non-voluntary turnover rate of less than 20 percent, and employees must earn at least $15.50 per hour after their training is complete. The Employment Training Panel (ETP) gives preference to businesses that:

    • Have fewer than 100 employees
    • Request $100,000 per year or less
    • Are manufacturers, technology firms, or technical professional firms
    • Are facing out-of-state competition

Sales Tax Exemption for Manufacturing and R&D Equipment

Since July 1, 2014, California has allowed manufacturers and certain businesses engaged in research and development (R&D) activities to obtain a partial exemption on the sales and use taxes associated with the purchase or lease of manufacturing or R&D equipment. With the partial exemption rate currently set at 4.1875 percent, qualifying equipment is taxed at 3.3125 percent as opposed to the statewide rate of 7.5 percent—a difference that can save businesses millions of dollars.

In July 2017, Governor Jerry Brown signed into law AB 398, which has expanded the sales tax exemption and extended it through June 30, 2030. This new law extends the exemption to taxpayers engaged in certain types of conventional and renewable electric power generation, distribution, and storage, as well as some agricultural businesses.

To benefit from this exemption, a business must:

    • Be a “qualified person” primarily engaged in certain types of business, including manufacturing and R&D in biotechnology or the physical, engineering, or life sciences
    • Purchase “qualified property,” such as equipment and machinery
    • Use the qualified property for permitted purposes, such as R&D activities, any stage of the manufacturing process, or other purposes enumerated by the law

As an incentive and tax advisory firm, Capital Review Group offers the in-depth knowledge needed to help California businesses or their tax professionals maximize savings through these opportunities. We can assist you with determining eligibility, completing the application process, ensuring compliance, and more. Contact CRG to learn more or schedule a pro bono analysis!

Tax Savings in the Present May Yield Substantial Income in the Future

For business owners seeking to boost net profits, taking advantage of all possible opportunities for tax savings offers a powerful solution. As they build their businesses, however, it is also crucial that owners plan for retirement and ensure that their tax and financial strategies are designed to support them in their later years. Fortunately, with some strategic planning, tax savings available to business owners may enable them to build future wealth, create comfortable lifestyles in retirement, or leave legacies for their families.

At Capital Review Group, our team of tax experts has helped business clients in a variety of industries maximize savings through often-overlooked incentives and strategies found in the tax code. The following examples represent real tax savings achieved by our clients, as well as demonstrations of how the amounts saved may be invested in order to generate future tax-free income—helping business owners reach their financial goals for retirement and beyond.

Hotel Owners Save $700,000 through Cost Segregation and Transform it into a Legacy for Their Children

A family-owned hotel on the East Coast was thriving, generating considerable income for the aging owners. However, a significant burden was growing along with the hotel’s success: taxes. The owners sought to minimize their tax liability as a way to ensure continued success for the hotel and financial well-being for their family. Fortunately, they were able to use the IRS-approved strategy of cost segregation to unlock substantial tax savings by simply changing the classification of certain assets in the hotel building.

Typically, real property is depreciated over 39 years for tax purposes, while personal property is depreciated over five, seven, or fifteen years. A cost segregation study uses engineering principles to reclassify certain real property assets as personal property—allowing commercial building owners to seize more substantial and immediate deductions. As a result of a cost segregation study performed by CRG, 29 percent of the hotel’s assets were reclassified as personal property, saving the hotel owners approximately $700,000 in taxes over a five-year period.

Since the hotel owners were beginning to plan for retirement, they decided to invest their six-figure savings in a tax-efficient estate plan that included life insurance. Due to strategic use of their tax savings, the estate plan is projected to yield a $2,241,265 tax-free death benefit guaranteed for 43 years—an amount that will help the owners fulfill their goal of ensuring that the hotel will have enough liquidity to stay in the family for generations.

Cost Segregation Saves Building Owners $300,000, Yielding a Potential $3.3 Million of Tax-Free Retirement Income

A married couple in the Phoenix area owned two successful medical practices: the husband was a renowned veterinarian, while the wife was a trusted OB/GYN. The couple also owned the buildings in which they had their offices. As their practices grew and prospered, the couple faced mounting tax liabilities every quarter. They knew that they had to cut costs in order to continue providing their patients with optimal care.

After consulting CRG, these ambitious medical professionals learned that as commercial building owners, they may be able to reduce their tax burdens through cost segregation. CRG performed a cost segregation study on their buildings, reclassifying several real property assets as personal property. As a result, the couple saved almost $300,000 in taxes, which allowed them to eliminate their tax liability for two full years and part of another.

The substantial tax savings helped the couple grow their businesses and inspired them to start planning for retirement. They met with their financial advisors and learned that if they were to apply the $300,000 savings toward a life insurance retirement plan (LIRP), they could receive an estimated $94,884 of tax-free income per year between the ages of 65 and 100—which would total over $3.3 million. By using their building assets to minimize their tax burden and applying those savings toward a retirement plan, the couple can be sure that they will enjoy a comfortable lifestyle long after their years of serving patients have ended.

R&D Credit Saves Architecture Firm $188,000—An Amount that Could Represent Over $14 Million of Tax-Free Retirement Income

The Research and Development (R&D) Tax Credit saves large corporations billions of dollars each year, but is often overlooked by eligible small and medium-sized businesses in a variety of industries. An architecture firm in Washington discovered the power of the R&D Credit when it claimed $188,000 in tax savings for designing a new, energy-efficient school building. By requiring the firm to evaluate and implement innovative design techniques, the project satisfied the R&D Credit’s four basic requirements:

    • Intent to create new or improved functionality of a business component, such as a product, process, or software.
    • Elimination of uncertainties regarding the activity’s design, process, method, or cost.
    • A process of experimentation, such as modeling, testing, or informal trial and error, designed to resolve uncertainties.
    • Reliance on the principles of engineering, biology, physics, or computer science.

The architecture firm worked with CRG to prepare the necessary documentation, such as project lists and payroll reports, and maximize tax savings under the R&D Credit. CRG also estimated that based on the firm’s routine activities, it may be able to repeat a tax savings of approximately $188,000 each year for seven years—resulting in a total savings of $1,316,000 through the R&D Credit alone.

However, the benefits of the credit may not end with the firm’s significantly reduced tax burden. After consulting a financial advisor, the owners of the firm learned that if they were to invest the $1.3 million of tax savings in a LIRP, they could receive over $406,000 of tax-free income per year between ages 65 and 100. This may result in a staggering $14 million or more in retirement income to support the architecture firm’s owners during their later years.

These case studies represent just a few examples of how business owners can use the tax code to generate wealth, boosting their net profits through tax savings and applying those savings to high-growth, tax-efficient retirement plans. To learn more about the lucrative opportunities for tax savings that may be available to your business or your clients’ businesses, contact CRG today!

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