The IRS has issued the final regulations for Code Section 45X under the Inflation Reduction Act, aimed at enhancing domestic clean energy manufacturing. The Advanced Manufacturing Production Credit incentivizes the production and sale of clean energy components such as solar panels, wind parts, inverters, battery components, and critical minerals, provided they are manufactured in the U.S. or its territories.

Key Updates:

• The credit is based on the eligible components produced and sold within the tax year and works in conjunction with the Section 48C credit for advanced energy projects.
• Earlier this year, the IRS released initial guidance and proposed regulations. Following extensive feedback and a public hearing, the final rules have been refined.
• Material costs for critical minerals and electrode active materials are now included in the credit calculation, and the use of recycled materials is permitted.

To qualify, the property must be produced at a Section 45X facility, which cannot also be a Section 48C facility. A Section 45X facility is defined as independently functioning tangible property necessary for the taxpayer to be considered the producer of the qualified components.

To prevent duplication, fraud, or improper credit amounts, the anti-abuse rule disallows the Related Person Election if the required information is not provided or if the components are improperly used or defective. However, defects arising after the sale are usually acceptable.

Since the start of the Biden-Harris administration, $450 billion in new clean energy investments have been announced, with $275 billion occurring post-Inflation Reduction Act. This includes significant investments in batteries, critical minerals, solar, and wind. The regulations aim to level the playing field for U.S. companies and boost domestic production of clean energy technologies.

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Key Changes to Section 45X

1. Inclusion of Material Costs:
   • Material costs for critical minerals and electrode active materials are now included in the credit calculation.
   • Mining and extraction costs are also considered in the credit calculation.
2. Use of Recycled Materials:
   • The final regulations clarify that eligible components can be produced using recycled materials. This was not explicitly stated in the proposed regulations but was included in the final regulations based on stakeholder feedback.
3. Definitions and Clarifications:
   • The definition of “produced by the taxpayer” was refined to mean a process that substantially transforms constituent elements, materials, or subcomponents into a complete and distinct eligible component.
   • The final regulations specify that both primary and secondary production (including using recycled materials) are included in the definition of “produced by the taxpayer.”
4. Facility Requirements
   • Property must be produced at a Section 45X facility, which cannot also be a Section 48C facility. A Section 45X facility is defined as independently functioning tangible property necessary for the taxpayer to be considered the producer of the qualified components.
5. Anti-Abuse Rule:
   • The anti-abuse rule disallows the Related Person Election if the required information is not provided or if the components are improperly used or defective. However, defects arising after the sale are generally acceptable.
6. Interaction with Section 48C:
   • The final regulations further clarify the interaction between Sections 45X and 48C, ensuring that property qualifying for the Section 45X credit must be produced at a Section 45X facility and not at a Section 48C facility.

If you have questions or want to discuss, please don’t hesitate to reach out to CFO Services.

IRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. 

October 2024

IRS Finalizes Regulations for Advanced Manufacturing Investment Credit

The IRS has finalized the rules for the advanced manufacturing investment credit under Code Sec. 48D. This credit, created by the CHIPS Act of 2022, is designed to boost U.S. production of semiconductors and related equipment by offering a 25% credit for qualified investments in advanced manufacturing facilities.

To qualify, the property must be put into service after December 31, 2022, with construction happening between August 9, 2022, and December 31, 2026.

First issued on March 23, 2023, these rules lay out who’s eligible, what counts as qualified property, and the construction requirements. They also include a 10-year credit recapture rule for major foreign expansions. There was a lot of feedback from groups like the U.S. Chamber of Commerce wanting more explanation, so the final rules now have broader definitions, covering semiconductor wafer production but not precursor materials like polysilicon. These rules also clarify definitions and expand what counts as semiconductor fabrication and packaging. They refine the rules on significant foreign expansions, focusing on transaction types rather than monetary thresholds.

The final regulations take effect on December 23, 2024, providing clear guidelines and incentives for the semiconductor manufacturing industry.  The following are the areas of the regulations that were changed in the final regulations. 

Summary of Comments and Explanation of Revisions

Overview

The final regulations retain the basic approach of the proposed regulations with certain revisions based on public comments. Definitions of “semiconductor manufacturing,” “semiconductor manufacturing equipment,” and “significant transaction” have been clarified.

The examples of semiconductor manufacturing equipment were included in the final regulations. The final regulations provide a comprehensive list of specific types of equipment that qualify as semiconductor manufacturing equipment.  This broadened and clarified certain uncertainty in the proposed regulations.  Below are the equipment areas listed.

Included Examples of Semiconductor Manufacturing Equipment

1. Deposition Equipment:
   • Chemical Vapor Deposition (CVD)
   • Physical Vapor Deposition (PVD)
   • Electrodeposition
   • Atomic Layer Deposition (ALD)
2. Etching Equipment:
   • Wet etch
   • Dry etch
3. Epitaxial Growth Equipment:
   • Equipment for epitaxial growth of transistor features
4. Chemical-Mechanical Polishing Equipment:
   • Equipment to planarize layers through the semiconductor fabrication process
5. Lithography Equipment:
   • Steppers and scanners of various light wavelengths (e.g., deep UV, extreme ultraviolet (EUV))
   • Photoresist coating and developer tracks
6. Wafer Production Equipment:
   • Equipment for producing ingots and boules
   • Wafer growth equipment
   • Wafer slicing equipment
   • Wafer dicing equipment
   • Wire bonders
7. Inspection and Measuring Equipment:
   • Scanning electron microscopes
   • Atomic force microscopes
   • Optical inspection systems
   • Wafer probes and optical scatterometer
   • Energy Dispersive Spectroscopy (EDS)
8. Metrology and Inspection Systems:
   • Systems to measure critical dimensions of integrated circuit features
   • Systems for detection and measurement of defects on wafers
9. Ion Implantation and Diffusion/Oxidation Furnaces
10. Specialty Glass Components:
    • EUV mirrors and optical pathways
    • Lenses and mirrors used in inspection equipment and other fabrication processes
    • Lens assemblies for wafer defect inspection
11. Electrostatic Chucks
12. High Performance Pumps
13. High Purity Quartz Devices
14. Ultra-High Vacuum Chamber Components
15. Photomasks and Light Sources:
    • Used in photolithography

Clarifications

• Non-Exclusive List: The list provided in the final regulations is non-exclusive, meaning other types of equipment that meet the criteria can also qualify as semiconductor manufacturing equipment.
• Subsystems: The definition includes subsystems that enable or are incorporated into the manufacturing equipment.

These examples and clarifications were added to provide more certainty and guidance to taxpayers on what constitutes semiconductor manufacturing equipment for the purposes of the advanced manufacturing investment credit.

Next are the key clarifications and changes made to the sections of the final regulations. 

Comments on and Changes to Proposed §1.48D-1

Clarifications were made regarding the exclusion of qualified rehabilitation expenditures from the qualified investment.

Comments on and Changes to Proposed §1.48D-2

Clarifications were made on the method for determining the portion of basis attributable to construction after the enactment date, and the definition of “foreign entity of concern” was updated.

Comments on and Changes to Proposed §1.48D-3

Clarifications were made on what constitutes “qualified property” and “property integral to the operation of an advanced manufacturing facility.”

Comments on and Changes to Proposed §1.48D-4

The definition of “advanced manufacturing facility” was revised to remove the term “finished” and clarify the primary purpose requirement.

Comments on and Changes to Proposed §1.48D-5

Clarifications were made on the beginning of construction rules, including the physical work test and the five percent safe harbor.

Comments on and Changes to Proposed §1.50-2 The definition of “significant transaction” was revised to align with the Commerce Final Rule, and the rules for determining “applicable taxpayer” were clarified.

If you have questions or want to discuss, please don’t hesitate to reach out to CFO Services.

IRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. 

October 2024

Grigsby v. United States: Research Tax Credit Case

Leonard and Barbara Grigsby claimed the Research Tax Credit for their company, Cajun Industries, focusing on oil refinery and flood control projects. To qualify, research must be technological and useful for new or improved business components, but not funded by grants or contracts.

The IRS challenged their claim, and the U.S. District Court for the Middle District of Louisiana ruled against them. The court found their projects didn’t meet the necessary criteria and noted they failed to update their claims from products to processes in time. Some projects were also funded, making them ineligible.

The 5th U.S. Circuit Court of Appeals upheld this decision, agreeing that the projects didn’t qualify and were funded. The court confirmed the IRS’s assessment was correct, and the Grigsbys couldn’t prove otherwise.  In the case of Grigsby v. United States, it is likely that SCOTUS did not see the case as presenting a significant federal question or a conflict that needed resolution at the national level.  The decision of the 5th U.S. Circuit Court of Appeals was likely deemed sufficient to resolve the issues at hand.

1. Background and Legal Framework:
   • The R&D tax credit, under Section 41 of the Internal Revenue Code, provides a tax credit for qualified research expenses, including wages and expenditures incurred in pursuit of qualified research.
   • Qualified research must be technological in nature and intended to develop new or improved business components.
   • Research funded by grants, contracts, or other external sources is not eligible for the credit.
2. Court Findings:
   • The court found that Cajun Industries’ projects did not meet the criteria for qualified research because they were not sufficiently technological and were funded by external contracts.
   • The Grigsbys argued that their contracts were not funded in a way that disqualified them from the credit, but the court disagreed, stating that the contracts were contingent on the success of the research.
3. Implications for Taxpayers:
   • This case highlights the importance of ensuring that research activities meet all criteria for the R&D tax credit, including the requirement that the research is not funded by external sources.
   • Taxpayers must carefully document their research activities and ensure that they can substantiate their claims for the credit.

If you need further details or have specific questions, please reach out to CFO Services.

IRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. 

The summer of 2024 might have seemed slow for the credits and incentives news cycle, but there was a bit still happening.  Below is a summary of the items taking place in regard to the IRA credits. 

45Q Procedures (Notice 2024-60)

Navigating the 45Q Tax Credit for Carbon Oxide Sequestration

Claiming the 45Q tax credit for carbon oxide sequestration involves multiple steps. To begin, taxpayers must ensure that carbon capture equipment is installed at a qualified facility. Next, they need to prepare a detailed lifecycle analysis (LCA) report, which outlines the greenhouse gas emissions linked to their carbon capture and sequestration activities.

This comprehensive report, along with supporting documents, must be submitted to both the IRS and the Department of Energy for approval. Upon receiving approval, taxpayers are then eligible to claim the 45Q tax credit.

By following these following steps, taxpayers can effectively leverage the 45Q tax credit to support their carbon sequestration efforts and contribute to a more sustainable future.

1. Installation of Carbon Capture Equipment:
   • Ensure that the carbon capture equipment is installed at a qualified facility. This facility must meet specific criteria set by the IRS to be eligible for the tax credit.
2. Lifecycle Analysis (LCA) Report:
   • Prepare a comprehensive LCA report. This report should detail the greenhouse gas emissions associated with your carbon capture and sequestration activities. It includes:
     • The amount of carbon oxide captured.
     • The methods used for capturing and sequestering the carbon oxide.
     • The environmental impact of the sequestration process.
3. Submission for Approval:
   • Submit the LCA report along with all supporting documents to both the IRS and the Department of Energy. This step is crucial for verifying the accuracy and legitimacy of your carbon sequestration efforts.
4. Claiming the Credit:
   • Once you receive approval from both the IRS and the Department of Energy, you can claim the 45Q tax credit on your tax return. This credit can significantly reduce your tax liability, making it a valuable incentive for carbon sequestration projects.

By following these steps, taxpayers can effectively leverage the 45Q tax credit to support their carbon sequestration efforts and contribute to a more sustainable future.

Final PWA Regulations Issued

New IRS Regulations on Prevailing Wage and Apprenticeship Requirements

The IRS has issued final regulations under the Inflation Reduction Act of 2022 (IRA) concerning prevailing wage and apprenticeship (PWA) requirements. These regulations are essential for taxpayers aiming to qualify for increased credit or deduction amounts under the IRA:

1. Prevailing Wage Rates:
   • Employers must pay workers prevailing wage rates for the construction, alteration, or repair of facilities. These rates are determined by the Department of Labor and are intended to ensure fair compensation for workers.
2. Apprenticeship Ratios:
   • Employers must adhere to specific apprenticeship ratios. This means that a certain percentage of total labor hours must be performed by qualified apprentices. The goal is to promote training opportunities and develop a skilled workforce within the clean energy industry.
3. Compliance and Penalties:
   • Failure to meet these requirements can result in penalties and reduced tax benefits. Employers must maintain accurate records and documentation to demonstrate compliance with the prevailing wage and apprenticeship requirements.

By complying with these regulations, employers can benefit from increased tax incentives and contribute to a more equitable and skilled workforce in the clean energy sector.

One clarification is that these final regulations do not apply to 48 or 48E ITC credits, but hopefully the IRS will make that adjustment some time this fall. 

Clean Fuel 45Z Registration Process (Notice 2024-49)

IRS Outlines Steps for Clean Fuel Production Credit Registration

The IRS has detailed the registration process for the Clean Fuel Production Credit, outlining several key steps for producers to follow:

1. Application Submission:
   • Producers must submit an application to the IRS. This application should include detailed information about the taxpayer, the production facility, and the type of clean fuel being produced. The application process ensures that only eligible producers can claim the credit.
2. IRS Review:
   • The IRS will review the application to ensure all required information is provided and that the producer meets the eligibility criteria. This review process helps maintain the integrity of the credit program.
3. Registration Letter:
   • Upon approval, the IRS will issue a signed registration letter to the producer. This letter serves as official confirmation that the producer is registered and eligible to claim the Clean Fuel Production Credit.
4. Ongoing Compliance:
   • To maintain eligibility, producers must comply with all ongoing reporting and record-keeping requirements. This includes submitting periodic reports to the IRS and maintaining accurate records of clean fuel production activities.

These steps are designed to streamline the process and ensure that only qualified producers benefit from the Clean Fuel Production Credit.

CFO Services Testifying in August on 48E/45Y Proposed Regulations

Public Hearing on Clean Electricity Credits Highlights Key Clarifications

A public hearing was held on August 12th and 13th to discuss the proposed regulations for Section 45Y Clean Electricity Production Credits and Section 48E Clean Electricity Investment Credits. The meeting featured 44 speakers, including Nick Panko from CFO Services, who provided valuable insights and suggestions to help taxpayers better understand the qualifications.

Key suggestions and clarifications discussed during the hearing included:

1. Qualified Facility Definition:
   • Clear Examples: Provide examples that clearly define what constitutes a qualified facility. This helps taxpayers understand the specific criteria that must be met.
   • Code Consistency: Review and ensure there is no ambiguity between different code sections. Consistency across sections helps prevent confusion and ensures that taxpayers can accurately determine their eligibility.
2. Reference Requirements:
   • If the “Constructed by the taxpayer” and “Original use” requirements are necessary for Production Tax Credits (PTCs), they should be referenced from Section 48E into Section 45Y or directly included in Section 45Y. The current inconsistency could allow taxpayers to count non-qualified investments to meet the 80/20 rule. Specifically, under Section 45Y, a taxpayer could include “non-original use” equipment as FICP under the 80/20 rule.
3. 80/20 Rule:
   • Integral Property Inclusion: Clarify whether integral property should be included in the 80/20 rule under Section 45Y.
   • Rewording for Clarity: Reword Section 1.48E-4(c)(5) to ensure it does not imply that adding new to used components should be excluded. While examples help, the paragraph remains unclear.
   • Original Use Clarification: Clarify if “Original Use” is included in the 80/20 rule. It seems implied but is not clearly defined. If the 80/20 rule is meant to be consistent across code sections, it should be clarified whether “original use” property is included within the qualified facility. Specifically, a new component in Section 1.45Y-4 does not require satisfying the “original use” condition. Therefore, a taxpayer under Section 1.45Y-4 could include property that is “new to the taxpayer.” This property might be a used piece of equipment that is new to the taxpayer, thus becoming a new component of property. This distinction should be clarified across Sections 1.45Y-4 and 1.48E-4, as well as the coordinating code sections. It’s important to make this clear because a new component versus a new “original use” component could be defined as two different costs.

These discussions and suggestions aim to provide clearer guidelines and ensure consistency across the regulations, ultimately helping taxpayers navigate the complexities of qualifying for clean electricity credits.

If you need further details or have specific questions about any section, feel free to ask!

IRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. 

In Brief

• Based on IRS Notice (2023-63), companies might not be capturing all costs for 174 
• 174 costs includes Overhead Labor, Depreciation allowance, and others.  
• 174 deduction excludes costs from Administrative Departments. 

A lot of companies had their first introduction filing the 174 R&D deduction (“174”) this past year. If a company had software development or wanted to claim the R&D Credit, they did not have a choice. The Tax Cuts and Jobs Act required all taxpayers with research expenses to capitalize and amortize these expenses over a 5- or 15-year period, depending on whether the expenses were domestic or foreign.  

Although the 174 deduction is intricately connected with the R&D credit, what qualifies for the 174 deduction is broader, both in qualification and the scope of expenses. As with the R&D Credit, there is a level of judgement needed to determine what activities should be qualified under the 174 deduction. Initially there was a surprise in the level of unambiguity about which expenses should be included.  

The Internal Revenue Service stepped in to help and gave some much-needed guidance (Notice 2023-63) on many things surrounding the 174 deduction, one of which was the scope of expense to include. From the IRS notice, they helped specify which 174 costs should and should not be included. The notice categorizes expenses that are “incident to the development or improvement of a product, a component of a product, or subcomponent of a product,” which is a key definition found in the R&D deduction regulation.  

Based on the guidance the IRS gave, in the initial year most companies did not capture all the expenses for the 174 deduction.  This will most likely lead to adjustment in the next year to the scope of expenses included for the 174 deduction.  Also, this article does not cover software development, which is also included in the notice and required to be included under 174.    

R&D Deduction Cost Categories 

Any company that has research activities needs to review and make sure they examine whether they had any of the expense categories the IRS specified. Here are categories the IRS wants companies to review and add to their R&D deduction expenses: 

Overhead Labor Costs:  

In addition to wages, companies need to pick up all elements of compensation including stock-based compensation, overtime pay, vacation pay, holiday pay, sick leave pay, payroll taxes, pension costs, employee benefits, and payments to a supplemental unemployment benefit plan. A surprise is companies do not have to account for severance compensation. Yet, aside from this exception, companies should include all fringe benefits expenses that are attributed to qualified employees.  

Overhead Materials and Supply Costs:  

If there were materials and supplies, including tools and equipment that were used and consumed in qualified activities these should be part of the 174 expenses. Similar to the R&D Credit, these should be only tangible items, software or software licenses would be excluded.  Software is included in 174 but addressed separately in the notice and not addressed in this article.   

Cost Recovery Allowances:  

This would be property that is depreciated and amortized for a company. It should only be depreciated property that was necessary in qualified activity. The notice gave the example of a “test bed” for research as property costs that should be included. 

Patent Cost:  

These costs connected with obtaining a patent, such as attorneys’ fees expended in making a patent application. 

Travel:  

Any travel expenses related to the direct involvement or support of qualified activities.  

Operational Costs:  

Certain operation or management expenses should be included, including costs that were a part of maintaining facilities and equipment used for qualified activities. The IRS notice highlights rent, utilities, insurance, taxes, repairs and maintenance and security costs as expenses that fit into the category. 

Excluded R&D Deduction Costs 

The IRS does make clear certain types of expenses that should be excluded, which provides clarity for 174.  

In the notice, the IRS stated any costs from general or administrative departments should not be treated as 174 expenses. There are many departments that only indirectly support or benefit qualified activities. Payroll, Human Resources, and Accounting were all departments called out as excluded in the notice. This gives companies an important boundary around qualified expenses. Not all expenses that could relate to qualified activities are qualified expenses. There is a clear fence that stops administrative departments from being included in R&D deduction.  The notice also excludes debt interest, software costs after development and website content costs as also excluded from 174.   

Some more guidance? 

Although this notice is welcomed, companies should be aware more could be coming. The IRS stated companies should have confidence with their areas in which they clarified, but more clarification—and possible expansion to expenses—could be given. Yet with this new guidance from the IRS, companies should have a better understanding as to what expenses should be in their 174 deductions, and most importantly, what should not. The expenses that should be included might be more than companies initially thought, but it is important to note that there were also limits given on the scope of 174 expenses. 

IRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. 

In Brief

• AI (Artificial Intelligence) can allow companies to dynamically gather data through IDP 
• IDP does have limitations in how it analyzes and extracts data. 
• AI has tools to incorporate OCR into IDP to expand data analysis. 

As AI is still being hashed out for its maximum potential, there are aspects of this newly founded technology that can benefit a company in its everyday processes or tasks. 

AI models and programs are still being developed. Some companies are already using AI for intelligent Document Processing (IDP). But what does a company do when their data is poor? Normally, a company can use Optical Character Recognition (OCR) technology to take document images and convert them to digitized text. But this process is isolated, only being able to analysis one document at a time. But with the assistance of AI tools, OCR data can be captured and used for IDP, making it more consumable for the company.  

IDP Example 

IDP can occur by extracting information from various areas within an organization. This could be from invoices, text found in photos and PDFs, receipts, and information from documents.  

Many of these items are used in applications that are limited in their ability to process data as well. Adobe is an application that hosts pdfs but does not engage in any data processing activities. Microsoft, with its Power Automate, can process and load data into tables and models but needs access from IT departments. 

But when setup, Power Automate can take good and bad invoice documents and perform IDP and extract invoice data correctly. And even after completing the task, it can offer a confidence score as this is AI making and attempt to pull the correct fields and information for how the user requests it. The higher the confidence score the more reliable the IDP process. 

This is not just a guess for the AI model, when creating the model, you can set the fields and pick out where that field should be within the document. For the IDP aspect of power automate, it will attempt to match what the user set as training material to what it is given for a test and try its best to give the correct output.  

Challenges with IDP 

IDP is capable at some levels, yet even with a confidence score, there will be times when finding and connecting data is too difficult. Too much volume (data size). Too much velocity (rate of change). Too much variety (breadth of sources). Experiences like this for data connectivity are too fragmented and data often needs to be reshaped before consumption. But any shaping is one-off and not repeatable. 

So, there are limitations to IDP as it may never be 100% confident. Especially when the source document is custom and complex due to its readability or over presentation of information. For other documents, it may make sense for time to be spent cleaning up documents for it to become easier for AI programs to read them. Correcting documents is not a one size fits all type of change as some documents, especially scanned in documents may have portions where the data quality is poor, which makes it difficult for IDP to occur.  

It would take enormous amounts of effort and non-value add time to convert files and sometimes boxes of invoices into consumable data for detailed analysis. One goal might be getting all those invoices and extracting the data into a table.  

AI to use OCR to convert PDF 

There are AI tools available that can convert these files into data that is more consumable, but it is important to evaluate the tool in comparison to the specific technology requirements at your organization. Here is a simple list of areas to review when deciding on an OCR conversion tool. 

• Does it connect to other tax processes? 
• Will my IT department allow access? 
• Can it extract data from a table on the PDF/invoice/agreement? 
• Can I use it as a model to train for other types of documents? 
• Are there any firewall/security issues with the data being extracted? 
• Easily drag/drop multiple files to have mass data extraction? 
• Processing time? 
• Cost structure? 

One of the most notable features of using AI to extract data is if the model can be trained: learning about the specific types of invoices (vendors, locations, etc.) a company might produce. Yet, it is important that whatever model or tool is selected, it allows the tax department to easily train the model to pick the data off the document.  

IRS CircIRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. 

In Brief

• Available to companies that invest in Carbon Capture projects. 
• Base Credit is $17 per ton based on geologically sequestered carbon oxide  
• Credit amount is increased 2 times per ton using DAC 
• Using prevailing wage and apprenticeship requirements further increases the Credit 5 times per ton. 
• Claimed for 12 years starting when the equipment placed in service. 

Companies involved with carbon sequestration have an opportunity for a new tax credit– commonly called 45Q referring to the code section. It incentives companies to receive tax benefits by making further investments in carbon capture, utilization, and storage.

45Q allows companies to receive tax credit for each metric ton of qualified carbon oxide (QCO) captured using carbon capture equipment, which could either be disposed of in a secure geological storage or used as a tertiary injection in certain oil or natural gas recovery projects.

A company can claim 45Q for a 12-year period beginning when the carbon capture equipment is originally placed in service.

Do You Qualify? 

This credit is available to companies that invest in carbon capture, utilization, and storage (CCUS) projects. CCUS is a technology that captures carbon dioxide (CO2) from industrial processes and other sources, such as power plants, and stores it underground or uses it for other purposes.   

How is the credit calculated? 

45Q revolves around the production of gases and is based on the capturing of CO2. So, weight and storage capacity are factors that contribute to how much credit a company will generate. For Carbon Oxide that is disposed of in a secure storage, the applicable credit is $17 per ton. Carbon Oxide as a tertiary injectant in a qualified enhanced oil or natural gas recovery project, commonly referred to as Enhanced oil recovery (EOR), the applicable credit is $12.  

If a company uses direct air capture (DAC) facilities, the applicable credit is multiplied roughly 2 times per ton. Furthermore, for a company that satisfies 45Q’s prevailing wage and apprenticeship requirements, the credit amount is increased by 5 times per ton.  

What are the steps to file? 

The 45Q credit is one of the few credits that is available for the “elective payment” refundable to taxable entities.  This allows taxpayers to receive a refund regardless of the tax liability.  A company aiming to claim 45Q will need to pre-register online with the IRS to receive an identification number, which is consistent for all tax credits within Inflation Reduction Act (IRA). Once a company has received an identification number, they can claim the 45Q on the tax return.  This registration process needs to be performed every year claiming the 45Q.  

IRS CircIRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. 

In Brief

• Transferable credits are available to companies that qualify under the Inflation Reduction Act. 
• A company can sell transferable credits to multiple buyers. 
• Companies purchase transferable credits, usually at a discount, to reduce tax liabilities.  
• A transfer statement and the required documentation are necessary to sell credits. 

What Is Transferability?

Transferability is the ability to exchange (i.e. sell) credit to another eligible entity. Taxpayers can either sell all or a portion of a tax credit to an unrelated third-party transferee in exchange for cash. Here is a list of the IRA tax credits that can be transferred and sold. 

• Energy Credit (48) 
• Clean Electricity Investment Credit (48E) 
• Renewable Electricity Production Credit (45) 
• Clean Electricity Production Credit (45Y)  
• Zero-emission Nuclear Power Production Credit (45U) 
• Advanced Manufacturing Production Credit (45X) 
• Clean Hydrogen Production Credit (45V) 
• Clean Fuel Production Credit (45Z) 
• Carbon Oxide Sequestration Credit (45Q) 
• Credit for Alternative Fuel Vehicle Refueling/Recharging Property (30C) 
• Qualified Advanced Energy Project Credit (48C) 

Why Sell/Transfer? 

In the scenario that the Seller’s credit exceeds their tax liability, they are eligible and have the option to transfer a portion or the entirety of that credit amount. This allows certain entities (including tax-exempt) to generate “cash” from the qualified energy projects. 

Why Buy? 

Buyers of transferable credits can offset current tax liability with the purchased credits, and they are typically purchased at a discounted rate. It is important to note when buying credit from another taxpayer, the buyer of the credit cannot then transfer the credit. 

What is needed for “Transfer Election Statement”? 

According to 1.6418-2(b)(5)(ii), there are certain items that need to be included within the “Transfer Election Statement”. This statement must be attached to the tax return for both the buyer and seller. The transfer election statement includes the following: name, address, and taxpayer identification number for both the buyer and seller, a description of the type and amount of the eligible tax credit transferred, the timing and amount of cash paid for the eligible tax credit transferred, and the registration number related to the eligible credit property. 

In addition, the tax return will also need a statement or representation from the seller and the buyer taxpayer acknowledging the notification of recapture requirements under section 6418(g)(3) and the section 6418 regulations (if applicable). Also, a statement or representation from the seller that the seller has provided the required minimum documentation to the buyer. 

The “required minimum documentation” that the seller will provide to the buyer will be information that validates the existence of the eligible credit property, which could include evidence prepared by third parties.  Additionally, if applicable, documentation substantiating that the seller has satisfied the requirements to include any bonus credit amounts in the eligible credit that was part of the transferred credit.  This could include evidence of the seller’s qualifying costs in the case of a transfer of an eligible credit that is part of the investment credit or the amount of qualifying production activities and sales amounts, as relevant, in the case of a transfer of a production credit. 

More information available 

At CFO Services, we are assisting our clients on both sides of these transactions, because of the significance of the transaction and the ongoing responsibility of each party.  We have put together a short list of the attributes that the seller and buyer need to be aware of in a transfer of credit.  If interested, please reach out to us and we would be happy to schedule a time to discuss.   

IRS CircIRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. 

In Brief

• All companies that want to file the IRA & CHIPs credit as transferable or an elective payment must pre-file with the IRS.
• Online pre-filing registration process launched on 12-22-23. 
• Each property that could receive credit must have its own registration number.
• A registration number is only valid for one taxable year.

Before applying for clean energy credits (IRA) and semiconductor credits (CHIPs), companies must pre-file through the IRS to gain their registration number. This is required before any tax credit form is to be filed or intended to be claimed. However, this does not guarantee that the credit will be claimed by the company, it only legitimizes the application when the company files for the credit on their tax returns.

Pre-Filing Registration Process

This is a required electronic process for all companies that intend to make an elective payment election or those that intend to make a credit transfer. It is designed to expedite the processing of returns and prevent improper payments. The IRS has provided guidance on how new and returning users can access their clean energy accounts to pre-file: https://www.irs.gov/newsroom/irs-opens-free-ira-and-chips-pre-filing-registration-tool-for-organizations-to-register-to-monetize-clean-energy-credits

As part of the pre-filing registration process, companies need to list all applicable credits they intend to claim on their income tax return or Form 990-T (tax exempt) and each applicable credit property that contributed or will contribute to determine these credits. Companies also need to provide any other specific information required, such as any required information about each applicable credit property. Once the company successfully completes the pre-filing registration process, they will receive a registration number(s) that will be necessary for making the elective payment election or a transfer election on their tax return.

After you complete the pre-filing registration process, the IRS will review the information provided and will issue a separate registration number for each applicable credit property for which the applicable entity or electing taxpayer provided sufficient verifiable information.

Why is this registration number important?

For each applicable credit property, it will need to have a unique registration number that contributes to an applicable credit. For example, a company plans to make an elective payment election to claim credits related to two applicable credit properties—a solar energy property and a geothermal energy property—they would complete and list both properties during the pre-filing registration process to obtain registration numbers for each property. When making an elective payment election for the credit attributable to both properties, both registration numbers must then be provided when filing a tax return.

When can you pre-file?

The online pre-filing registration process launched on Friday December 22^nd, 2023. After the launch, a company may complete pre-filing registration as soon as they have all the information required. The IRS has also issued Publication 5884 with instructions on the pre-filing process.

Do you need to file again for the same credit in the next year?

A registration number is only valid for the taxable year for which it is obtained. Registration numbers must be renewed each year as necessary. For example, an elective payment for the Renewable Electricity Production Credit (45/45Y) requires annually renewing registration numbers even though the credit lasts for 10 years.

What happens if you’re late registering?

Completing the pre-filing process and receiving a registration number is a requirement to making an elective payment election. There are no extensions for registration numbers and the IRS recommend completion of the pre-registration at 120 days before filing the respective tax return, to give time for the IRS to review the information and provide back a valid registration number.

Am I locked into Elective Payment after pre-filing?

No. Completing the pre-filing registration process does not require that a company make an elective payment election when filing a return. Also, the pre-filing registration process is unnecessary if a company will not be using elective pay (or a transfer election).

IRS CircIRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. 

CHIPS

With the CHIPs ‘grant’ process up and running (Department of Commerce), the current focus is now preparing for the 48D tax credit. 

Proposed Regulations and theme of Comments

During March of this year, the proposed regulations were released by the IRS, related to n the 48D credit.  Generally speaking, there is typically a 2-month commentary window, and CFO Services was one of 43 commenters on the regulations.   

Primarily the theme of the comments was around the definition of semiconductors and semiconductor manufacturing.  These comments ranged from materials definitions, wafer substrates, and silicon carbide (SiC).  In addition, comments also addressed the limitation of the credit to only original new equipment.  With such a wide range of participants in the semiconductor space, it is not surprising the variety of comments.    

CFO Services will be participating in the upcoming hearing on the proposed regulations later this month.  After that process is complete, the IRS will review all commentary and issue final regulations.  There is not a set timetable on when final regulations are released, but hopefully it is before companies need to consider the 48D credit for financial close in early 2024. 

Elective payment regulations released

 Proposed regulations were released in late June, related to the “elective payment” option, under 48D, which will make the credit extremely beneficial to all participants in the semiconductor space. 

The comment period ends in mid-August, with a hearing at the end of that month.  CFO Services is preparing commentary and will attend this hearing. 

Upcoming items for clients (48D)

1. Project registration process upcoming:  Each project (“location”) will need to register with the IRS each year to receive the 48D credit, per the temporary regulations released in June.  This registration process will be targeted to open this fall. 
2. Start identifying 2023 spend:  Now is the time to start identifying 2023 spend that could qualify for the 48D credit, before the 2023 year-end, as it will be needed to provide a clear value for the provision.

IRA

Now that the IRS has moved past providing guidance on the individual IRA credits, they have issued information for the business-related IRA credits.

First round of 48C allocation concept papers closes the end of July

The IRA funded an additional $10B to the allocation of 48C credits.  The first allocation of $4B will accept concept papers for review by the DOE through July 31^st.  All allocations of the first round will be issued by the IRS no later than March of 2024. 

Proposed Regulations released

Late June the IRS also released proposed regulations on the “elective payment” and “transferability” of certain credits from the Inflation Reduction Act (“IRA”).

Similar to 48D, both proposed regulations have comment periods that end in mid-August, with an applicable hearing at the end of that month.  CFO Services is currently preparing commentary and plans to attend this hearing.  The “transferability” of certain credits will be especially important to understand, because a ‘credit transfer’ option will create funding opportunities for those companies that otherwise find no value in generating credits. 

Upcoming items for clients

1. Project registration upcoming:  Each project (“location”) will need to register with the IRS each year to receive the IRA credit as per the temporary regulations released in June.  This registration process will be targeted to open this fall. 
2. Identify qualified projects for energy, carbon capture, material development:  It is important now to identify projects that could qualify for the different IRA credits.  With the significant compliance and complexity of credits, companies should complete proper due diligence now, in order to gain knowledge/understanding of credit-program options and value (ROI), before the fall, when you will need to start registering projects. 

IRS CircIRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. 

THE NEW 174 METHOD CHANGE

On December 12, 2022,the IRS released Rev. Proc. 2023-8 containing long-awaited procedural guidance concerning the 2017 amendment to Section 174, which requires the capitalization and amortization of specified research or experimental (R&E) expenditures paid or incurred in taxable years beginning after December 31, 2021.

The Tax Cuts and Jobs Act (TCJA) amended section 174 of the Code to require capitalization of specified research and experimental (R&E) expenses (new section 174). Under new section 174, specified R&E expenses must be capitalized and amortized over the applicable period (5 years for domestic research and 15 years for foreign research), beginning in the year the expenses are paid or incurred. Further, software development costs are treated as specified R&E expenses. This treatment is in stark contrast to the favorable treatment provided prior to amendments by the TCJA in which a taxpayer could deduct its R&E expenses and software development costs. New section 174 applies to specified R&E expenses paid or incurred in taxable years beginning after 2021.

A taxpayer requesting a method change to apply new section 174 is granted limited audit protection; under this rule, no audit protection is granted for R&E expenses paid or incurred in taxable years beginning before 2022. Further, notwithstanding the general audit protection rules under Rev. Proc. 2015-13, the IRS may change the characterization or classification of a taxpayer’s expenditures as specified R&E expenditures. 

The release of this procedural guidance and that this newsletter is released with only a few days left in 2022, is a strong indication that the TCJA changes to section 174 are here to stay.  Rev. Proc. 2023-8 provides taxpayers the roadmap to change their existing methods of accounting for R&E costs to the new section 174. 

Scope of Rev. Proc. 2023-8

Rev. Proc. 2023-8 modifies the list of automatic method changes provided in Rev. Proc. 2022-14 to include a new automatic method change under section 7.02 of Rev. Proc. 2022-14 for a change to apply the capitalization and amortization rules under new section 174. 

The automatic method change provided by Rev. Proc. 2023-8 only applies to specified R&E expenses paid or incurred in taxable years beginning after 2021 and includes different procedures depending on whether a taxpayer is requesting a change for their first taxable year beginning after 2021 or for a subsequent year. 

Highlights of Rev. Proc. 2023-8 are as follows: 

1.    Grant of automatic consent

Taxpayers may use this new automatic accounting method change procedure to secure the IRS consent necessary to change from their present Section 174 accounting methods to the new capitalization and amortization regime. 

2.    Statement in lieu of Form 3115 for changes made in the first effective year

For changes made in the first taxable year beginning after December 31, 2021, the revenue procedure waives the requirement to file a Form 3115, “Application for Change in Accounting Method”. Instead, taxpayers request and implement the change by attaching a statement to their original federal income tax return. The statement must contain the following information for each applicant:

• The name and EIN (or SSN) of the applicant that has paid or incurred R&E costs after December 31, 2021;
• The beginning and ending dates of the year of change (the first taxable year in which the change to the required Section 174 method takes effect for the applicant);
• The designated automatic accounting method change number (DCN 265);
• A description of the type of expenditures included as R&E costs;
• The amount of R&E costs paid or incurred by the applicant during the year of change; and
• A statement that the applicant is changing the method of accounting for specified R&E expenditures on a cut-off basis. The applicant must also state that under the new method they will capitalize such expenses to a specified R&E capital account and amortize it over a 5-year or 15-year period, as applicable, beginning with the mid-point of the taxable year in which the expenses were paid or incurred.

3.    Delayed changes require a Form 3115 and modified Section 481(a) adjustment

When the change is made for years later than the first taxable year beginning after December 31, 2021, the requirement to file a Form 3115 to secure the necessary consent is not waived.

For these delayed changes, the revenue procedure requires a modified Section 481(a) adjustment, which would consider only those R&E costs paid or incurred in taxable years beginning after December 31, 2021. 

This modified Section 481(a) rule serves to reduce the opportunity for strategic delay in implementing the new regime. As an example, if an accrual basis taxpayer continues to immediately expense its domestic R&E costs in accordance with its historic method, deducting $200,000 that it had incurred during the 2022 tax year, that taxpayer would have a $180,000 unfavorable Section 481(a) adjustment were it to request this accounting method change for the 2023 taxable year (the original $200,000 expense, less the first year amortization based on the midpoint approach, calculated as of the beginning of the 2023 year of change).

4.    Favorable transition rule

For taxpayers who have already filed 2022 tax returns (or who do so prior to January 9, 2023), the revenue procedure deems such taxpayers to have effectively changed their methods of accounting as long as the taxpayer (i) properly capitalized and amortized its R&E costs in accordance with the new rules, and (ii) properly reported its R&E costs incurred on Part VI of Form 4562, Depreciation and Amortization. 

5.    Waiver of eligibility rule  

Limited to changes made in the first post-2021 year, the revenue procedure waives the general rule prohibiting a taxpayer’s use of automatic consent procedures for subsequent changes sought on the same item within a five-year window.  

Taxpayers who have changed their R&E cost method within the last five years (perhaps with the aim of maximizing deductions prior to the amendment’s effective date) should note of the limitation on this waiver. If such taxpayers do not change to the new rules for their first tax year beginning after December 31, 2021, they will be scoped out of the automatic change procedures until that five-year window has lapsed. Taxpayers scoped out of Rev. Proc. 2023-8 will need to file their accounting method changes to comply with the Section 174 amendment under the more burdensome and costly advance consent procedures. 

However, taxpayers should keep in mind that they will not receive audit protection for R&E costs (including software development costs) paid or incurred in taxable years beginning before 2022. Further, while the IRS waived the general prior five-year scope limitation, this waiver only applies to changes made for the first taxable year beginning after 2021. Thus, taxpayers that filed one or more method changes for R&E expenses or software development costs for years beginning before 2022 may be unable to file an automatic method change to apply the new section 174 rules if such taxpayers fail to make the change for their first tax year beginning after 2021. 

Decreasing Deductions and Increasing Taxable Income 

These changes will mostly affect taxpayers who claim the Research and Development Credit by decreasing the amount of deductions available via 174, and thereby increasing taxable income – especially for software companies which utilize overseas development activities. In some situations, this increase may be significant, along the lines of a 50% increase, or taking a taxpayer from a net loss to a net profit position. 

Taxpayers need to know that going forward, additional information will need to be gathered that they were priorly not used to gathering for the Research and Development Credit. These data include development costs incurred outside of the United States, and data that can be delineated between design, construction, and testing phases of research. By breaking out expenses in these ways, taxpayers might be able to claim some expenses as qualified research expenses (QRE) – which will then need to be capitalized and amortized – and others as cost of goods sold, to increase deductions. 

Additional items to consider are that qualified expenses are treated differently under section 174 than they are in section 41 – namely, that there are no provisions for “substantially all” when considering wages, and that there is no reduction or “haircut” for contract research expenses. This means that a separate calculation will need to be completed – one that adjusts any wage QRE to specific percentages, and that adds back any reduction in contract research expenses. This separate calculation will provide the taxpayer with the number they need for the capitalization and amortization now required in the new section 174. 

Takeaways

The official bulletin containing Rev. Proc. 2023-8 is not set for release until after the new year; however, an advance copy of the revenue procedure has been made available. 

Rev. Proc. 2023-8 provides long-anticipated procedural guidance, the IRS has yet to release substantive guidance under new section 174, which likely will be required to properly apply the new rules. Rev. Proc. 2023-8 contains only the procedural component.  Substantive guidance on applying the Section 174 amendment (definitions, explanations, examples, etc.) remains outstanding. It is anticipated the release of that substantive component sometime next year.

IRS CircIRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. 

CHANGES TO THE 174 DEDUCTION ARE COMING HERE 

What is the difference between 174 and the R&D credit? 

On December 22, 2017, the Trump Administration signed into law, “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (“tax reform” or the “law”). A significant component of this legislation included a provision that changed the manner in which 174 expenses (Research and Experimentation or “Research and Development” expenses) can be deducted by taxpayers for tax years beginning after December 31, 2021. 

Companies are Required to Amortize Research and Experimentation/Development 

Under current law, Section 174 generally allows taxpayers to deduct Research and Development expenditures as the amounts are paid or incurred during a tax year; alternatively, taxpayers may elect to capitalize and amortize these expenditures over a period of no less than 60 months. For most companies claiming a Research and Development Credit, it made more sense to deduct the entire amount in the year expensed, as this would lower taxable income. 

For amounts paid or incurred in a tax year beginning after December 31, 2021, the law will require taxpayers to capitalize and amortize IRC Section 174 research and experimental (Research and Development) expenditures over a five-year period, beginning with the midpoint of the taxable year in which the expenditure is paid or incurred.  

The new provision will impact taxpayers treating Research and Development costs as deductible expenses by no longer enabling them to recover all costs incurred in the year in which they are incurred. Accordingly, taxpayers currently deducting Research and Development costs in the year incurred will be required to file an Application for Change in Method of Accounting (Form 3115) to begin capitalizing and amortizing such costs for tax years beginning after December 31, 2021. 

Additionally, costs for research conducted outside of the U.S. will be amortized over a 15-year period. Further, expenditures for the development of any software will be treated as Research and Development expenditures. For purposes of this rule, software development costs are included in the definition of Research and Development expenditures. This means that many software companies are going to be affected in two major ways – first, that any overseas development will need to be quantified and included and second, that the amount of expenses incurred through overseas development will be amortized over a 15 year period – three times longer than domestic expenses, and reducing the amount of deduction further. 

Decreasing Deductions and Increasing Taxable Income 

These changes will mostly affect taxpayers who claim the Research and Development Credit by decreasing the amount of deductions available via 174, and thereby increasing taxable income – especially for software companies which utilize overseas development activities. In some situations, this increase may be significant, along the lines of a 50% increase, or taking a taxpayer from a net loss to a net profit position. 

Taxpayers need to know that going forward, additional information will need to be gathered that they were priorly not used to gathering for the Research and Development Credit. These data include development costs incurred outside of the United States, and data that can be delineated between design, construction, and testing phases of research. By breaking out expenses in these ways, taxpayers might be able to claim some expenses as qualified research expenses (QRE) – which will then need to be capitalized and amortized – and others as cost of goods sold, to increase deductions. 

Additional items to consider are that qualified expenses are treated differently under section 174 than they are in section 41 – namely, that there are no provisions for “substantially all” when considering wages, and that there is no reduction or “haircut” for contract research expenses. This means that a separate calculation will need to be completed – one that adjusts any wage QRE to specific percentages, and that adds back any reduction in contract research expenses. This separate calculation will provide the taxpayer with the number they need for the capitalization and amortization now required in the new section 174. 

The Bottom Line 

While these changes affect many taxpayers who have come to regard the Research and Development Tax Credit as a dependable component of their financial planning, most taxpayers will feel the biggest differences in the first two years. However, as the years pass on the amortization the deduction amount will eventually level out. – meaning that the value of the deductions and the Research and Development Credit will negate the dips of the early years of the amortization. 

CFO Services Can Help With Your Research Credit & Tax Incentive Needs 

• Through knowledge and perspectives gained working with virtually every industry and type of client (Fortune 500, medium-size and small companies), CFO Services has committed to a strategy of providing a depth of knowledge in a narrow field of focus: business incentives and credits. Overall:  CFO Services provides companies with services to identify and secure federal, state and local incentives across the United States 
• Specialities:

• Federal/State R&D Credits:  Helping clients with the R&D credit calculation, documentation, and exam for creating or improving the product/process. 
• Multi-State Credits & Incentives:  Collaborate with our clients to capture statutory and discretionary state incentives. 
• Technology:  Both areas of service utilize proprietary technology to streamline the capture, compliance, and management of a client’s business incentives.

IRS CircIRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. 

Nebraska Legislative Update………..

The Nebraska’s Unicameral meets every year, and every year we (CFO Services) are involved directly or indirectly, on various legislation that impacts Economic Development.  Our role is technical and narrow, but we have gone ahead and drafted a short summary and provided various links for more detail.  In addition to the typical activities/bills that occur every year, this year’s session was particularly interesting because State Senators were also responsible for allocating over $1B of ARPA funds.

Again, the intent is not to summarize everything that occurred, but to highlight certain areas of interest. If you have any questions, please don’t hesitate to reach out to Chad Denton (@ cdenton@cfoserv.com). 

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Nebraska’s second session of the 107th Legislature adjourned on April 20^th, 2022, which was a 60-day session and resulted in 146 bills passed.  CFO Services, as an Economic Developer/Compliance Partner, views a lot of the session with a more narrow lens, so this correspondence is cursory, and attempts to create awareness of the ARPA activity, in Nebraska, and hone in on specific bills that may impact business incentives. 

Provided below is a link to the Nebraska Unicameral site, as well as two other sites that we identified that provide a broader perspective/summary:

ARPA:

In addition to funding households, small businesses and schools, the American Rescue Plan Act (ARPA) was provided as a relief fund to state and local governments that were negatively impacted by the coronavirus pandemic. In Nebraska, over $1B (Pandemic funding bill approved – Unicameral Update (ne.gov)) in ARPA funds has been allocated to the State of Nebraska and its counties, cities, and local communities. As a result, a significant amount of time, during the 60-day legislative session, was spent sifting through over $4 billion of requests made for ARPA appropriations.  The aforementioned link provides a good summary directly from the State’s Unicameral Update.  High points include:

• Rural and urban workforce housing grants to help attract new talent; and
• Support for community college capital projects, as well as workforce development and dual-credit programs for high school students; and
• Recovery grants in qualified census tracts, primarily targeted to North and South Omaha; and
• Internships, apprenticeships and customized workforce training programs; and
• Expanding childcare capacity; and
• Rural Health Complex to be located at the University of Nebraska at Kearney; and
• Assistance for direct care staff at licensed Medicaid-certified nursing facilities; and
• Support for new, industrial rail park infrastructure; and
• Site and building development support for a North Omaha Industrial Park project; and
• Agricultural Research Service National Center; and
• Assistance to alleviate pandemic-related setbacks for shovel-ready capital projects building arts, culture, humanities and sports amenities across the state; and
• Enhanced outdoor recreation sites across the state; and
• Adjustments to the Nebraska’s Business Innovation Act (to spur additional investment, and assist the H3 career scholarship program

Other Legislation: 

LB873 reduces individual and corporate income tax top rates  over five years to 5.84%, offers income tax credits for property taxes paid to community colleges, boosts total income tax credits available for property taxes paid to local schools to $548 million, and $567 million for 2023, and completely phases out income taxes on social security income.

LB1261 extends the Nebraska Advantage Rural Development Act (NRDA) through 2027 and increases the tax credits available from $1 million to $10 million. The bill also allows a refundable income tax credit equal to ten percent of the investment, not to exceed a credit of $500,000 per application, specific to livestock modernization. A separate technical change also occurred specific to ImagiNE Nebraska, allowing/ensuring that rural and urban manufacturing tiers may include more than one location within their stated project parameters.

LB1150 was passed and includes a combination of other bills/provisions, mostly related to business incentives:

• LB817, an incentive clean-up bill from the Nebraska Department of Revenue, 
• LB502, which provides for the same sales tax treatment for Data Center projects under the Nebraska Advantage Act, as compared to those under ImagiNE Nebraska, 
• LB985 corrects an unintended base-year calculation, under ImagiNE Nebraska, for companies that hired more employees as a result of the COVID-19 pandemic, and 
• LB1094 clarifies the treatment/inclusion of Nebraska resident teleworkers under ImagiNE Nebraska.

NOT PASSED was LB701, which would have extended the Nebraska Job Creation and Mainstreet Job Development Act by 5 years (from 2022 – 2027) and Nebraska Advantage Research and Development Act by 1 year (from 2022 – 2023).   

MITIGATE 174 CHANGES FOR FOREIGN RESEARCH EXPENSES 

Companies with foreign research expenses must account for section 174 changes soon. Beginning in tax years that begin after December 31, 2021, companies with foreign research will have to capitalize and amortize all foreign research over 15 years. This will increase taxable income, so companies need to plan for this change, especially the software industry. But companies can reduce the impact of these 174 changes, by asking foreign research vendors to break out development and maintenance expenses.   

Be Aware – Taxable income will rise and soon. 

It is amazing that the Tax Cuts and Jobs Act (TCJA) passed in 2017, will have a major impact upon companies with foreign research. Starting in tax year 2022, the TCJA requires all companies with research expenses to now capitalize and amortize all 174 deductions. For domestic research expenses, the amortization period is five years. But for foreign research expenses the amortization period is 15 years, triple the domestic timeframe. 

Congress has introduced a bill to modify and delay the implementation of these changes to Sec. 174, with the most recent being included in the “Build Back Better” bill.  Yet this bill has stalled in Congress and there is no certainty in a change being passed. Companies must be ready to not only incorporate these changes into tax policy but find ways to ensure maximum benefit.  

Be Ready – Mitigate the rise in income by breaking out Foreign Expenses  

There is a way companies can help mitigate the increase in taxable income from foreign research expenses. Companies should only amortize foreign expenses that are related to actual development. If a foreign vendor performs both development and maintenance work, a company can remove the maintenance expenses from the 174 deductions and amortize. This distinction provides an opportunity to make sure only the correct amount is amortized.  

To ensure only development work is deducted and amortized under 174, companies should work with foreign research vendors to itemize their expenses, especially those related to development and maintenance work. This might take some planning with foreign vendors, but it could considerably help lower taxable income.   

Companies with foreign research need to take a proactive approach and prepare for an increase in taxable income related to the TCJA 174 changes.  One such way to prepare is for companies to work with foreign research vendors to itemize expense between development and maintenance work, thereby to helping to mitigate the amount of increase in a company’s taxable income by carving out the maintenance work for immediate expensing and reducing the amount of foreign design work to be amortized under 174. 

CFO Services Can Help With Your Research Credit & Tax Incentive Needs 

• Through knowledge and perspectives gained working with virtually every industry and type of client (Fortune 500, medium-size and small companies), CFO Services has committed to a strategy of providing a depth of knowledge in a narrow field of focus: business incentives and credits. Overall:  CFO Services provides companies with services to identify and secure federal, state and local incentives across the United States 
• Specialities:

• Federal/State R&D Credits:  Helping clients with the R&D credit calculation, documentation, and exam for creating or improving the product/process. 
• Multi-State Credits & Incentives:  Collaborate with our clients to capture statutory and discretionary state incentives. 
• Technology:  Both areas of service utilize proprietary technology to streamline the capture, compliance, and management of a client’s business incentives.

IRS CircIRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. 

174 CONSIDERATIO174 IMPACT, 2022 Q1 CONSIDERATIONS, AND IMPLICATIONS ON FLOW-THROUGH ENTITIES 

CFO Services has been writing about the upcoming 174 capitalization requirement (“174-change”) for a long time.  In fact, one of the first newsletters was back in the spring of 2020, almost 2 years ago.  Now the change is quickly approaching, especially with upcoming 1st Quarter tax estimates for 2022.  Taxpayers will want to review what specific items do flow-through entities (S, LLC, and Partnerships) need to consider. 

Brief Summary of the 174-Change 

One of the most significant tax changes for many businesses in 2022 is a requirement that taxpayers capitalize and amortize their research and experimentation (R&E) expenses paid or incurred after Dec. 31, 2021, under Sec. 174 (174-change). Previously, taxpayers were permitted to either deduct 174 expenses in the year they were incurred or amortize them over different periods of time depending on the nature of the expenses. However, taxpayers must now capitalize and amortize all 174 expenses. The relevant amortization period is five years for research conducted within the United States or 15 years for research conducted outside of the United States. 

Legislative proposals have been introduced to modify the application of Sec. 174. The most recent draft of the “Build Back Better” bill contained a provision that would defer the effective date from 2022 to 2026. However, this bill has stalled in the Senate, and any legislative changes to Sec. 174 face a highly uncertain future. 

1st Quarter 2022 Consideration 

The most immediate impact of the 174-change will be on quarterly estimated tax payments, beginning with the first quarter of 2022. Corporations and individuals, including sole proprietors, partners, and S corporation shareholders, generally must make quarterly estimated tax payments if they expect to owe tax. If a taxpayer doesn’t remit an accurate estimated tax payment, the IRS may apply an underpayment penalty for each quarter that the taxpayer doesn’t remit an accurate payment of estimated tax.  

It is important to determine the methodology to be applied for estimated tax projections during 2022, such as calculating the actual impact of Sec. 174 or utilizing a high-level estimate based on assumptions.  Also related is any assumption as to whether quarterly estimated tax payment calculations will be based on current year or prior year taxable income.  Depending on certain facts and circumstances, some taxpayers could be required to pay estimated taxes, which in the past was not required.   

Flow-Through Entities 

With the 174-change impacting taxable income, this will require shareholders to determine if this will change their tax impact for 2022.  Here are a few examples that could drive different decisions for 2022.   

Flow-through entities (“flow-through”), which would include S-Corporations, LLCs, and Partnerships have always had differences from their C-Corporation sibling, because the tax is determined at the shareholder or individual level.   

Large Increase of Taxable Income/Smaller Losses 

Depending on the type of industry and business expense profile, some flow-throughs could increase their taxable income by 50%.  This could also equate to reduced losses by that same amount as well.  This large increase in taxable income might trigger tax to be paid on those flow-throughs which historically had not been planned for.  Starting earlier to model out if the 174-change will change tax significantly at the shareholder level is important to identify any possible tax surprises.   

Large Increase of Taxable Income/Smaller Losses 

On a positive note, at the shareholder and/or individual level there might be R&D credit carry forwards they can use.  Positive taxable income is required from the flow-through to utilize the R&D credit at the shareholder level.  If there is a large change in taxable income from the 174-change, it could be offset at the shareholder tax level because now they can offset that increase with R&D credit carryforwards.   

With all of these changes coming soon, especially for flow-throughs, it is important to get ready for the 174-change in Q1 of 2022 and also look at taxable income changes that might make the R&D credit more valuable.   

CFO Services Can Help With Your Research Credit & Tax Incentive Needs 

• Through knowledge and perspectives gained working with virtually every industry and type of client (Fortune 500, medium-size and small companies), CFO Services has committed to a strategy of providing a depth of knowledge in a narrow field of focus: business incentives and credits. Overall:  CFO Services provides companies with services to identify and secure federal, state and local incentives across the United States 
• Specialities:

• Federal/State R&D Credits:  Helping clients with the R&D credit calculation, documentation, and exam for creating or improving the product/process. 
• Multi-State Credits & Incentives:  Collaborate with our clients to capture statutory and discretionary state incentives. 
• Technology:  Both areas of service utilize proprietary technology to streamline the capture, compliance, and management of a client’s business incentives.

IRS CircIRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. 

174 CONSIDERATIONS FOR Q1 ESTIMATES 

Companies Need to Be Prepared for Upcoming Changes 

The Research and Development Credit (R&D) has been a popular tax credit for years.  In taking the credit, the vast majority of companies have taken immediate expensing of the expenses that are deemed qualified and gone on with the filing of company tax returns.  With the Tax Cuts and Jobs Act (TCJA) that was passed in 2017, a change was made to how taxable income is calculated if the R&D credit is taken.  Starting with the 2022 tax year, all expenses utilized in the R&D credit will now have to be put into section 174 and amortized.  This will change companies’ taxable income and require more tracking of expenses.  Additionally, this will have an impact on what needs to be disclosed on quarterly filings for publicly held companies, and privately held companies should consider this change in forecasting results. 

This IRS rule change will require a change in accounting method so that will have to be disclosed in financial filings.  Upon this change all domestic research expenses are required to be amortized over a five-year period.  If there is any foreign research, those expenses are required to be amortized over a fifteen-year period.  This most likely will be the biggest hit to companies who develop software and outsource some of the work overseas.  That topic will be covered in detail in another article from CFO Services. 

The good news is the change to taxable income is on the tax side and will not have as big of an impact on financial statements and valuation.  There will need to be disclosures to investors, stakeholders, and owners that taxable income will be impacted, and it will require additional planning and resources.  So, the company will need to file Form 3115 – Change in Accounting Method to begin the capitalization and amortization of the expenses, but no section 481(a) adjustment should be needed, though the IRS has still not issued guidance on the issue.  The bigger issue is the administrative burden of creating and keeping up the amortization schedules as well as being more diligent and recording more detailed information with regard to the expenses.  In the past, foreign research expenses have not been part of the R&D credit study because those expenses were not able to be qualified for the credit.  Now, under 174 the expenses must be tracked and amortized over the fifteen-year period.  Where this could impact financial statements is if the additional work requires additional administrative costs.  This could include having to hire additional staff or require outsourcing some of the work to contractors or consulting firms. Time will need to be spent with outside vendors to determine what work is being done overseas, and whether it can be broken out between design and maintenance activities. 

Some company owners or investors may want to know the impact this new regulation will have on the company tax return.  The tax provisions that get prepared should start to incorporate these new regulations.  The best way to start this process is to take the prior year credit study and make the calculation changes for the differences between Section 41, the R&D research credit, and Section 174.  Under Section 174 there is no substantially all rule, so any wage expenses need to be taken at the specific amount that was qualified. For example, if an employee was qualified at 85% for the R&D credit study then for the credit they would appear as being 100% qualified, but under 174 the wage expense would be 85%.  Additionally, contract research under Section 174 does not have a “hair cut” to 65% of the expense, so that will need to be adjusted to determine the 174 expenses.  The hard part will be determining the amount of foreign R&D expense since that has likely not been tracked in prior years.  Estimated tax that must be paid will be higher than in previous years due to this amortization of expenses. 

The Build Back Better bill that failed to pass Congress did have a provision within it that would have pushed this change out another five years.  Depending on what happens over the next couple of months there is a slight chance that it could be taken up apart from the bigger bill, but this is not likely.  So, start planning and putting systems in place now.  CFO Services can assist in this process as you calculate your new quarterly tax provision. 

CFO Services Can Help With Your Research Credit & Tax Incentive Needs

The R&D Credit provides an opportunity to reduce tax liability. In order to maximize the R&D Credit impact to don’t forget to capture all the expenses that should qualified, especially wages that are direct support.  To learn if you’re eligible for the R&D Credit or have more questions related to qualified direct support, please contact CFO Services. 

• Through knowledge and perspectives gained working with virtually every industry and type of client (Fortune 500, medium-size and small companies), CFO Services has committed to a strategy of providing a depth of knowledge in a narrow field of focus: business incentives and credits. Overall:  CFO Services provides companies with services to identify and secure federal, state and local incentives across the United States 

• Specialities:
  • Federal/State R&D Credits:  Helping clients with the R&D credit calculation, documentation, and exam for creating or improving the product/process. 
  • Multi-State Credits & Incentives:  Collaborate with our clients to capture statutory and discretionary state incentives. 
  • Technology:  Both areas of service utilize proprietary technology to streamline the capture, compliance, and management of a client’s business incentives. 

IRS CircIRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. 

Each quarter, CFO Services highlights a certain feature or aspect of its RCM tool for Research Credits.  This quarter, CFO Services is highlighting how to view the source data and how the source data ties out to the information added in the lists. This helps clients see how the original source is being used in RCM and how to tie out the data in the lists to the source data. If you would like to learn more about CFO Services’ RCM tool, please visit our Newsletter archive.

Source Data and Tying Out: Clients can upload data needed to calculate the R&D credit to our safe and secure RCM portal’s Source Document Library. CFO Services will categorize, describe, and assign a reference to the data. As you can see from the below picture each document also has a tie out description that helps us to ensure that all the data correctly goes from the original source documents and into the RCM site lists.

For example, the picture below of the General Ledger shows all items from “SD-01” and that total amount equals the total amount from the tie out description in the source documents library. The uploaded and Reviewed columns from the Source Document Library also help us to keep track of the data. Once the data has been uploaded into one of the lists on RCM that person will change the “uploaded” column to yes so that another person knows it is their turn to review the data and double check that the source data ties out to what was uploaded. When their review is complete, they will change the “Reviewed” column to “Yes”. All the important lists used in the R&D calculation will have this source reference column so that a client looking at the data knows where the list data originally came from.

IRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein

With 2021 off and running, it is important to highlight the upcoming change for the Research Credit and deduction starting at the beginning of calendar year 2022.  The Research and Development Credit (Section 41) and Research and Development deduction (Section 174) have been utilized by companies for many decades to help build research, improve processes, and launch new products.

Tax reform from 2017 has put a little wrinkle into capturing this benefit that have clients asking about the economics and impact of the change on their credit strategy.  Previously, if a company wanted to claim the Research Credit (41), they were not required to claim the corresponding Research and Development deduction (174).  Companies would still receive the deduction for wages, supplies, and contract research claimed under the credit but typically deduct them under section 162 as ordinary and necessary business expenses, treat them as cost of goods sold, or capitalize them.  So either way a company could gain the immediate deduction of the full amount of the expense.

With the tax law change, and starting in 2022, companies will only be able to claim the research credit  for expenditures that “may be treated as specified research or experimental expenditures” under section 174.  Additionally, under 174 a company is required to capitalize and amortize the deduction over five years.  So under these news changes, in order to claim the Research Credit, a company will be required to capitalize and amortize the deduction, instead of immediate expensing. 

With this 174 amortization requirement, let’s assume we are taking the 174 amortization and also taking the Research Credit.  Below are a few scenarios that will be impacted from this required change in accounting. 

NOLs reduced and/or taxable income increased

174 amortization will take items that are currently deducted in the year and spread them over 5 years.  The requirement is to take these expenses and defer them over the 5 years, creating a timing of the deduction issue.  In year 5 though, it will essentially be caught up as current, because years 1-5 will all have contributed 20% to the amortization calculation. 

Increases taxable income and/or reduction in the NOL will be the result of this amortization.  For companies that have been traditionally generating NOLs and building a Research Credit carry forward, this could be a surprise because the 174 amortization will reduce that NOL. 

This can speed up the utilization of NOLs and increase the need to generate credits.  Companies that have a long-time horizon of NOL utilization, might have it shortened and increase the need to generate credit to offset the increase in tax. 

LBI Directive inconsistency

LBI Directive is related to ASC 730 research expenses reported on the financial.  This method of calculating the Research Credit was created to streamline the process and give the IRS a clear picture of the expenses from the LBI Directive to the Research and Development Credit. 

Even though we have expenses classified as 174 they could still be outside of ASC 730.  Certain wages and supplies, and always contract research are outside the LBI Directive, even though they will be classified as a specified research expense. 

By being outside the LBI Directive these expenses could be scrutinized deeper than those inside the LBI Directive.  The 174 amortization does not guarantee qualification for the Research Credit and will still require in depth analysis of the qualitative documentation.

Foreign Research Expenses

Typically for the Research credit, foreign research is non-qualified.  Especially within contract research expenses, all foreign based research must be removed for the Research Credit calculation.

174 amortization allows for foreign research to be amortized over 15 years which is a special clause in the code section.  The companies will need to bifurcate their foreign research from their domestic research to capture the different amortization amounts. 

If foreign research is amortized this will create a difference between a 174 expense and section 41 research credit QREs.  Typically, companies will think that the 174 and 41 expenses will match, but foreign research can change that direct correlation. 

These are just a few example scenarios of the 174 research expense amortization changes for 2022.  Please contact us in 2021 to start the planning process, as we are helping our clients with the necessary accounting as well as upgrading our software to bring in this additional calculation.

CFO Services Can Help With Your Research Credit & Tax Incentive Needs

The R&D Credit provides an opportunity to reduce tax liability. In order to maximize the R&D Credit impact to don’t forget to capture all the expenses that should qualified, especially wages that are direct support.  To learn if you’re eligible for the R&D Credit or have more questions related to qualified direct support, please contact CFO Services.

Through knowledge and perspectives gained working with virtually every industry and type of client (Fortune 500, medium-size and small companies), CFO Services has committed to a strategy of providing a depth of knowledge in a narrow field of focus: business incentives and credits. Providing tried and tested methodologies, our professionals can help almost any business research, identify and comply:

• Research and Development Credits
• Multi-State Tax Incentives and Credits
• State Sales and Use Tax
• Strategic Alliances
• Workforce Training

IRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein

With the high demand in housing and multi-use properties currently increasing in sometimes record amounts across the country, it may be a surprise to companies within the Design-Build industries, including Architecture, Engineering, and Construction, which provide the engineering, design and manufacturing processes related to new housing and real estate development that some of these activities can be qualified and claimed as part of the Research and Development Tax Credit. The difficulty with these types of activities – and which is commonly the case related to other manufacturing industries and activities – is the determination of where the design process ends, and production begins. For the Research and Development Tax Credit, the important activities to focus on are those that occur up to the point of when a product, business component or design is considered as “in production”.

For an example – some companies provide the engineering design necessary for the components of a home or other structure – i.e., the walls, the trusses and roof, and floors. The time spent by the engineers to design each component, as well as the time spent combining those components into overall building designs can likely be considered as qualified activities, as long as the four tests – technical uncertainty; process of experimentation; new or improved performance, function, quality or reliability; and based on “hard sciences” such as engineering – are met. In this example, these four tests might be met in the following manner:

• Technical uncertainty – the overall design for a wall is unknown – what the framing design will be; what the materials will entail and what impact those materials will have upon the structural integrity of the wall; what will be the ultimate load bearing capability of the wall and will it meet all necessary specifications?

• Process of experimentation – many design firms utilize advanced software such as CAD to analyze the overall structures of engineered items. Computer simulation is an allowable form of process of experimentation – a systematic, recordable, or observable manner in which to eliminate uncertainty from a design. Additional activities that might fall under process of experimentation in this example might include the fabrication of a prototype wall for actual physical testing of load bearing, or in finding the point of failure; or in analyzing the impact that moisture has on the performance of the wall.

• New or improved performance, function, quality or reliability – even though walls are common and have been around for centuries, the specific application and design needs of walls in new construction can be considered as a new design, especially if the whole of the design (the house or structure) is a new design. It may be perfectly suitable and successful to import a wall design used in other instances, but it is still unknown whether that wall will function as necessary according to specifications.

• Based on “hard sciences” – this test is to ensure that the activity being claimed is not related to sectors of activity considered as explicitly non-qualified – ie., accounting, marketing, human resources, etc. The majority of companies performing these design activities will be basing their work upon engineering and physics principles and knowledge, which are considered “hard sciences.” For example – the physics behind the development of a load bearing wall – evaluating the impact of wind and other natural forces on the structural integrity of a wall design, and what impact utilizing different materials might have on these forces.

Some items of concern other than identifying when the design process ends, and the production process begins including how companies performing these activities structure their agreements with clients and customers. The main items of concern in this area are who retains the rights to the design, and who inherits the risk of performing the activity?

Staying within the example of designing the components of a home or structure, if the company performing these design activities has an arrangement with a real estate development firm to provide designs, and will receive payment regardless of whether the designs are used or if the designs meet the specifications provided by the developer, then these design activities, no matter how complex, would be considered funded research – because the development firm has paid for the rights to the designs, and also inherits the financial risk regardless of the final design.

However, another agreement structure might entail the design firm receiving a portion or “good faith” deposit from the developer, the remaining amount being contingent upon the delivery of an acceptable final design. In this case, any costs for the design efforts that occur outside of the initial good faith deposit would be a risk of the design firm. And the contingency aspect of the acceptable final design also puts the risk inherently with the designer, and not the developer. Regardless of the structure of the agreement, it is very important that when claiming these types of activities for the Research and Development Tax Credit that the agreements be collected as part of the contemporaneous documentation required to successfully defend a claimed credit.

These are just a few ways that Design-Build industries can participate in and benefit from the Research and Development Tax Credit. The main issues to consider are:

• When does design end and production begin?
• If there was a design agreement with a third party, what is the structure of that agreement?
  • Who holds the rights to the design and the risk of the design activity?
• What documentation has been collected to support the claim?
  • Design documents – showing iterations, computer modeling, testing, test reports, photos of prototype testing, etc.
  • Agreements between the Design Build firm and their client/customer

IRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein

The research Credit and Covid-19

Covid-19 has impacted almost every part of people’s lives.  This includes the business world where organizations have had to limit operations and, in some cases, either let people go or furlough employees.  These measures that businesses and organizations had to make will have a significant impact on the Research Credit. 

In order to combat some of the hardships businesses and employees were experiencing, the federal government passed the Paycheck Protection Program (PPP) as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  This program was designed to provide an incentive to keep employees on the payroll.  The PPP were low interest rate loans that had the potential to be completely forgiven if certain criteria were met and were structured as having either two- or five-year maturity period.  If the funds were used for payroll costs, interest on mortgages, rent, and utilities, and at least 75% of the amount had gone to payroll then the loan would be forgiven. 

Deductibility of PP expenses

If the loan is forgiven, then the expenses used came from PPP funds should still be included in the Research Credit calculation. Initially based on the April 30, 2020 IRS issued Notice 2020-32 to provide guidance regarding the deductibility for federal income tax purposes it was thought the PPP funds would include some risk to the R&D credit.  The notice stated that no deduction was allowed under IRC for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan, because the income associated with the forgiveness is excluded from gross income.  It goes on to reference Sec. 265 as the specific disallowance provision and notes that case law would disallow the deduction because the taxpayer has reasonable expectation of reimbursement for the expenses. Since this initial determination Congress passed the Consolidate Appropriations Act[1] which allowed the full deductibility of ordinary and necessary business expenses that were paid and forgiven with a PPP loan.

Planning for employee expenses

Some foresight and planning to determine what potential qualified expenses were funded by a forgiven PPP loan would be a beneficial exercise.  One Covid-19 issue that will take extra investigation is how employees were categorized during any office or business closures.  The way businesses and organizations handled employees during this difficult time varied but for the most part fell into one of a few categories.  Those categories would be: employee was laid off or furloughed with no pay or work duties; employee was paid to work from home; employee was paid but not required to fulfill normal job duties or only limited duties; and finally employee was considered essential and had normal work throughout the pandemic. 

The biggest items to review are if an employee is qualified for the Research Credit and how that employee’s pay and job duties were affected by Covid-19. Some employees who typically would be considered to have qualified activities in a normal year may still have been paid to work at home, but not able to do the same types of work as a typical business year.  This scenario would result in the employee’s qualified percentage being lower for the year and result in lower wage QREs.  Another scenario could be an employee was laid off or furloughed for part of the year.  With no pay the employee would not count that time as part of the work year, so there is potential to keep a stable qualified percentage of time.  The IRS has not come out with guidance for these various issues but based on the current regulations and how paid time off is treated it is safe to assume the same would apply to breaks in work for Covid-19 related issues.

The 2020 tax year will be a more difficult year to understand and develop a tax plan.  These issues will need to be accounted for as taxes are filed. Proper planning and expert help can allow for the best tax position for each business. If you have more questions related to Research Credit, please contact CFO Services.

CFO Services Can Help With Your Research Credit & Tax Incentive Needs

The R&D Credit provides an opportunity to reduce tax liability. In order to maximize the R&D Credit impact to don’t forget to capture all the expenses that should qualified, especially wages that are direct support.  To learn if you’re eligible for the R&D Credit or have more questions related to qualified direct support, please contact CFO Services.

Through knowledge and perspectives gained working with virtually every industry and type of client (Fortune 500, medium-size and small companies), CFO Services has committed to a strategy of providing a depth of knowledge in a narrow field of focus: business incentives and credits. Providing tried and tested methodologies, our professionals can help almost any business research, identify and comply:

• Research and Development Credits
• Multi-State Tax Incentives and Credits
• State Sales and Use Tax
• Strategic Alliances
• Workforce Training

IRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein.

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[1] P.L. 116-260 Consolidated Appropriations Act, 2021 [12/21/2020] 276(a)(1)(i) ‘(1) no amount shall be included in the gross income of the eligible recipient by reason of forgiveness of indebtedness described in subsection (b),

(2) no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided by paragraph (1), and”

What types of activities qualify, and how can taxpayers support their claim?

The Section 41 Research and Development Tax Credit allows for the qualification of process development/process improvement activities to be claimed as qualified, due to the following subsection:

• 41(d) QUALIFIED RESEARCH DEFINED.–
• 41(d)(2)(C) SPECIAL RULE FOR PRODUCTION PROCESSES.–Any plant process, machinery, or technique for commercial production of a business component shall be treated as a separate business component (and not as part of the business component being produced).

It is still incumbent upon the taxpayer to demonstrate how a process improvement activity/project meets the “Four Tests” – Technical Uncertainty, Process of Experimentation, Reliance Upon Hard Science, and with goal of improving or developing a new performance, function, quality or reliability to the process. Additionally, it is important from a defensive standpoint that taxpayers document or gather documentation to support the claim of qualified process improvement activities. This will not only help in final determination of whether process improvement activities are qualified but will also aid in demonstrating how the activities meet the four tests. Some of these documents may already be generated as part of the process improvement activity, especially if the taxpayer is employing programs such as Lean Manufacturing, Six Sigma, or conducting Kaizen events.

Technical in Nature/Technical Uncertainty

Improving upon a complex process, whether in the manufacturing industry or industries such as health care, can meet the test of being technical in nature. The technical nature of the activity can be enhanced when using such complicated industrial engineering techniques and hands on analyses as those found in programs/approaches like Lean Manufacturing or Six Sigma. However, technical uncertainty or complexity can also exist due to the nature of the process itself – how complex the process is, how difficult modifying or changing portions of the process may be, or how much engineering, design, testing, and iterations are required to implement the process improvement.

Technical uncertainty within a process is often the driving factor for using programs/approaches such as Lean Manufacturing or Six Sigma in process improvement. However, if a taxpayer is not using these programs specifically, the principles can still be applied in these instances. For example, in the initial phase of a Six Sigma project,  the process or system as a whole is defined (business component) and questions are raised as to where problems such as bottlenecks, design flaws, scheduling, and inventory management can be solved (uncertainty). This phase is where possible paths of improvement are suggested or evaluated and recording this portion of the process can help with supporting the taxpayer’s claim. The Define, Measure, Analyze, Improve, and Control (DMAIC) approach, the backbone of most Six Sigma improvements, can also be applied both when planning and executing a process improvement activity; and can also be utilized when documenting and/or describing how an activity is qualified.

Process of Experimentation

Figuring out what data to determine and conducting statistical analysis of this data is included in the process of experimentation within DMAIC approach. There is often extensive testing and studying of the effect of different components within a process. These components might include the inputs and outputs of the system or the mechanical workings of different parts of the process.

Modeling and simulation are also prevalent when studying process improvement possibilities. Modeling and simulation make it possible for the system to be analyzed without interrupting daily operations. By modeling and simulating a production floor or process flow, engineers/process designers can understand how certain factors affect inputs, outputs, and overall performance without interrupting the real-life process from functioning. Additionally, some of the modeling and analysis tools can provide a good example as to why a process improvement activity is technically challenging or uncertain. Some of these documents may include video analysis of a regular production day – following a product through the entire process to identify the possible bottlenecks, supply chain issues or production line hinderances. Other examples might be spaghetti diagrams, data analysis of waste from specific production lines, etc.

Consideration of Alternatives

Lean manufacturing, Six Sigma, or other process improvement approaches are rarely taken without considering multiple alternatives. The complexity of the process, how many parts or different processes there are within a system, determines the number of alternative process improvements that can be considered. In some cases, there are a significant number of changes that can be made, but only several alternatives can be prudently considered. These are the cases in which modeling and simulation can be an effective way of comparing these alternatives with each other. When documenting the consideration of alternatives, it is not necessary to document every single possible alternative. However, if the taxpayer can show that there were at least more than one alternative considered, modeled, tested, vetted or even tried, then the case is better made for the existence of technical uncertainty that was attempted to be resolved through a process of experimentation. This can include test runs, comparing initial waste percentages to the percentages after the production line is modified; meeting minutes/email discussions with production engineers or personnel discussing the possible impact of changing production lines in suggested ways, or can also include more formal documentation like test reports, product quality evaluations, etc.

What is Kaizen, and Where Does it Fit In?

When roughly translated from Japanese, Kaizen means “continuous improvement”. The purpose is to eliminate the seven kinds of waste in:

• Overproduction
• Unnecessary stock
• Defects
• Waiting
• Transportation
• Processing
• Motion

Improving all these aspects through the elimination of waste is an on-going process that strives for perfection. Companies that utilize the Kaizen philosophy are continuously testing their processes, studying relationships and outcomes, and working with new technologies to improve their processes. These activities are completed within a framework of what are termed as “Kaizen Events” – usually short, focused, specific outcome driven events that can include personnel from varying areas of the company – sales, production, engineering, product design, etc.

While all these activities make it seem like a Kaizen event would be a slam dunk for meeting all the criteria of a qualified process improvement activity, that may not be the case. Not all Kaizen events are created the same, nor are all of them documented in a manner that would slow them to withstand scrutiny under a review. In fact, a Kaizen event may be performed in an area of a company completed unrelated to manufacturing – i.e., Human Resources, or Accounts Payable. When determining whether a Kaizen event is qualified, it still need to meet the four tests. One of the benefits of a Kaizen event in terms of the Research Credit is that most are well documented – there is a stated purpose given for the event, specific metrics or goals for determining success of the event, named “stakeholders” or participants in the event, and most importantly, good record keeping related to each person’s time spent on the event.

Conclusion

While it may seem at first glance that qualifying and supporting process improvement costs is a nebulous process and not likely to withstand review; given that there is a specific subsection of Section 41 specific to processes should provide some assurance that it is possible to qualify these types of activities. However, as with all qualified activities for the Research Credit, it is important to not only demonstrate how and why an activity qualifies, but also supporting that claim with documentation as much as possible. Thankfully, many of the companies undertaking these activities may already be generating the necessary documentation; if not, then it may not be too much of a burden to implement some methods for doing so.

CFO Services Can Help With Your Research Credit & Tax Incentive Needs

The Research Credit provides an opportunity to reduce tax liability. In order to maximize the Research Credit impact to don’t forget to capture all the expenses that should qualified, especially wages that are direct support.  To learn if you’re eligible for the Research Credit or have more questions related to qualified direct support, please contact CFO Services.

Through knowledge and perspectives gained working with virtually every industry and type of client (Fortune 500, medium-size and small companies), CFO Services has committed to a strategy of providing a depth of knowledge in a narrow field of focus: business incentives and credits. Providing tried and tested methodologies, our professionals can help almost any business research, identify and comply:

• Research and Development Credits
• Multi-State Tax Incentives and Credits
• State Sales and Use Tax
• Strategic Alliances
• Workforce Training Programs

Our company was founded on the principal that we’d deliver results – cash results. Our focus, is not about persuading companies they need something; it’s about sharing ideas and then ensuring that our niche will benefit the company.

A narrow field of focus. As much or more knowledge than anybody else in our niche. Actual profits to our client companies. That’s our objective.

Economics of “Specified” Research Expenses Change for 2022

With 2021 off and running, it is important to highlight the upcoming change for the Research Credit and deduction starting at the beginning of 2022.  The Research Credit (Section 41) and R&D deduction (Section 174) have been utilized by companies for many decades to help build research, improve processes, and launch new products.

Tax reform from 2017 has put a little wrinkle into capturing this benefit, and many of our clients have asked about the economics and effects of the change.  Previously, if a company wanted to claim the Research credit (41), they were not required to claim the corresponding R&D deduction (174).  Companies would still receive the deduction for wages, supplies, and contract research claimed under the credit but typically deduct them under section 162 as ordinary and necessary business expenses, treat them as cost of goods sold, or capitalize them.  Either way a company could gain the immediate deduction of the full amount of the expense.

With the tax law change, and starting in 2022, companies will only be able to claim the research credit for expenditures that “may be treated as specified research or experimental expenditures” under section 174.  Additionally, under 174 a company is required to capitalize and amortize the deduction over five years.  Under these news changes, in order to claim the Research Credit, a company will be required to capitalize and amortize the deduction, instead of immediate expensing. 

Economics & Impact of the Change

The next question in the tax law change, is evaluating the two choices companies have with regards to research expenses. 

• Immediately expense the cost under another section, BUT lose out on claiming the Research Credit; or
• Amortize the cost under section 174 and claim the Research Credit

At first it might seem that immediate expensing is the most desirable, but the amortization is an overall timing issue that is only impacted by inflation or the time value of money.  Since inflation has been historically low, and within the next five years looks to stay historically low, that difference is very small.  Second, a taxpayer loses the credit fully if they choose immediate expensing which can’t be recovered.

Below is a comparative example for a company to demonstrate the economics of this change.  Here are a few assumptions within the example.

• Utilizing a 1.5% discount rate
• Research Credit is calculated using the simplified method
• Using 21% as the corotate tax rate

EXAMPLE of “specified” research economics
	Immediate Expensing	New 174 “specified expense”	Difference
Amount of Expenses	$100,000	$100,000
Current Year Deduction	$100,000	$20,000
Remaining NPV of Deduction	$0	$75,653
Total Deduction	$100,000	$95,653
Tax effective Benefit	$21,000	$20,087	($913)
R&D Credit (Year 1)	$-	$5,530	$5,530
Total Benefit	$21,000	$25,617	$4,617

From the above example, even with the new tax law change, a taxpayer who has R&D costs should be deducting these as a “specified expense” and claiming them as a Research Credit.  If the company chooses the other method, they will lose any ability to claim the Research Credit, which is shown above to be approximately 22% of additional tax benefit. 

In 2021, companies should start looking at their current accounting system to start isolating the expenses for research that will need to be “specified” and captured for the Research Credit.  This will allow these companies to make an easy transition to the new method and not miss out on the additional benefit for claiming the Research Credit.

CFO Services Can Help With Your Research Credit & Tax Incentive Needs

The R&D Credit provides an opportunity to reduce tax liability. In order to maximize the R&D Credit impact to don’t forget to capture all the expenses that should qualified, especially wages that are direct support.  To learn if you’re eligible for the R&D Credit or have more questions related to qualified direct support, please contact CFO Services.

Through knowledge and perspectives gained working with virtually every industry and type of client (Fortune 500, medium-size and small companies), CFO Services has committed to a strategy of providing a depth of knowledge in a narrow field of focus: business incentives and credits. Providing tried and tested methodologies, our professionals can help almost any business research, identify and comply:

• Research and Development Credits
• Multi-State Tax Incentives and Credits
• State Sales and Use Tax
• Strategic Alliances
• Workforce Training Programs

CFO Services

Our company was founded on the principal that we’d deliver results – cash results. Our focus, is not about persuading companies they need something; it’s about sharing ideas and then ensuring that our niche will benefit the company.

A narrow field of focus. As much or more knowledge than anybody else in our niche. Actual profits to our client companies. That’s our objective.

_{IRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein.}

Missing R&D Expenses: Don’t forget Support Activities

If a company files for the research credit, they would be aware of the “Four-part” test for qualified activities. Part one, a qualified activity has a purpose to create or improve a company’s product or process; part two, these improvements are made through the application of hard sciences principles and techniques; part three, there are uncertainties as to how to use or design the improvement with the hard sciences; and part four, there needs to exist a process to evaluate design and development approach in order to mitigate the improvement uncertainties.

What companies might miss are the types of expenses that can relate to qualified activities, specifically wage expenses. The eligible research expenses for wages fall into three categories of qualified services: those engaged in qualified research; those who are directly supervise, and those who directly support.

Most of the time, companies understand which employees are engaged in qualified activities and even who supervises them. The missed opportunities are usually with employees who directly support research activities. Companies should be willing to look past employees who are directly involved in qualified activities, in order that they not miss employees who, while not fully engaged in a substantially all capacity, are still performing qualified activities.

The R&D Credit states that direct support is anyone who is helping support either those engaged in qualified activities or directly supervising them. Direct support can include employees like technicians, project managers, quality assurance personnel, and assistants. The R&D Credit gives further examples:

• A secretary for typing reports;
• A laboratory worker for cleaning equipment;
• A clerk for compiling research data;
• And a machinist for machining parts for a prototype model.

Most companies at first glance would probably not have selected a secretary or machinist wages as qualified for the R&D Credit. The important aspect to those supporting employees is that it is direct support. General administrative work would not be qualified, things like accountants preparing checks for engineers, or janitors cleaning the research laboratory.

A good rule of thumb is to look around the employees who are directly involved and see if there are other employees who support the work. It might be surprising what types of employees can qualify for supporting R&D activities.

The R&D Credit provides an opportunity to reduce tax liability. In order to maximize the R&D Credit impact to don’t forget to capture all the expenses that should qualified, especially wages that are direct support.  To learn if you’re eligible for the R&D Credit or have more questions related to qualified direct support, please contact CFO Services.

CFO Services Can Help With Your Research Credit & Tax Incentive Needs

The R&D Credit provides an opportunity to reduce tax liability. In order to maximize the R&D Credit impact to don’t forget to capture all the expenses that should qualified, especially wages that are direct support.  To learn if you’re eligible for the R&D Credit or have more questions related to qualified direct support, please contact CFO Services.

Through knowledge and perspectives gained working with virtually every industry and type of client (Fortune 500, medium-size and small companies), CFO Services has committed to a strategy of providing a depth of knowledge in a narrow field of focus: business incentives and credits. Providing tried and tested methodologies, our professionals can help almost any business research, identify and comply:

• Research and Development Credits
• Multi-State Tax Incentives and Credits
• State Sales and Use Tax
• Strategic Alliances
• Workforce Training

Each quarter, CFO Services highlights a certain feature or aspect of its RCM tool for Research Credits.  This quarter, CFO Services is highlighting how to view the scope of documentation captured to help determine if the projects qualified are substantiated.  This helps clients determine the scope of what activities have or need document support while maintaining efficiencies. If you would like to learn more about CFO Services’ RCM tool, please visit our Newsletter archive.

Project Details

Percentage of QREs Documented: This graph on the dashboard shows the percentage of projects that are documented for qualitative purposes. This donut chart is being created from a column in the project listing that is checked if there is qualitative descriptions in the list Once a project has been documented, that field can be marked “yes” to show those project QREs in the graph’s percentage as covered.  In the Project listing there are columns for the Project Purpose, and descriptions for the 4 tests of the R&D Credit, Technical Uncertainty, Process of Experiementation, Business Component and Technical in Nature. You can see the Qualitative Project Listing example below. This List can also be exported to Excel when you click on an item and at the top tab under “List” click on the “Export to Excel”.

This project data is all taken from conversations with SME’s or from contemporaneous documentation. The documents that are received can be uploaded to a document library on the site and connected to the specific projects that they help support.

When viewing a project individually (see below) you can see all the documents associated to the project under the tab “Project Documentation”.  Along with documents you can see additional project details, such as time that employees have put to that specific project as well as any expenses that are associated with the project.

CFO Services Can Help With Your Research Credit & Tax Incentive Needs

The R&D Credit provides an opportunity to reduce tax liability. In order to maximize the R&D Credit impact to don’t forget to capture all the expenses that should qualified, especially wages that are direct support.  To learn if you’re eligible for the R&D Credit or have more questions related to qualified direct support, please contact CFO Services.

Through knowledge and perspectives gained working with virtually every industry and type of client (Fortune 500, medium-size and small companies), CFO Services has committed to a strategy of providing a depth of knowledge in a narrow field of focus: business incentives and credits. Providing tried and tested methodologies, our professionals can help almost any business research, identify and comply:

• Research and Development Credits
• Multi-State Tax Incentives and Credits
• State Sales and Use Tax
• Strategic Alliances
• Workforce Training

Nebraska Legislative Update………..

• The 106^th Nebraska Legislature’s 2^nd Session convened (January 8, 2020), adjourned due to COVID-19 (March 25, 2020), reconvened (July 20, 2020), and adjourned, for the year, on Thursday, August 13, 2020.   

• The Nebraska Legislature passed the ImagiNE Nebraska/business incentive legislation.  The bill, which began as LB720, became part of a compromise bill (LB 1107), that included property tax relief, business incentives and a transformational jobs project at UNMC (NEXT – Nebraska Transformational Projects Act). The bill passed on a 41-4 vote. 

• Governor Pete Ricketts signed into law Legislative Bill 1107 on August 17, 2020.

• For purposes of business incentives, the Nebraska Advantage Act will sunset at 12/31/20 and ImagiNE Nebraska applications may be filed on/after 1/1/21.  Any applications filed and approved, via a ‘complete application’ date, under Nebraska Advantage, on/prior to 12/31/20, will be ‘grandfathered’ in under the NAA program.

For additional information about the legislative session, please go to the Nebraska Legislature link at http://www.nebraskalegislature.gov/.

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ImagiNE Nebraska (LB 1107) – Cursory High Points

• Fiscal cap is in place at $25M (2021 & 2022), 100M (2023 & 2024), $150 million (2025) and after Year 5, cap is equal to 3% of actual General Fund net receipts. 

• A requirement that the Taxpayer not violate any state or federal law against discrimination.

• Applications will be filed to the Nebraska Department of Economic Development, and compliance/audits will be completed by the Nebraska Department of Revenue.

• Application fees, due to the State of Nebraska, have increased to $5,000, for all tier levels, and a .05 fee is assessed on benefits realized.  A credit is allowed against the .05 fee, specific to the first $5,000 (i.e. application fee). 

• Qualified activity designations have changed, involving designated activities and/or NAICS codes. Furthermore, locations will be designated as either qualified or non-qualified locations, as a result of meeting a majority activity designation.

• A tier designation, at application, exists, but the Applicant may move to another tier, via a State-provided form, ‘until the first December 31 following the end of the ramp-up period’.

• Attainment period (aka ramp-up period) is 5 years, Entitlement period is 7 years, and Carryforward period is 3 years.

• Base year (employment) for 2021 applications, will be the higher FTE computation of 2019 or 2020, whereas applications filed in 2022 or later, will utilize ‘the year immediately preceding the year of application’.

• Qualified employees must be Nebraska residents (out-of-state employees working at the NE site no longer qualify), full-time employees (part time employees no longer qualify), offered a sufficient package of health/benefit coverage, and meet minimum wage requirements (required of the applicable tier).  Each tier has a documented minimum wage requirement at either 70% of the statewide average (rural manufacturing), 75% of the statewide average, 90% of statewide average, 100% of the statewide average, or 150% of statewide average.  Using current wages (this will change for 2021 applications), 100% of the statewide average is currently estimated/calculated at $44,824 annually/$21.55 per hour.

• Qualified investment continues to have a project location bias and allow for assets placed in service at the project site, assets transferred into NE (and utilized at the project site) and assets leased (at the project site). 

• Benefits may be claimed/filed ‘when’ the business reaches the required levels (at the end of the calendar year), rather than ‘post’ audit.  As a result of this change, yearly filing requirements and correlating documentation/support, required by NDR, will be expanded and scrutinized yearly, in order to ensure compliance.  The Department of Revenue has the authority to conduct audits, of any filer.   

• Updated language on job training and talent recruitment, including additional use of credits.

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Economic Development around the Country……….

Amazon.com is expanding its physical offices in six US cities, estimating that it will add 3,500 corporate jobs and 900,000 sq. ft. of office space across its hubs in New York, Phoenix, San Diego, Denver, Detroit and Dallas. 

BAE Systems, one of the world’s leading aerospace and defense technology companies, is expanding its operations in Austin, Texas, via the construction of a new 390,000 sq. ft. facility, at its campus development in Parmer Austin Business Park.  The site, which is anticipated to be completed in 2022, and valued at approximately $150M, will increase capacity by more than 1,400 employees and include business activities including, but not limited to, engineering, manufacturing, laboratory, and administrative.

Online pet retailer Chewy, Inc., is opening an eCommerce fulfillment center in Belton, Missouri, at the NorthPoint Development’s Southview Commerce Center.  The Company estimates that the new 800,000 sq. ft. facility will require approximately 1,200 employees, whom will help ship pet food and pet-related products representing over 2,000 brands.

Commercial Metals Company, a Texas-based steel and metal manufacturer, plans to construct a $300 million rebar micro mill adjacent to its current operation center and campus in Mesa, Arizona. The expansion in Mesa represents CMC’s third micro mill, since 2009, and is expected to produce an estimated nominal annual capacity of 500,000 tons, including 150,000 tons of merchant product, The Company plans to hire 185 additional employees. 

The developer of Fortnite, Unreal, and Gears of War (Epic Games) is planning to start construction, during 2020, to expand its current headquarters in Cary, NC.  The plans, which are expected to accommodate up to 2,000 employees, and include an additional 450,000- to 500,000-sq. ft. will occur at an adjacent property, next to the current property that Epic has owned since 2015.  Epic’s new facility will include a range of amenities, outdoor features, and additional parking.

Kubota continues to invest in Kansas, with its most recent decision to invest $43M and create net-new 130 full-time positions, at a Great Plains Manufacturing site in Salina, Kansas.  Through Kobata and its Subsidiaries, the Company currently employs over 1,600 people in Kansas.  

Austin also announced, during July-2020, that it will become home to a new Tesla assembly plant, which will produce the Tesla Cybertruck and Model Y (SUV).  The plant will cost in excess of $1.1B and employ 5,000 people, and vehicle production is anticipated to begin late 2021. 

Over 100 million pizzas a year.  That’s how many pizzas the Schwan’s Company will produce in Salina Kansas, after the upcoming expansion.  During August 2020, the Company made public its plans to build/expand, by 400,000 sq. ft., its current pizza manufacturing plant in Salina, KS.  The Company already employs 1,125, at the plant, and anticipates hiring an additional 225 net new full-time jobs (by 2023).

Walmart is building a new direct-import distribution center, at an estimated cost of $220M, at/near Ridgeville, South Carolina, and the Port of Charleston.  The new distribution center will support approximately 850 Walmart Stores and Sam’s Clubs in the Southeast Region. 

This newsletter is provided for information purposes only and should not be used by itself as legal, tax or business advice.

Subject:                 Supporting the R&D Credit with JIRA

Newsletter Date:   November, 2020

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IRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein.

USING JIRA TO SUPPORT R&D CREDIT

JIRA is a fantastic platform for project tracking, but it can also help in supporting your R&D credit claim. Using some or all of these best practices will help you in your goal of having as minimal a role as possible for yourself or your personnel during a review of your R&D credit, as the documentation will do the supporting for you. First, let’s learn a little about what JIRA is…

JIRA is a tool developed by Australian Company Atlassian. It is used for bug tracking, issue tracking, and project management, most commonly during the software development. 

Atlassian provides JIRA for free to open source projects meeting certain criteria, and to organizations that are non-academic, non-commercial, non-governmental, non-political, non-profit. For academic and commercial customers, the full source code is available under a developer source license.

The tool can be used as a hosted solution or as an internally managed, on-premise solution. When launched in 2002, JIRA was purely issue tracking software, targeted at software developers. The app was later adopted by non-IT organizations as a project management tool. The process sped up after the launch of Atlassian Marketplace in 2012, which allowed third-party developers to offer project management plugins for JIRA. “BigPicture”, “Portfolio for JIRA”, “Structure”, and “Tempo Planner” are major project management plugins for JIRA.

Software teams began adopting JIRA as they adopted the Agile development method (a development method that breaks product development work into small increments that minimize the amount of up-front planning and design. Iterations, or sprints, are short time frames (timeboxes) that typically last from one to four weeks). As a project management tool, JIRA is a robust way of tracking and assigning tasks, tracking progress and issues, as well as tracking time spent on specific tasks and sub-tasks. Whether being used for project management in the realm of software development or for non-software development related projects, JIRA can be leveraged to support your R&D credit.

Some of the fields/inputs in JIRA that can be used to help support the R&D credit activities in your company include:Who was involved (creator, reporter, and assignee fields)

1. What work was performed to attempt to resolve said issue (summary and or description)
2. When the work was performed (creation, update, and resolution timestamps)
3. How the work was carried out (description and or comments)
4. Why the work contributes to the development/implementation of new features or functionality, or how it pertains to the overall improvement of the product or service (epics or other parent entities that group together logically related issues).

Now that you know a little more about what JIRA is and where it has come from, let’s investigate how you can best use JIRA to help with reporting information related to the Research and Development Tax Credit, or, how tax departments can use these practices as a conversation guide with development groups.

Best Practice 1: Use Those Descriptor Fields!

The easiest way to communicate what the technical nature of the work was and how it was carried out is to focus on filling out the (default) project, summary, and description fields in a consistent manner as the work progresses. If you choose to organize JIRA into multiple projects, it helps tremendously during an R&D credit review, as an auditor can then filter for eligible work at the project level. Summaries and task descriptions should be filled out with enough detail such that someone outside your company can easily tell what tasks are related to qualified activities and directly in support of your R&D work according to Section 41 guidelines.

The information contained within these fields should enable an auditor to clearly distinguish between eligible and ineligible work at the task level. Beyond that, you may choose to create custom JIRA labels (e.g. ‘R&D’ or ‘experimental’) and apply them to epics/issues for ease of filtering at the end of the tax year, as well as any other fields that may help a reviewer see what small or routine tasks were necessary parts of an R&D project.

Naming/labeling conventions, terms, acronyms, and insider jargon should all be standardized across JIRA issues to enable an outsider to filter for, reference, and group logically related tasks. For example, if tasks or sub-tasks are labeled as “Bugs”, but those activities actually include qualified work such as performance testing of a newly deployed feature prior to roll-out, it may be worth the discussion to either break out those activities as sub-tasks, or give them a label all their own (i.e, “performance testing” or “testing” instead of “Bugs”.

Likewise, consistency is key. If projects go by a different name every time they get referenced, tracking the work associated with a given claim becomes a nightmare.

Best Practice 2: Use Sub-Tasks to Bolster Assignee Fields for Wage QRE

Wages make up the bulk of expenses of a typical R&D claim, meaning that evidence supporting your wage allocation is commonly the most important kind of evidence. Therefore, it’s important that your supporting documents clearly demonstrate who was working on a given task, and when that work occurred.

Trying to use JIRA to calculate the overall qualified percentage of individuals can result in lower than accurate results, due to a built-in feature of JIRA regarding past reassignment of tasks that decreases the amount of eligible work you can associate to specific individuals. The root cause stems from JIRA having only one Assignee field, and this field only retains the most recent assignee ID. As already stated, Atlassian has done this purposefully, as it means one person is responsible for each piece of work at any given time, but this it makes it much more difficult to figure out how to apportion total time logged in a particular issue amongst all past and present assignees.

So how do you make sure that your JIRA documentation matches the actual R&D work of your team? The most straightforward way is to create a large amount of individual sub-tasks (e.g. having design, production, and validation all be independent tasks), each with a single individual being responsible for them, and duplicating tasks should multiple people need to collaborate. Admittedly, this method results in a lot of clutter in terms of fields but will ensure that the “assignee” field accurately identifies who did what.

Alternatively, you might consider adding a custom user-picked field for tracking personnel who have previously worked on a task, but who became unassigned for whatever reason, for multiple assignee tracking with minimal overhead.

Best Practice 3: Time Spent is Time Tracked

Since two JIRA issues can take wildly different amounts of time (compare an issue to fix a typo with one to develop a new feature) it helps if you can account for that. Since qualified R&D issues tend to take longer than routine ones, a tracking method which treats every issue as equal weight is probably leaving money on the table.

This is where the recommendation to leverage the “time spent” fields to keep as accurate an accounting of time spent on tasks as possible. This can be done either at the epic or task level. Make sure that you don’t miss out on time spent planning work and all the other support activities as these are eligible tasks as well; many companies only track hands-on development work in JIRA, while neglecting to log the initial R&D, design, and planning work that made implementation possible.

In lieu of explicit timekeeping, it is acceptable to use story points for time tracking/project weighting purposes. While the IRS prefers some form of time tracking, in practice they commonly recognize that story points are a good proxy for time/effort spent on tasks, so long as points are consistently applied to tasks throughout the project lifecycle. Therefore, if you have a reasonable estimate for the amount of time an individual performed qualified activities throughout the year, as well as projects/tasks to which they were assigned in JIRA, then it is a reasonable approach to utilize the number of story points as an indicator of how to properly allocate time to those projects.

Subject:                 Payroll Offset for the R&D Credit

Newsletter Date:   October, 2020

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IRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein.

VALUE FOR STARTUPS AND NEW BUSINESS: R&D PAYROLL TAX
CREDIT

New businesses have enough uncertainty, yet this has been compounded because of the current coronavirus (COVID-19) pandemic. To reduce any expense or tax liability could be a significant benefit for keeping new businesses on track during this time.

One of the more overlooked areas is the R&D Credit. Most new businesses, although they qualify for the R&D credit, don’t have taxable income, so there are no immediate benefits and they don’t file for the credit. But new businesses have possibly missed that they can use the R&D Credit to offset payroll tax up to $250,000, that can be used quickly to alleviate their tax burden.

Some new businesses might not even realize this opportunity exists because they do not see their activities as research and development. But if a new business invests in improving or creating a product or process, they have a high chance of qualifying for the R&D Credit.

The R&D payroll credit offers immediate value for the current year. For example, if a qualified business makes the R&D payroll election in the second quarter on their Federal Return. They can start using the payroll credit in third quarter of the current year.

To offset payroll tax using the R&D Credit, new businesses must meet these qualifications:

• Qualifying activities and expenditures for R&D tax credit
• An average of $5 million or less in gross receipts within the last five years.
• Only have gross receipts up to five years.

New businesses should not overlook this opportunity to reduce their tax liability that can have an immediate impact. To learn if you’re eligible for the R&D payroll tax credit or have more questions related to R&D tax credit, please contact CFO Services.

Federal and State Credits:

Benefit Summary: This chart on the RCM dashboard shows the federal credit amount, and each state’s credit if the project is filing in states. You can hover over each color on the graph to see the amount of credit.

Clicking on the graph’s title “Benefit Summary” will take the user to the Benefit Summary List. This will show more specific detail (seen left).  This list shows the federal QREs and Credit that the RCM Tool calculates, as well as any states that might be captured from the data. The “Form Detail” Column has a link that sends the user to a screen that shows how the credit is calculated based on the Tax Forms for that specific state.

You can see the New Jersey form detail example below.

At the top of the page you can click on the Print Icon to pull up a printable page that has been created to look like the State Tax Credit Form. You can see the New Jersey Print Form example below.

Subject:                 R&D Credit: Upcoming changes to capitalization and amortization rules.

Newsletter Date:   August, 2020

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IRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein.

OPTIONS FOR CHANGES TO THE CAPITALIZATION AND AMORTIZATION RULES

The Tax Cut and Jobs Act (TCJA) was passed in 2017, but parts of the act do not take effect until years later.  One of these is that R&D costs will have to be capitalized and amortized over a five-year period for domestic expenses and a fifteen-year period for foreign expenses.  This results in proper planning needing to take place years in advance of this regulation becoming active.

Currently there are two options taxpayers may take:

• Direct expensing of R&D costs in the year those expenses are incurred, expensing them immediately and seeing a reduction in taxable income; or
• Costs can be capitalized and amortized over sixty months from when the benefit of the research is realized.

Under TCJA, taxpayers will not have these options and little ability to treat expenditures in a way that has immediate tax savings.

Starting in 2022, companies will have to capitalize and amortize all R&D costs incurred in connection with their trade or business over a five-year period for domestic research and a fifteen-year period for foreign research.  The midpoint of the tax year is utilized as the convention for the first year of amortization.  These expenses must continue to be amortized over the full five-year period even if the research is abandoned or scrapped.  Unlike assets the remaining basis cannot be written off upon the abandonment.

On the planning side it is important to take these changes into account.  Understanding there will be a dip in research expense relief on taxable income and planning for that is important.  Businesses will also need to file Form 3115 – Change in Accounting Method to begin the capitalization and amortization of R&D expenses incurred after December 31, 2021.

These changes will result in added administrative burden as well. The research expenses will need to be tracked and amortization schedules created in order to comply. It is likely that more detailed information will need to be prepared on the part of the taxpayer to substantiate expense claims.

This is a substantial change and will be the first time since 1954 that companies will not be able to deduct the full amount of R&D expenses immediately.  The good news is that it does not prevent the taxpayer from taking a deduction for R&D, but rather changes the timing of when the benefit can be seen.  Additionally, this is still a couple years off and there is hope that another round of tax reform will take place and the capitalization and amortization rules for R&D expenses will not come to fruition.

Tax departments don’t have a lot time. There is quarter end, yearend, and not to mention constantly working on financial reporting. It’s difficult to review and reflect on a business tax profile, let alone on possible new incentives, or even if currently claimed incentives could be increased.

Taking a cue from football, let’s go through a 2-minute drill with the Research and Development Tax Credit (R&D). 2 minutes is all a football team needs to score before the half or end of the game. So, teams have a 2-minute strategy or drill to use these moments to extend their lead or win. It’s usually the most exciting part to watch. A team doesn’t have time for long, intricate plays. Fast and focus is their only plan if they want to score.

R&D has a lot of details with plenty of legislative and court history. But someone doesn’t need to know all the details to grasp whether a business can apply for R&D, or possibly increase the amount of benefit. Let’s take 2-minutes and point to key areas.

Be Engaged: Your business can probably benefit from the R&D Credit

R&D is not just for large technology corporations, but also for small to medium businesses. From one hundred thousand dollars to multiple millions, all sizes of companies have received benefits from R&D. The same is true for the types of industries that can qualify. Businesses within various industries have all successfully claimed credits: Utility, Construction, Manufacturing, Retail, Transportation, Finance, Real Estate, Mining, and Agriculture companies.

Don’t think that to qualify for R&D a business must fit into a certain size or particular industry. What is important is whether a business has work that qualifies.

Be Focused: The essential elements of the R&D Credit

Too many times businesses will avoid applying for R&D because of the complexity. But the key aspects are straight forward. R&D reduces a business’ tax liability for expenses connected to R&D work or qualified activities. These expenses are employees’ wages, supplies used in research, and any contractors used to help with research activities.

The most important part is knowing whether a business has work that is qualified. With qualified activities, here is the most important questions a business can ask: Do they have an engineering or technical staff? And is that technical staff improving products or services for customers? If there is an engineering staff who helps make products for customers and they consistently improve these products every year, then the business should explore filing.

Focusing a little more of the technical staff. With any new or improved product, the technical staff will have a process, containing elements of design, development, testing, and redesign. This process usually has been standardized but adjusts based on the unique challenges for each project. This technical process is the core of what qualifies for R&D.

A business that needs a technical staff to make new or improved products or services for their customers has usually met the essential elements of R&D qualification.

Be Aware: Important areas where your business can increase its R&D Credit

Another roadblock might be whether the tax reduction will be worth the effort. Why go through the effort if a business only has four engineers? That can’t generate that much tax credit. It is important to remember R&D qualifies more than just the engineers connected with qualified work.

Without the supervisors and support staff most projects can’t move forward. These supervisors and support staff should be included in R&D. Businesses need to consider all activities outside of engineering that contribute to the lifecycle of the project. Most projects have Sales, Project Management, Operation, and Quality Assurance departments involved, and without them the project could not be completed. The Engineering staff is just the beginning of expenses that business can included; it’s not the end.

R&D is successfully claimed by businesses big and small, in a variety of industries outside of technology and manufacturing. Businesses qualify because they the make and improve products or services for their customers. They have an engineering or technical staff focused on making new and improved products, with the support of other departments necessary to complete it.

If a business has this fact pattern, they should explore filing for R&D.

Is there more to R&D? Yes. But these are the most important areas to determine whether a business can make a successful claim that will offer a benefit. 2 minutes might not be enough time say everything, but it is enough to convey the most important parts of R&D and win a football game.

In today’s manufacturing environment robotics, automation, and autonomy are technologies that are being heavily integrated into operations. The efficiencies gained, flexibility in performance, and consistency in operation while providing a cost savings, robotics has become more ubiquitous throughout the plant.

Typically, a robot can range from $25,000 to $400,000 depending on the type of movement, application, architecture, and quality of the brand. From there, the amount of additional spend that goes into the project from foundation, electrical, and expanding layout can become significant. On top of that, manufacturing will hire robotics, software, or electrical engineers to install, configure, and design the procedures for the robotics to function properly.

For example, typically when a new part or process is implemented into an existing robotic manufacturing process there is time from engineering, operations, quality/testing that need to run test parts and evaluate that those meet specification. Also, typically when a new robotics application is installed, new tooling or fixturing is tested and built to allow for the increase in capacity or performance.

With these large projects, companies can recoup some of this value in immediate payback through the Research and Development Tax Credit (R&D) . R&D is a federal incentive for companies to capture a tax credit for design, development, process improvement, application engineering, and even robotics projects. Here is a short list of the types of costs within robotics that could qualify.

• Robotics costs that could potentially qualifying

o Alpha robot used for initial evaluation
o Software developers time to build middle ware connecting to existing applications
o Prototype parts run through the robot to test quality or performance enhancements
o Engineering used to optimize movement procedures
o Tooling/Fixturing built to increase capacity and extend reliability
o Outside contractors utilized to design improvement configurations
o Hourly operation labor to test or evaluate new parts or manufacturing consistency

The list and example above can be expanded and depending on the application, the costs can get quite significant. On average, if a company has qualifying costs from their robotics projects, they can capture approximately 7.9% of the expenses back from the R&D.

With the high value of R&D and the expensive development costs of implementing robotics, manufacturers should look to build a better ROI on these projects by targeting the R&D credit as way to fund that payback sooner.

The Research and Development Tax Credit (R&D) has adapted over the years as technology has changed, in order to address new costs and expenses related to the qualified expenses. One of these areas in which there has been significant change over the past decade is in the realm of software development, due to the fast-paced nature of the industry and the speed at which new techniques and processes are implemented. Case in point, one of the commonly accepted expenses claimed by software developers in the past were the cost of licenses for software development tools utilized by developers specifically for qualified development activities. These costs were commonly classified as “supply” costs, as it could be argued that the nature of the expense was something necessary to and “consumed” within the development. Additionally, the definition of “Supplies” included the stipulation that the item be “any tangible property,” which could be construed to mean the physical copies of software (CDs, etc.) that were commonly provided by the creator of the software development tool.

However, as technology has changed, and most software is now either delivered digitally via download or through a subscription-based model (i.e., Adobe Creative Cloud), there is literally no longer a “tangible property” component, and therefore a much higher risk factor in claiming these licensing expenses as supply Qualified Research Expenses (QRE).

While this concept may seem to reduce the potential QRE a software development company may be able to claim, in looking at the changing landscape, technology and methods in the software development arena, an increasingly common cost is the use of cloud-based resources such as Amazon Web Services (AWS) or Microsoft Azure. At their beginning, many of these cloud-based services were utilized mainly as an off-site storage solution. However, as these companies have continually developed their platforms and integrated tools designed specifically for developers, many software companies are using these services for actual development activities. In doing, so the costs associated with these services can and have been successfully claimed under the banner of computer rental QRE.

Computer Rental

Computer Rental is defined in §41(b)(2)(A)(iii) as “any amount paid or incurred to another person for the right to use computers in the conduct of qualified research.”

A developer can take advantage of cloud-based command-line tools and software development kits (SDKs) to deploy and manage applications and services. For example, the AWS Command Line Interface is Amazon’s proprietary code interface. A developer can also use AWS Tools for Powershell to manage cloud services from Windows environments and AWS Serverless Application Model to simulate an AWS environment to test Lambda functions. AWS SDKs are available for a variety of platforms and programming languages, including Java, PHP, Python, Node.js, Ruby, C++, Android and iOS.

A development team can also create continuous integration and continuous delivery pipelines with services like AWS CodePipeline, AWS CodeBuild, AWS CodeDeploy and AWS CodeStar. A developer can also store code in Git repositories with AWS CodeCommit and evaluate the performance of microservices-based applications with AWS X-Ray.

Technology is continually changing and will continue to do so. As software development companies adapt to and integrate these new technologies and processes, it doesn’t have to be at the detriment of losing qualified QRE expenses. Many of these costs have just changed, from “Supply QRE” to Computer Rental QRE.” As there is no reduction in direct expenses claimed for computer rental as there are for “Contract Research QRE” (65% reduction), many of these software development companies have been able to realize the same or similar levels of qualified expenses when capturing R&D.

Nebraska Legislative Update………..

• The 106^th Nebraska Legislature’s 2^nd Session convened (January 8, 2020), indefinitely adjourned (March 25, 2020), reconvened during the week of March 23^rd (specific to the authorization of $83M of emergency COVID-19 funding) and is on hold again.

• There are currently 17 days left of the 60-day session. The Speaker/Legislature intends to reconvene sometime during the 2020 calendar year.

• Nebraska’s primary election is slated for May 12, 2020.

• The Nebraska Legislature has NOT passed the ImagiNE Nebraska/business incentive legislation (LB720).  It is expected that, when the session does reconvene, that business incentives will be identified as one of the primary items that needs to be addressed by the body.  A possible alternative to passage, is choosing to extend the current program (Nebraska Advantage Act) past its current sunset date of 12/31/20.

For additional information about the legislative session, please go to the Nebraska Legislature link at http://www.nebraskalegislature.gov/.

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COVID-19 Stimulus Summary/Update………..

Round 1 – $8.3 billion package designed to boost vaccine research, preparedness and prevention, and give seniors greater access to telehealth options through Medicaid. Enacted into law in early March 2020.

Round 2 – On March 18, 2020, the Families First Coronavirus Response was signed into law, marking the second major legislative initiative to address COVID-19.  The Act focused on temporarily requiring paid sick and family medical leave, increasing unemployment benefits, providing coronavirus testing at no cost to consumers, and increasing funds for a variety of other financial support to programs expected to see increased demand due to coronavirus.

Round 3 – The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) – $2 trillion  economic stimulus package, signed into law on March 27, 2020, covering multiple categories including, but not limited to, business, labor, tax, health care, individual and other: 

Business Provisions

• $500 billion in loans to eligible businesses
• $350 billion in small business loans (see editorial below)
• $24 billion to stabilize the farm economy

Labor Provisions

• Paid leave payment cap and advance tax credit
• $600/week add-on to state unemployment programs
• Create state short-term compensation programs

Tax Provisions

• 2018 – 2020 losses can offset previous income
• Allowable interest deductions up to 50%
• 2-year payroll tax deferral
• Access to tax refunds when paying taxes on overseas earnings
• Create employee retention tax credit (see editorial below)
• Accelerate corporate Alternative Minimum Tax (AMT) credits
• Fix to Qualified Improvement Property

Health Care Provisions

• $150 billion for health care facilities
• Liability protections for personal protection equipment makers
• Clarifies insurance coverage for tests and treatment
• $200 million for telehealth

Individual Provisions

• Individual rebate checks
• Waives 10% penalty for retirement plan distributions

Other Provisions

• $25 billion food assistance
• $30 billion emergency education funding

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Paycheck Protection Program (PPP)

1. Funding/Deadline? Various headlines indicate that $350B PPP program has reached its full funding allocation.  Current discussions are occurring, at the federal level, to earmark additional funds to the PPP program.

2. Separate Account Management. Guidelines, by both the SBA and banks, are to deposit PPP funds into a separate bank account, from normal operating accounts, in order to separate and correctly document permitted uses of the PPP program.  Recall that if permitted uses aren’t abided by, or documented, loan forgiveness will not occur. NOTE: Permitted uses, of loan proceeds under PPP, have changed from original guidance. 

3. Documentation. PLAN NOW.  When applying (in the future) for forgiveness, companies must support their permitted uses (including detailed documentation verifying payments and from what sources), COVID-19 impacts to your business, wage and health care cost calculations, and FTE calculations.  Plan now in order to ensure future reporting necessary to obtain loan forgiveness.

4. Workforce. Loan forgiveness is subject to FTEs (full-time employee equivalents) and compensation requirements.

Related to FTEs, to determine loan forgiveness, borrowers will use a ratio to divide the average number of full-time equivalent employees per month during the eight-week period following PPP loan disbursement by, at the discretion of the borrower, either:

• The average number of full-time equivalent employees per month during the period beginning February 15, 2019 and ending on June 30, 2019; or
• The average number of full-time equivalent employees per month during the period beginning January 1, 2020 and ending on February 29, 2020.

Seasonal employers cannot use the 2020 period for comparison, but instead must use only the period beginning on February 15, 2019 and ending on June 30, 2019.

After determining this ratio, the borrower’s loan forgiveness will be reduced if the above calculation results in some number less than one, i.e., if it has less full-time equivalent employees during the eight-week period after loan disbursement than it did during the earlier period of comparison as described above. If that number is less than one, then the forgiveness will be reduced by a proportional amount.

Borrowers may be able to avoid forgiveness penalties by restoring employee or salary reductions that already occurred between February 15, 2020 and April 26, 2020.

Related to Compensation, loan forgiveness also will be reduced for each employee whose salary or wages is decreased by more than 25% during the eight-week period after loan origination as compared to that employee’s salary and wages for the full quarter before the eight-week period. However, this reduction only applies related to employees who did not receive, during any single pay period in 2019, wages or salary at an annualized rate of pay higher than $100,000 (i.e., $8,333.33 over 12 pay periods or $4,166.67 over 24 pay periods). Therefore, borrowers need to track any pay reductions to employees who made less than $100,000 in 2019, because a 25% or more decrease of salary and wages to those individuals during the eight-week period after loan origination as compared to the full quarter before it will cause a reduction in loan forgiveness.

One key point is that borrowers can correct any reduction in employees or compensation that occurred between February 15, 2020 and April 26, 2020 to avoid penalties under the above forgiveness calculations. For reductions in employees or compensation that occurred during that period, borrowers will not have their loan forgiveness reduced if they restore those numbers in accordance with the PPP forgiveness provisions by June 30, 2020. This language was included in the CARES Act with an understanding that several employers needed to take adverse action before it was enacted. The forgiveness provisions allow those employers to amend those prior actions by June 30, 2020 to avoid suffering any reduction in forgiveness on that basis.

5. Documentation.  FORGIVENESS.  A borrower will apply for forgiveness directly with its lender. Although guidance on the application for forgiveness has not yet been promulgated, it will include:

• Documentation verifying the employee and wage thresholds are met, including payroll tax filings reported to the IRS and state income, payroll, and unemployment insurance filings;
• Documentation verifying other permissible expenses, including cancelled checks, payment receipts and account statements;
• Certification from an officer of the borrower that the documentation is true and correct, and that the proceeds were made for permitted uses; and
• Other documentation or certification the SBA or lenders determine may be appropriate

6. PPP versus Employee Retention Credit. Employers may receive a PPP loan OR the Employee Retention Credit.

Employee Retention Credit

7. Refundable Tax Credit.  Refundable payroll tax credit equal to 50% of qualified wages paid by eligible employers.   The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an Eligible Employer for qualified wages paid to any employee is $5,000. (Act Sec. 2301(c)(3)(C); Act Sec. 2301(b)(1) 

8. Eligible Employers.  Employers, including non-profits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings, OR employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.  Governmental employers are not eligible.

9. Term. Eligible Employers may claim the Employee Retention Credit for qualified wages that they pay after March 12, 2020, and before January 1, 2021. Therefore, an Eligible Employer may be able to claim the credit for qualified wages paid as early as March 13, 2020.

10. Qualified Wages.  Qualified wages are wages (as defined in section 3121(a) of the Internal Revenue Code (the “Code”)) and compensation (as defined in section 3231(e) of the Code) paid by an Eligible Employer to employees after March 12, 2020, and before January 1, 2021. Qualified wages include the Eligible Employer’s qualified health plan expenses that are properly allocable to the wages.

11. Application of refund.  The credit is allowed against the employer portion of social security taxes under Code Sec. 3111(a) , and the portion of taxes imposed on railroad employers under section 3221(a) of the Railroad Retirement Tax Act (RRTA) that corresponds to the social security taxes under Code Sec. 3111(a).Eligible Employers will report their total qualified wages and the related credits for each calendar quarter on their federal employment tax returns, usually Form 941, Employer’s Quarterly Federal Tax Return.  

This newsletter is provided for information purposes only and should not be used by itself as legal, tax or business advice.

There are many activities and expenses that are eligible for the Research and Development Tax Credit (R&D) that go unreported and therefore the company loses out on potential tax savings. A few of these activities and expenses will be discussed and explained briefly to make sure you are making the most of your R&D filing.

Eligible Employees

There are many employees that are not typically thought of as being research, development, or design specific employees. The regulations allow for support and supervisory employees as to be utilized in the credit calculation. A good example of this is the time the sales employees are working with customers to determine what new features or requirements are needed for products. These individuals are on the front end of the development process by helping determine the initial specs for a product and act as a liaison with customers if field testing is done.

Eligible Time

Time spent in design meetings is often overlooked. During these meetings supervisors are listening and giving feedback as to what the next steps need to be or giving advice on how to overcome a design obstacle based on their experience. Other stakeholders are providing feedback, taking notes, and giving suggestions. Each of these activities goes towards the result of whether a project will be successful or not.

Eligible Expenses

Tooling and testing equipment can also be expensed. Often tooling must be designed in order to be able to make the new product. Other times new testing equipment may need to be developed in order to properly test a new product to make sure it is performing as intended. These expenses can be added into the R&D calculation. The use of third-party contractors often comes into play with these types of expenses.

Many times, a proof of concept or a first of kind product is made to show that a design is viable, or in order to get a contract. Other times the product being developed is to too costly or too intricate to make a simple prototype, so the first piece made is treated as a prototype for testing purposes. A first-time production run can also be part of the testing process. Assurances need to be made that scaling a design up and the manufacturing process that has been designed is going to provide the same end resulting product that has been seen on the smaller scale. All these types of costs can be considered in the R&D calculation.

Process Improvements

New or improved manufacturing processes can also be claimed under R&D. In order to accomplish these tasks, you might have to reconfigure the shop floor, which takes design time to fit anything new into the finite space you must work with. New products often also require the use of new technologies that have not been used by a company before. Time must be used to determine what the best way to manufacture a new product is, or if a new technology can improve how a current product is being produced. This research time is part of the new or improved process development.

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Research Credit Module (RCM) is a way for CFO Services to organize, calculate and display the Research and Development Tax Credit (R&D) for providing full service consulting and more importantly for clients in-house calculation. RCM organizes the data received from clients into multiple lists within SharePoint. A back-end database is used to help run the credit calculation. RCM can be used by the client during the whole process of the project, so they can easily see how the project is moving along. All data seen on RCM can be viewed and edited, as well as exported to Excel.

Below is a picture of the dashboard from the home page of the RCM tool.

The RCM Dashboard shows the most important information of the calculated R&D at a glance:

• Total QREs (Qualified Research Expenses): QRE split out of Wages, Supplies and Contract Research.
• Benefit Summary: Federal credit amount, and each states credits, and even LBI Directive, if applicable.
• Client Profile: This section gives important details about the company and the current project, like the target filing date and base period type.
• Company QRE: QRE Differences from the previous year by company. Very useful for multi-company clients.
• State Map: This map shows the QREs in each state. Hover over one of the states and you can see the QREs for that state. Also a colored legend at the bottom to show where that state is at on the QRE spectrum.
• Percentage of QREs Documented: Percentage of projects that are documented for qualitative purposes.

Nebraska Legislative Update………..

• The 106^th Nebraska Legislature’s 2^nd Session convened on January 8, 2020 and is considered a short session (60-day). 

• Bill introductions were allowed to be submitted through January 23^rd (476 Legislative Bills & 25 Legislative Resolutions).  Priority bill deadline is February 21^st.  Last day of hearings is February 27^th.  Last day of Session is tentatively scheduled for April 23^rd.

• The Nebraska Legislature did NOT pass the ImagiNE Nebraska/business incentive legislation (LB720) last year (2019); the bill is considered carryover legislation into the 2020 Session, with a special hearing scheduled for this Thursday (February 6^th) related to Amendment 2207 (AM2207).

For additional information about the legislative session, please go to the Nebraska Legislature link at http://www.nebraskalegislature.gov/.

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ImagiNE Nebraska (LB 720) Last year, the bill received first-round approval (37-8), but failed to advance a second time, after an unsuccessful cloture vote 30-18 (33 votes needed to stop filibuster).  The bill (LB720) is on Select File and this Thursday, does have a special hearing related to AM2207.  The amendment has three primary components:

1. Manufacturing Enhancements – Targeted changes, in employment levels and required wages, for manufacturers statewide, with special consideration to rural Nebraska. 
2. Retention Tool – Key employer and retention incentives, which are triggered in special situations when a business, in Nebraska, is at high risk of leaving Nebraska.
3. Technical Provisions – Technical changes that were identified in the interim.   

NOTE: LB 720 and the most recent amendment do represent significant changes to prior legislation (Nebraska Advantage Act). If you have questions or would like more details about circumstances specific to your business activity in Nebraska, please contact us.  GENERALLY SPEAKING, significant-positive changes related to administration, qualified activities, city/local transparency, and utilization of credits.  Related to jobs/wages, the focus of the new program is full time jobs (only) with benefits, at significantly higher wage thresholds (over current NAA levels).  

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The Business Innovation Act, under LB879, would appropriate an additional $2M, to further fund programs under the Business Innovation Act. The additional funding would be the result of eliminating the Nebraska Advantage Microenterprise Tax Credit Act.

LB 1084 (Nebraska Transformational Project Act, aka NExT) would allow for the expansion of the UNMC and Nebraska Medicine, through a joint partnership with the Department of Defense and Homeland Security.  Preliminary estimates indicate it will entail $2.6B public-private investments, which would result in 8,700 net new permanent high-wage jobs and significant ROI opportunities. 

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Economic Development around the Country……….

Memphis Tennessee is getting a new state-of-the-art fulfillment center via Amazon, in which Amazon will create 1,000 net new full-time jobs. The Company already has multiple fulfillment and sortation centers, in the state, and is currently building an “Operations Center of Excellence” in downtown Nashville, under the Amazon Retail Operations Division. The ‘two towers’, that will be located in Nashville’s Yards development, will have capacity for approximately 5,000 Amazon employees.

DXC Technology, a Fortune 500 Company that specializes in IT outsourcing, is bringing an additional 1,200 jobs to Jonesboro, Arkansas.  The expansion, which is expected to occur over the next 3 years, is the result of an existing business, with 450 employees, and their plans to establish a Center of Excellence.

In a sign of the future in automobiles, General Motors has committed to invest at least $3.5B, over the next 10 years, at its Detroit/MI Hamtramck facility.  The facility, which will participate in the Michigan Strategic Fund, will produce a battery electric truck and other electric vehicles.

In December 2019, Microsoft reached an agreement, with the State of North Carolina, to create 500 net new jobs and invest more than $47M, related to its expansion in Morrisville, NC.  In the month prior, Microsoft identified that it would expand at its Charlotte facility too, creating an additional 430 jobs in Charlotte.

Newell Brands, a manufacturer and distributor of consumer goods, plans to invest $11 million at its current Shelbyville, TN site.  The project will result in 115 net new jobs, over the next five years, and include the relocation of the Packaging Operations Center and expansion at its current distribution center.

UPS and Pennsylvania officials announced a $1.4B investment, involving 4 different locations within the commonwealth state, that is intended to add 1,721 full-time jobs, and retain another 6,458 full-time jobs.  The State has identified the Company’s intent to obtain business incentive assistance through the Pennsylvania Department of Community and Economic Development.

Waste handling equipment manufacturer (Wastequip) and the Kentucky Economic Development Finance Authority are proceeding forward with a performance-based business incentive package that will help enable a new distribution center at/near Mt. Sterling, Kentucky.  The Company intends to invest $7.2M and hire 100 full-time associates.

Nebraska Legislative Update………..

• The 106^th Nebraska Legislature’s 2^nd Session convened on January 8, 2020 and is considered a short session (60-day). 

• Bill introductions were allowed to be submitted through January 23^rd (476 Legislative Bills & 25 Legislative Resolutions).  Priority bill deadline is February 21^st.  Last day of hearings is February 27^th.  Last day of Session is tentatively scheduled for April 23^rd.

• The Nebraska Legislature did NOT pass the ImagiNE Nebraska/business incentive legislation (LB720) last year (2019); the bill is considered carryover legislation into the 2020 Session, with a special hearing scheduled for this Thursday (February 6^th) related to Amendment 2207 (AM2207).

For additional information about the legislative session, please go to the Nebraska Legislature link at http://www.nebraskalegislature.gov/.

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ImagiNE Nebraska (LB 720) Last year, the bill received first-round approval (37-8), but failed to advance a second time, after an unsuccessful cloture vote 30-18 (33 votes needed to stop filibuster).  The bill (LB720) is on Select File and this Thursday, does have a special hearing related to AM2207.  The amendment has three primary components:

1. 1)      Manufacturing Enhancements – Targeted changes, in employment levels and required wages, for manufacturers statewide, with special consideration to rural Nebraska. 
2. 1)      Retention Tool – Key employer and retention incentives, which are triggered in special situations when a business, in Nebraska, is at high risk of leaving Nebraska.
3. 1)      Technical Provisions – Technical changes that were identified in the interim.   

NOTE: LB 720 and the most recent amendment do represent significant changes to prior legislation (Nebraska Advantage Act). If you have questions or would like more details about circumstances specific to your business activity in Nebraska, please contact us.  GENERALLY SPEAKING, significant-positive changes related to administration, qualified activities, city/local transparency, and utilization of credits.  Related to jobs/wages, the focus of the new program is full time jobs (only) with benefits, at significantly higher wage thresholds (over current NAA levels).  

The Business Innovation Act, under LB879, would appropriate an additional $2M, to further fund programs under the Business Innovation Act. The additional funding would be the result of eliminating the Nebraska Advantage Microenterprise Tax Credit Act.

LB 1084 (Nebraska Transformational Project Act, aka NExT) would allow for the expansion of the UNMC and Nebraska Medicine, through a joint partnership with the Department of Defense and Homeland Security.  Preliminary estimates indicate it will entail $2.6B public-private investments, which would result in 8,700 net new permanent high-wage jobs and significant ROI opportunities. 

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Economic Development around the Country……….

Memphis Tennessee is getting a new state-of-the-art fulfillment center via Amazon, in which Amazon will create 1,000 net new full-time jobs. The Company already has multiple fulfillment and sortation centers, in the state, and is currently building an “Operations Center of Excellence” in downtown Nashville, under the Amazon Retail Operations Division. The ‘two towers’, that will be located in Nashville’s Yards development, will have capacity for approximately 5,000 Amazon employees.

DXC Technology, a Fortune 500 Company that specializes in IT outsourcing, is bringing an additional 1,200 jobs to Jonesboro, Arkansas.  The expansion, which is expected to occur over the next 3 years, is the result of an existing business, with 450 employees, and their plans to establish a Center of Excellence.

In a sign of the future in automobiles, General Motors has committed to invest at least $3.5B, over the next 10 years, at its Detroit/MI Hamtramck facility.  The facility, which will participate in the Michigan Strategic Fund, will produce a battery electric truck and other electric vehicles.

In December 2019, Microsoft reached an agreement, with the State of North Carolina, to create 500 net new jobs and invest more than $47M, related to its expansion in Morrisville, NC.  In the month prior, Microsoft identified that it would expand at its Charlotte facility too, creating an additional 430 jobs in Charlotte. 

Newell Brands, a manufacturer and distributor of consumer goods, plans to invest $11 million at its current Shelbyville, TN site.  The project will result in 115 net new jobs, over the next five years, and include the relocation of the Packaging Operations Center and expansion at its current distribution center.

UPS and Pennsylvania officials announced a $1.4B investment, involving 4 different locations within the commonwealth state, that is intended to add 1,721 full-time jobs, and retain another 6,458 full-time jobs.  The State has identified the Company’s intent to obtain business incentive assistance through the Pennsylvania Department of Community and Economic Development.

Waste handling equipment manufacturer (Wastequip) and the Kentucky Economic Development Finance Authority are proceeding forward with a performance-based business incentive package that will help enable a new distribution center at/near Mt. Sterling, Kentucky.  The Company intends to invest $7.2M and hire 100 full-time associates.

Nebraska Legislative Update………..

• The 106^th Nebraska Legislature’s 90-day session has 20 working days left (ends June 6, 2019).

• The Revenue Committee advanced a property tax relief bill (LB289), which is expected to begin first-round debate on Tuesday, May 7, 2019.

• The Revenue Committee also advanced LB 720 (ImagiNE Nebraska), including a committee amendment, on Thursday, May 2, 2019, by a 6-0 vote.  LB 720 is expected to begin first-round debate next week (May 13, 2019). 

For additional information about the legislative session, please go to the Nebraska Legislature link at http://www.nebraskalegislature.gov/.

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ImagiNE Nebraska (LB 720)  

High points of the committee amendment (May 2, 2019):

• Added – renewable tax credit (LB 605 – Lindstrom),
• Added – annual review committee process,
• Added – requirement that applicants offer health insurance to full-time employees,
• Removed – $1M/10 FTE level and replaced by a $1M/5 FTE level (attainment period is 5 years),
• Added – multiplier incentive for projects deemed located in an ‘extremely blighted’ area.
• Minimum wage requirements, by each new employee, are unchanged at 100% of 90-County Avg ($1M/5 level only and $18.55/hr est.), 100% of statewide average ($21.55/hr) or 150% of statewide average ($32.32/hr).

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Economic Development around the Country……….

Months after Amazon decided to cancel its plans for a new headquarters in New York City, the Company will be adding 800 jobs at its tech hub in Austin. Since 2011, the Company has created more than 22,000 full-time jobs and has invested over $7 billion in Texas.

Austin continues to flex its muscle in the tech business space, having won a site selection opportunity, announced during December 2018, whereby Apple announced it will build a $1 billion campus. The 133-acre campus, which is located less than a mile from existing facilities, will bring in 5,000 additional employees and ‘post’ move, likely make Apple the largest private employer in Austin.

Over $2B and 1,000+ new employees…….at two locations within the United States. Disney began accepting online reservations last Thursday morning from fans who want to be the first park visitors to experience Star Wars: Galaxy’s Edge. The $1 billion expansion covering 14 acres, in Anaheim, is expected to open May 31, 2019, and will open August 29, 2019, in Orlando, Florida.

Fiat Chrysler says it will hire 6,500 workers and invest $4.5 billion, by adding a new assembly plant in Detroit and boosting production at five existing factories.  Expansion is due primarily to Jeep Wrangler demand/production, upcoming new jeep models (Wagoneer and Grand Wagoneer) and plug-in hybrid and fully electronic technology. 

Kohler Engines has committed to spend $15M and expand its workforce by 250 employees, over the next two years, as it consolidates manufacturing operations at a facility in Wisconsin, to Hattiesburg.  Kohler, at its manufacturing operation in Hattiesburg, produces gasoline engines.

Lockheed Martin recently opened a $50 million, 255,000 square foot Research & Development II facility in Orlando, Fla.  Since 2017, Lockheed Martin has created more than 1,000 jobs in Orlando, with hundreds more expected over the next three to five years.

In South Carolina, Perdue Farms completed a $25 million expansion at its harvest operation, which is anticipated to create 100 additional jobs.  As part of the expansion, the company added to its portioning and marinating operations, added a state-of-the-art shipping cooler, installed an automated pallet storage system and constructed office space to occupy more than 28,000 square feet at the existing facility.

A major expansion announced by Toyota Motor Manufacturing Alabama will create 450 new jobs and push its all-time investment in the Huntsville plant past $1 billion.  The motor plant, which produces approximately one-third of all Toyota engines built in the United States, produces an array of Toyota motors for vehicles that include the RAV4, Highlander, Corolla, Tacoma, Sequoia and Tundra.

Research and Development Credit:

Louisiana:  Extends R&D Credit

The R&D tax credit program has been extended in Louisiana. Louisiana’s Department of Economic Development (LED) has extended its R&D tax credit to December 31, 2021. Regrettably, LED reduced the credit rates for all three employment categories, each dropping 10%. Businesses with less than 50 employees will now receive credit for 30% of its increase of Louisiana R&D Expenditures for the tax year, 10% for businesses with more than 50 employees, and 5% for businesses with more than 100 employees.

This credit reduction is further magnified by LED increasing the base amount for all business with more than 50 employees. These businesses R&D expenses must now overcome 80% of their base amount, which is still the average of their previous 3 year’s Louisiana qualified research expenses. If larger businesses were filing for the LA R&D credit, there going to see a reduction in their credit in 2018 and beyond. Smaller business, under 50 employees, won’t feel this pinch since LED reduced their base amount from 70% to 50%. Small business could even see an increase in R&D credit even though its R&D credit percentage dropped.

It might come as a surprise to some, not that Louisiana extended its R&D Credit, but it even had a R&D Credit. There is good reason for this. Louisiana requires businesses to apply for R&D credits, something like Pennsylvania’s R&D Credit. Yet Louisiana requires much more information upfront, something in line with a full R&D study or an IRS exam. The R&D application also requires businesses to pay a fee to apply for the R&D credit, which is .5% of the R&D credit generated. There is always a $500 minimum, but the maximum can only go to $15,000. Businesses considering applying for the Louisiana R&D credit will want to account for the additional administrative tasks necessary to file. 

Wisconsin:  Disallows R&D credit because failed to timely claim

The Wisconsin Tax Appeals Commission (WTAC) dismissed a portion of the taxpayer’s appeal, finding that for a research credit to be carried forward, the underlying claim must be filed within four years of the un-extended due date of the tax return for the tax year in which the qualified research expense is incurred.

The Wisconsin Department of Revenue (WDOR) denied the taxpayer’s claims for carryforward research credits from 2002-2006 on the taxpayer’s 2011 and 2012 returns claiming the research credit was not computed on the originally filed returns for 2002-2006 and WDOR had not received amended returns for those years.

The WTAC framed the issue as which time frame took preference, the four-year limit for claiming credits or the 15-year period allowed for carry-forward credits.

WDOR contended that a research credit cannot be carried forward at all unless it is first computed and claimed (even if not used) on a tax return filed within four years of the un-extended due date for the year that the expense is incurred. WDOR further argued that because the taxpayer did not claim its research credits within four years of incurring the expenses, no credits were available to be carried forward, so any claim of carry-forward of those credits is untimely and therefore the taxpayer failed to state a claim.

The WTAC determined that a research credit must be claimed within four years; if it is and is not fully used, only then can the carried forward credit come into existence for use against income for up to 15 years. If the research credit is not claimed within four years, no research credit is allowed and there is no credit to carry forward. As Wis. Stat. § 71.28(4)(h) requires that the research credit claims be filed within four years of the un-extended due date of the tax return for the year in which the expenses were incurred, and the taxpayer failed to claim the credit within the statutory period for tax years 2002 and 2003, those claims are dismissed. (The C.A. Lawton Co. v. Wis. Dept. Rev.)

This is a different procedure than unused carryforward credits under the Federal R&D credit.  Please be careful if you are calculating carryforward credits in Wisconsin, because the credits do need to be filed before they can be considered carryforward. 

Multi-State Incentives Highlight:

Georgia:  High technology data center exemption.

It seems like everyone is investing in technology, which requires the use of data center resources.  If you have an internal data center or use outside data center resources, in the state of Georgia, make sure to understand the application process for the equipment certificate of exemption. 

Recently, the Georgia Department of Revenue (GDOR) has issued guidance on how data centers and their customers may apply for the high-technology data center equipment certificate of exemption under Ga. Code Ann. § 48-8-3(68.1). Application for the certificate is available on the Georgia Tax Center (GTC). All data centers, but not customers, must obtain a $2 million bond before GDOR will approve a high-technology data center equipment certificate.

Data centers must submit documents showing their ability during the investment period to create and maintain an average of 20 New Quality Jobs and to make the amount of qualifying aggregate expenditures.

Examples of supporting documents include:

• a list of each New Quality Job created and maintained;
• a list of expenditures that would meet the minimum Investment threshold;
• a business plan with planned expenditures to meet the investment threshold;
• and a business plan with a list of New Quality Jobs to be created and maintained during the investment period.

For data center customers to qualify for the exemption, they must submit a copy of a contract for data center services with an approved high-technology data center which must be for an initial term of at least 36 months. Customers will need the data center’s sales tax number to complete the application. Data centers and customers may upload documents through the GTC while submitting their applications for the exemption certificate. Alternatively, they may email or send documents to the Department. Data centers are also required to submit annual reports for every calendar year they have claimed the benefit of the exemption. Reports are generally due on April 30 of the following year.

If you have questions on this exemption or other state data center incentive, let us know.

Nebraska Legislative Reminder/Update………..

• The 106th Nebraska Legislature’s 90-day session is at the 30%-mark, with the projected final day of the session at/around June 6, 2019.

• Approximately 740 bills were introduced.

• Speaker priority bills will be requested by March 14th, and priority bills must be identified by March 19th. Hearing deadlines are March 28th. Full-day floor debate begins April 2nd.

• One of the key priorities this session, for the business community, is to rewrite Nebraska’s business incentives. The Nebraska Advantage Act, which began 2006, is due to sunset as of 12/31/2020 and as a result, there is a concerted effort to create a new-improved economic incentive program. Priorities of the bill are to continue the pay-for-performance incentive approach, simplify administration, create more focus on higher wage jobs, all-the-while pursuing a market competitive incentive tool for Nebraska.

For additional information about the legislative session, please go to the Nebraska Legislature link at http://www.nebraskalegislature.gov/ __________________________________________________________

ImagiNE Nebraska (LB 720)

Press Release: ​Kolterman Introduces Bill To Rewrite Nebraska’s Business Incentives (January 23rd, 2019) 

____________

Senator Kolterman (and 21 other senators) have introduced LB 720, identified as the ImagiNE, which would replace the Nebraska Advantage Act.  The link to LB 720 is located at https://nebraskalegislature.gov/FloorDocs/106/PDF/Intro/LB720.pdf

_____________

General comments/high points of the bill include:

• Nebraska Advantage Act applicants will not be impacted by ImagiNE (they are grandfathered in), but any new applications filed after enactment will fall under ImagiNE.  If passed via an emergency clause, which requires a vote of two-thirds (33 members), the bill becomes effective immediately.

• Application process will be assigned to the Nebraska Department of Economic Development, versus Nebraska Department of Revenue. Compliance review and audits still fall under the NDOR.

• Qualification of stipulated attainment levels, will not predicate a mandatory audit by NDOR.  Companies will file for benefits immediately after qualification.  NOTE:  Yearly filing requirements will require forms AND support to forms, which will allow NDOR to perform a certain level of review each year, which will displace the need for the majority of audits at qualification.  NDOR does retain the right to audit and procedures will predicate some form of ongoing sampling/audits.

• Qualified activities and definitions primarily follow a NAICs code requirement, which does represent a significant change from NE Advantage.  It’s important that all companies verify NAIC codes for inclusion within ImagiNE.

• Ramp up period is 5 years, Performance Period is 7 years, Carryover Period is 3 years.

• Current intent is to be able to move up or down between tiers/levels, during the ramp up period.

• Credit usage continues to include income tax, sales/use taxes paid and withholding. New additions include certain circumstances related to job training and site development.

• Direct pay permit-type scenario that would allow for an Applicant to, upon qualifying, have the option to enter into a direct pay relationship, with the State, intended to create a more streamlined sales/use tax process for filers and NDR.

• As introduced, a company creating:

• 10 new FTE, at $19.53/hr. per each employee, combined with a $1 million investment, qualifies for 5% wage and 5% ITC credit;

• 20 new FTE, at $21.55/hr. per each new employee, and zero investment, qualifies the taxpayer for wage credits on a 5-15% scale;

• 30 new FTE, at $21.55/hr. per each new employee, and $5 million investment qualifies the taxpayer for 7% ITC, wage credits on a 5-15% scale, sales tax refund/exemption on qualified assets, and personal property tax exemption for data center equipment;

• Mega-sites with 250 new FTE (each employee must be paid at or above $32.33/hr.) and $250 million qualifies the taxpayer for 10% ITC, wage credits on a 5-15% scale, sales tax refund/exemption on qualified investment, and a personal property tax exemption; and

• $50 million investment with $32.33/hour average wage (at the site), qualifies the taxpayer for 4% ITC and personal property tax exemption for data center equipment. 

• Minimum wage requirements increase from current NE Advantage Act levels of $12.97, to $19.53 (1M/10), $21.55 (20 ees only or 5M/30), or $32.33 (Mega and Modernization).  This increase represents 100% of the 90-county average wage ($40,622 or $19.53), 100% of the statewide average wage ($44,824/$21.55), and 150% of the statewide average wage ($67,246/$32.33).

• Hearing for LB 720 is set for the first week in March, so don’t delay in your review of the LB 720 legislation.

__________________________________________________________

Economic Development around the Country……….

In New York, Amazon has redacted their intent to spend $2.5B and add 25,000 jobs.

Catalent, Inc., a global provider of advanced delivery technologies and development solutions for drugs, biologics and consumer health products, will expand its biologics manufacturing operations in Bloomington, IN.  Plans are to invest over $100M and create up to 200 new jobs by the end of 2024. 

Fujifilm Corp, a subsidiary of Fujifilm Holdings of Tokyo, will expand its biomanufacturing facilities in Morrisville, NC and add about 100 new employees as part of a $90 million investment in its contract development and manufacturing. In 2016 Fujifilm Diosynth Biotechnologies opened a 62,000-square-foot facility in Morrisville for its bioprocess R&D groups.

At a ribbon cutting ceremony in Gulfport last month, Geri-Care Pharmaceuticals announced the completion of a 200,000 square-foot manufacturing facility. The new manufacturing space is set to be utilized by up to 200 new employees, who make a variety of pharmaceutical products including over the counter medications for Walmart, Walgreens and CVS.

Google has announced that it will spend $13B to build new data centers and offices as it expands its presence across several key locations in the US, including new data centers in Nevada, Ohio, Texas and Nebraska. 

Stone Fox Ventures, a manufacturer of industrial-grade grinding and finishing products, has recently purchased Even Cut Abrasive (Cleveland), with expectations to create 52 new jobs as part of a $3.76 million expansion project…in Wyoming, Michigan.

Nebraska Legislative Reminder/Update………..

• The 106th Nebraska Legislature’s 90-day session commenced on Wednesday, January 9, 2019. The projected final day of the ‘long session’ is June 6, 2019.

• New legislation is introduced from January 9th – January 22nd, with Wednesday January 23rd marking the bill introduction deadline. 

• Bill hearings begin today and the deadline for Senators/Committees to designate priority bills is March 19th. A new state budget is required for this session, that will cover the two-year period from July 1, 2019 – June 30, 2021.

• One of the key priorities this session, for the business community, is to rewrite Nebraska’s business incentives. The Nebraska Advantage Act, which began 2006, is due to sunset as of 12/31/2020 and as a result, there is a concerted effort to create a new-improved economic incentive program. Priorities of the bill are to continue the pay-for-performance incentive approach, simplify administration, create more focus on higher wage jobs, all-the-while pursuing a market competitive incentive tool for Nebraska.

For additional information about the legislative session, please go to the Nebraska Legislature link at http://www.nebraskalegislature.gov/

__________________________________________________________

The Nebraska Department of Revenue responds to the inability to E-Verify, as a result of the federal shut-down…..

E-Verify and E-Verify services are currently unavailable due to the federal government shutdown.  While E-Verify is unavailable, employers will not be able to access their E-Verify accounts to enroll, create an E-Verify case, add or edit any user account, or run reports.  To minimize the burden on employers, the Department of Homeland Security has suspended the “three-day rule” for creating E-Verify cases affected by the unavailability of E-Verify, and the Nebraska Department of Revenue (NDR) will treat the federal shutdown as a temporary short-term lapse under Revenue Ruling 29-13-3.  NDR has issued guidance available at http://www.revenue.nebraska.gov/incentiv/e-verify_notice_shutdown.html.

__________________________________________________________

Economic Development around the Country……….

In December, Governor Susana Martinez, of New Mexico, announced that international industrial & manufacturing company, Admiral Cable, will expand to Santa Teresa, NM and create up to 342 new manufacturing jobs. Admiral Cable, a subsidiary of Taiwanese Isheng Electric Wire & Cable, which manufactures and assembles electrical cords and power supplies, will invest over $50M+ and bring 342 jobs to Santa Teresa, New Mexico. 

In New York, both Amazon and Google have made major announcements.  Amazon announced, during late 2018, that it is building a second headquarters in Long Island City, with plans to spend $5B and add 25,000 jobs.  Google’s new $1 billion 1.7-million-sq-ft campus in Hudson Square, and a new office complex, at Chelsea Market, will result in the web portal company, in NY, increasing its expected workforce by 7,000 employees by year 2022.

Publicly traded Catalent Inc, announced plans to spend more than $100 million to expand its biologics manufacturing operations in Bloomington, Indiana, where it will add up to 200 employees by the end of 2024.

In December, online career giant Indeed.com, said it plans to spend $66 million to expand its presence in Stamford, CT, including an additional 500 new jobs.  The expansion, which already includes a 2018 increase (year-over-year increase over 2017 levels) of approximately 500 employees, will bring the company’s total headcount, in Stamford, to approximately 1,700.

LinkedIn, a Microsoft-owned employment-focused website, announced today that it will expand its workforce in Omaha, via a new office campus, at the Sterling Ridge development (132^nd and Pacific Streets). The Company also said that it could potentially increase its workforce from about 450 today, to 1,000 by 2021.

It’s a continuing growth story for both LinkedIn and Omaha: Back in 2007, when the company was a nascent website for people to post their résumés, it opened its first outpost outside of its Silicon Valley home smack in the middle of the Silicon Prairie — Omaha. It hired 11 people.

Microsoft is making a significant expansion at its data center operation, in Southside Virginia (Mecklenburg County), resulting in an additional 100 jobs.

Sports Brand PUMA North America, Inc. is establishing a new North American headquarters in Somerville, Massachusetts.  The new construction will total 300,000 square feet and include approximately 550 positions at the location, representing a more than 20 percent increase in its current workforce.

Smarp, a hub for content discovery and distribution via an SaaS model, will create 60 jobs and invest $3 million in Atlanta, Georgia.

Volkswagen, a German manufacturer of automobiles, announced on the sidelines of the 2019 Detroit Auto Show, that it will expand their Chattanooga, Tennessee factory by $800 million, creating 1,000 net-new jobs.  The factory builds the Passat (sedan) and Atlas (SUV) and will begin steps to produce battery-powered vehicles in the coming years.

Nick Panko 2019 Perspective LinkedIn Article

https://www.linkedin.com/pulse/2019-perspective-nick-panko/

 

 

Research and Development Credit:

Minnesota R&D Credit:  Computation clarified

Recently the Minnesota Tax Court clarified the base period calculation for a taxpayer that can provide significant changes to the R&D credit calculation in the state. These changes also could be applied to a taxpayer’s current calculation when under exam by the state of Minnesota.

The Minnesota Tax Court has held that in computing the Minnesota research and development credit, for the tax year at issue, Minnesota “base amount” had to be computed using federal gross receipts in the denominator of the fixed-base percentage. However, it also held that Minnesota law incorporated the federal minimum base amount provision as part of the state-law definition of “base amount,” and did not incorporate the federal election of alternative simplified credit. (General Mills, Inc. v. Commissioner of Revenue, Minn. Tax Ct., Docket No. 9016-R, 08/17/2018)

The interesting point in this case is that the Tax Court determined that the R&D legislation, specified to use Minnesota qualified research expenses, but did not specify to use Minnesota gross receipts. So, based on this court case a taxpayer would use Minnesota qualified research expenses and Federal gross receipts to calculate its base amount. Also, since the court clarified that the simplified credits was unavailable, taxpayers will still need to utilize the regular credit method, which can be difficult to determine expenses and gross receipts from that time period.

Multi-State Incentives Highlight:

Sign up below for the webinar (September 27^th, 2018) on the state incentive process utilized by CFO Services’ clients. In this webinar CFO Services will cover the typical issues and solutions to gain, track, and manage state incentives. Lastly, CFO Services will cover a couple features of its Business Incentives Portal.

Sign up for our webinar on the Multi-State incentive process.

Technology Update:

R&D Credit planning for next year

Are you starting to plan for your budget next year, and are interested in a competitive bid for R&D credits?

Complete our quick three questions survey and let us know if you want to have CFO Services contact you for planning the R&D credit for next year.

Click Here to complete a 3-question survey on R&D credit planning for next year

 

2018 Conference sponsorship and presentations:

CFO Services, is constantly out across the country reaching out to clients at conferences and events. In addition, we are speaking and helping to build knowledge through the tax community on credits, incentives, and technology. Check out some of the events in 2018, and don’t forget to stop by if you are at one of these events.

• February 2018: NJ TEI Chapter Day
• “Purchased State Credits: Too Good to be True & How not to lose them”
• February 2018: Houston TEI Tax School
• May 2018: Association of Computers and Taxation annual conference
  • “Cloud Computing and Maximizing Credits and Incentives”
• June 2018: Southeast regional TEI conference (Hilton Head)
• June 2018: West regional TEI conference (Phoenix)
• September 27^th, 2018: Webinar on CFO Services state incentives process
  • Sign up for our webinar on the Multi-State incentive process.
• October 2018: R&D Credit & ASC 730, how do they relate? (CFO Webinar)
• More to follow in 2018

Research and Development Credit:

Pennsylvania—online application requirement

The Pennsylvania Department of Revenue is launching a new online application system for the Research and Development Tax Credit that can be accessed through the Department of Revenue website. The new application system will allow users instant access to an automated application that will be more efficient and cost effective than filing a paper application, and will also allow users to check the status of their applications and respond quickly to notifications. The state will not accept any paper applications anymore for the Pennsylvania R&D credit.

All R&D credit applications are required to be submitted through the online system, and taxpayers must file their automated R&D applications by September 15, 2018 to be eligible for the R&D credit program. There are no limits to the number of applications that may be filed using the automated system, so a user may file an R&D credit application for one business or for multiple businesses. Once an application is filed, a system-generated confirmation number will be provided indicating that the application has been completed successfully. Errors in the online form will prevent the application from being successfully filed.

 

Washington—guidance on R&D credit for staffing companies

The Washington Department of Revenue released an advisory explaining the circumstances under which staffing companies may qualify for the business and occupation (B&O) tax credit for research and development (R&D). In addition, this excise tax advisory provides examples on the circumstance in which the staffing company can qualify.

A staffing company may qualify for the credit when:

1. the company performs qualified R&D activities through its employees;
2. the company’s employees perform qualified R&D activities in an R&D project, without considering any activity performed by the person contracting with the staffing company for such performance or by any other person;
3. the company completes an annual tax performance report by March 31st following any year in which the credit is taken;
4. the company must document any claim of the credit.

Here are two different examples in the advisory that are interesting in how the staffing can qualify for the R&D credit.

Example 1: Company P, a staffing company, furnishes three employees to Company Q for performing an R&D project in biotechnology. P’s employees perform all the work of this R&D project. None of Q’s employees are involved in the R&D project. P qualifies for the B&O tax credit if all other requirements of the credit are met.

Example 2: Company M, a staffing company, furnishes three employees to Company N for assisting an R&D project in electronic device technology. N has a manager and five employees working on the same project. The work of M’s employees and N’s employees combined as a whole constitutes R&D. M’s employees do not perform sufficient activities themselves to be considered performing R&D. M does not qualify for the B&O tax credit.

In these two examples, the only difference is that the company that hired the staffing company had employees performing research in addition to the staffing employees. Yet, there is no discussion about the typical contract issues found within the federal R&D credit. Lastly, there is an example on assigning the R&D credit in Washington, which a company hiring the staffing company will probably want assignment of the credit.

 

Multi-State Incentives Highlight:

Pennsylvania—“relocation” for Keystone Opportunity Zone recapture

The court of Pennsylvania recently held that application of the Keystone Opportunity Zone (“KOZ”) recapture provisions is not limited to situations where the qualified business physically relocates outside the Keystone Opportunity Zone.

At issue was the definition and interpretation of the term “relocation”. The taxpayer constructed a restaurant in the zone, but sold all assets and interest to another company that continued operating the restaurant. It still maintained an office in the zone, but no actively operated business in the zone. The Department of Community and Economic Development (DCED) advised the taxpayer of recapture for moving out a business within five years of locating in the zone. The taxpayer responded that the restaurant was still in operation and that the taxpayer had an office.

In court, the taxpayer argued that the KOZ recapture provision does not define the term “relocate”, it should be construed within a common interpretation and require that the taxpayer has physically moved to a new location. The court based their decision on the statute and that the intent of the statute was to have incentives apply to the business location and actively conducting business in the zone. The taxpayer was therefore subject to recapture. (Vetri Navy Yard, LLC v. Department of Community and Economic Development, Pa. Commw. Ct. Dkt. No. 499 M.D. 2017, 07/16/2018)

 

Technology Update:

Schedule a demo for a look at BIP

Have you seen our Business Incentives Portal (BIP)? Do you want to?

We have a quick survey link for you to fill out info and dates in August that will allow you to schedule a demo of the tool. BIP allows companies to capture all their incentives across the country in one place, manage the tasks and milestones, as well as research additional incentives.

 Click here to schedule a BIP demo in August 2018

 

2018 Conference sponsorship and presentations:

CFO Services, is constantly out across the country reaching out to clients at conferences and events. In addition, we are speaking and helping to build knowledge through the tax community on credits, incentives, and technology. Check out some of the events in 2018, and don’t forget to stop by if you are at one of these events.

• February 2018: NJ TEI Chapter Day
• “Purchased State Credits: Too Good to be True & How not to lose them”
• February 2018: Houston TEI Tax School
• May 2018: Association of Computers and Taxation annual conference
  • “Cloud Computing and Maximizing Credits and Incentives”
• June 2018: Southeast regional TEI conference (Hilton Head)
• June 2018: West regional TEI conference (Phoenix)
• September 2018: Webinar on CFO Services state incentives process
• October 2018: R&D Credit & ASC 730, how do they relate? (CFO Webinar)

More to follow in 2018

Research and Development Credit:

Capturing the value in the era of tax reform

With tax reform now implemented and a good number of federal incentives either eliminated or reduced, most companies are not aware or have forgotten about capturing the value from the R&D credit. Here are a couple of items to remember on the R&D Credit for 2018.

• Corporate rate down, R&D credit rate up: Since the corporate was reduced to 21%, most companies claiming the R&D credit under the “reduced” amount will get a bump in their R&D credit for 2018. For some companies, this could be a jump of the R&D credit of almost 40%.
• AMT out, more R&D credit utilized: With corporate AMT being eliminated, more companies will have the opportunity to utilize the R&D credit, because it is not limited by AMT anymore.
• Don’t forget software development and process improvements: Most of the time, CFO Services is helping clients identify the areas that qualify for the R&D credit. Two of the areas that we identify in addition to traditional R&D are software development and process improvements. In today’s economy, we are all building “technology” into our products and processes, which in turn drives innovation and builds efficiencies. These resources can qualify for the R&D credit, which in some cases is significant.

 

Iowa enacts legislation on the R&D credit, limiting the type of industries

In May, the state of Iowa enacted legislation (SF 2417), which among other things, adjusts the state’s R&D credit to only apply to businesses engaged in “manufacturing, life sciences, software engineering, or aviation and aerospace”. It also specifically excludes certain industries such as agricultural production and types of “contractors”. With Iowa having a large agricultural economy, clients should contact us to discuss if they fall within a certain industry for the R&D credit.

 

Multi-State Incentives Highlight:

At CFO Services, we are continually looking to help our clients with credits and incentives. All 50 States and many local communities have some sort of tax or financial incentive programs designed to stimulate investment, job growth and economic development. Credits & Incentives can make a big impact on site selection as well as the bottom line. Examples include Investment and/or Job tax credits, sales tax refunds, property tax abatements, training funds and infrastructure grants or even straight cash or land, just to name a few. Most programs have various thresholds to meet along with a compliance reporting period but the benefits are often significant.

CFO Services’ Multi-State practice identifies those opportunities through expert analysis of project-specific information derived from our survey process. The next phase of the process Identifies which incentives are the best fit through our comprehensive Research and concludes with Filing of the application including the negotiation, implementation and incentive compliance reporting.

In our next edition of the newsletter, we start highlighting a state’s incentives and items that we can help with along the way.

 

Technology Update:

Top 5 items you probably did not know about CFO Services and technology.

• CFO Services can help you build workstreams for your SharePoint environment
• We have a mobile app, that you can utilize for certain credits and incentive services
• Our clients are provided technology with every engagement
• CFO Services uses its own technology
• Clients work with CFO Services for its consulting, technology or a combination of both

 

2018 Conference sponsorship and presentations:

CFO Services, is constantly out across the country reaching out to clients at conferences and events. In addition, we are speaking and helping to build knowledge through the tax community on credits, incentives, and technology. Check out some of the events in 2018, and don’t forget to stop by if you are at one of these events.

• February 2018: NJ TEI Chapter Day
  • “Purchased State Credits: Too Good to be True & How not to lose them”
• February 2018: Houston TEI Tax School
• May 2018: Association of Computers and Taxation annual conference
  • “Cloud Computing and Maximizing Credits and Incentives”
• June 2018: Southeast regional TEI conference (Hilton Head)
• June 2018: West regional TEI conference (Phoenix)
• More to follow in 2018

 

 

 

IRS issues a directive to streamline R&D credit exams, which provides numerous benefits

 

Taxpayers and the IRS, during exam, have spent many hours going through issues and arguments related to Qualified Research Expenses (QREs) for the Research and Development Credit (R&D Credit). Recently the Large Business & International (LB&I) division of the IRS released guidance for large taxpayers to verify the QREs on the Form 6765 with detail of research and development expenses from its financial statement.

Basics of the guidance

In a memorandum dated Sept. 11, 2017, the LB&I division of the Internal Revenue Service (IRS) issued guidance to all LB& I employees regarding the examination of the credit for increasing research activities under tax code Section 41 claimed by LB& I taxpayers (the directive).

In the directive (LB&I-04-0917-005), a taxpayer with assets of at least $10 million who follow GAAP to prepare their certified audited financial statement can utilize this directive. The taxpayer must show a separate line item or show a separately stated note, the amount of currently expensed ASC 730 R&D. In addition, the taxpayer must attach a certification statement described in the directive.

The Adjusted ASC 730 is the amount currently expensed on a taxpayer’s certified audited financial statements pursuant to ASC 730 for U.S. Generally Accepted Accounting Principles (U.S. GAAP) purposes, with certain specified adjustments as required in the directive.
The directive applies only to original returns timely filed (including extensions) on or after Sept. 11, 2017, the date of the directive (publicly released Sept. 22) and only to LB& I taxpayers, i.e., those whose assets are equal to or greater than $10 million.
If the taxpayer satisfies these items above, the IRS examiners will not challenge the QREs that align with adjustment to the financial statement R&D. The whole intent of the directive is to reduce time during exam to reach a reasonable conclusion of what are QREs for taxpayers. However, any additional amounts of QREs claimed by the taxpayer on Form 6765 for the credit year over the Adjusted ASC 730 amount are subject to a risk assessment for an examination. In the end, even though the directive has a specific purpose, taxpayers need to evaluate their type of activities and level of effort needed to comply to with the directive.

Key Questions

Since its release, the directive has generated much interest, and along with the interest, many questions have arisen on the application of the directive. Below are some of the questions raised and assuming more will follow as it is applied.

• What information will the IRS require to support QREs under this Directive?

The directive provides a list of items, but it is not intended to be an exhaustive list. Taxpayers will need to evaluate their facts to determine the best way to show the LB& I exam team how they arrived at their Adjusted ASC 730 amounts and related support that ties back to the ASC 730 reporting. Note that any Form 6765 QREs that are in excess of the Adjusted ASC 730 amount may be subject to the normal audit process.

To comply with the certification process of the directive, LB&I requires the taxpayer to retain documents from the tax year. The list of documents is as follows, but is not limited to these documents. A taxpayer’s facts will need to be considered to determine what other documents should be retained.

 

• Certified Audited Financial Statement for the Credit Year including auditor’s certifying opinion;
• Taxpayer’s Chart of Accounts;
• List of U.S. ASC 730 Financial Statement Cost Centers that make up the ASC 730 Financial Statement R&D amount shown in Step 1 of Appendix C.
• All ASC 730 R&D GL Accounts with account balance details that make up the ASC 730 Financial Statement R&D amount shown in Step 1 of Appendix C.
• List of ASC 730 R&D GL Accounts with account balances that make up the adjustments in Steps 2 through 4 of Appendix C.
• Taxpayer’s organization chart showing employees and levels of management for the Credit Year.
• Executed contracts pursuant to which Taxpayer is performing ASC 730 research in order to comply with the terms of the contract.
• Executed contracts pursuant to which persons other than employees of Taxpayer are performing ASC 730 research on behalf of Taxpayer. This would include sufficient information to show what research was performed outside the U.S.

List of employees with their respective W-2 Wage amounts claimed as additions to U.S. ASC 730 Financial Statement R&D in Step 4 of Appendix C, which list would also identify for the applicable taxable year each employee’s job title and reporting level and the cost center where each of those employees worked.

• Can I eliminate “interviews” or “surveys” of engineering or research individuals during the R&D credit compliance process?

The intent of the directive is to streamline the exam process for the “typical” R&D, but an ancillary benefit is that taxpayers could eliminate some time and resources needed from engineering or research staff. In the R&D credit process, these individuals typically provide contemporaneous documentation and also provide allocations of their projects and/or activities. Now the directive will allow taxpayers to focus on the documents required for the directive and only other items claimed outside the directive, hence reducing the need to depend on those individuals.

• Does the directive apply to certain industries?

This directive was drafted by LB& I in consultation with the technology industry, but it is not limited to any industry. This directive, is similar to a directive issued for the pharmaceutical industry for costs within certain drug phases. However, there are many industries performing qualified research that report little or no ASC 730 amounts in their financial statements. The directive will not benefit those companies.

• How do you apply or elect this Directive?

The directive does not require a formal election or application. It only requires that Taxpayers satisfy the conditions in the directive. Taxpayers who satisfy the conditions of the directive may attach the completed disclosure statements at the time of filing of the Federal income tax return; alternatively, taxpayers may provide the completed disclosure statements at the outset of the examination.

General Requirements of the Directive

The directive provides examination guidance to LB& I agents, which means no other offices or divisions within the IRS are subject to the directive, namely, Appeals and Small Business and Self Employment (SBSE). Where a taxpayer appeals LB& I’s proposed assessment upon audit, it is uncertain how Appeals will respond to disputes over the application or interpretation of the directive.

In order to claim the benefits of the directive, LB& I taxpayers must:

• Follow U.S. GAAP to prepare their Certified Audited Financial Statements, which show as a separate line item on the income statement OR show separately stated in a note the amount of the currently expensed ASC 730 Financial Statement R& D; and

 

• Provide completed disclosure statements contained in Appendices A through D of the directive, including the Certification Statement in Appendix A.The directive does not require taxpayers to attach the completed disclosure statements at the time of filing of the Federal income tax return; instead taxpayers may provide the completed disclosure statements upon examination. The directive instructs the audit team to verify at the beginning of the examination of the research credit whether the taxpayer followed or plans to follow the directive.

Benefits of Utilizing the Directive

In reviewing the directive, there could be additional benefits to taxpayers in applying this directive. Here is an explanation on a few initially observed.

• Increase financial certainty for a large portion of the R&D credit
  • In today’s FIN 48 and UTP environment taxpayers need to measure the risk associated with their R&D credit. This directive can significantly reduce the risk level associated with the R&D credit, which has a positive financial impact.
• Minimize engineering and research employee involvement from the compliance of the R&D credit
  • Many taxpayers have to work significantly to communicate, educate, and capture information from the engineering and researching employees within their organization. The directive allows taxpayers to work around those individuals and require little if any of their time and energy towards the R&D credit.
• Streamline the IRS exam towards the R&D credit
  • Taxpayers can settle a typically contentious issue rather quickly under this directive, and focus only on the items outside of the directive (contract research, e.g.). In addition, the directive has a “cap” like feeling to the application of the process.

Conclusion

In the end, taxpayers need to address the directive within their current framework of capturing the R&D credit. The challenge is that the application of the directive within exam will not occur for another two years, but it’s intent could be utilized today to streamline and improve the R&D credit process. During the upcoming tax compliance season, it would be prudent to analyze if the directive provide benefit to a taxpayer’s current R&D credit process.

Nebraska Legislative Reminder/Update.

• The Nebraska Legislature began its 2017 session on Wednesday (1/4/17). The 105th Legislature (1st Session) is a 90-day session, which is slated to end June 2, 2017.
• There are 17 new senators, 5 of which defeated incumbents, and 49 total senators within the legislative body.
• Carryover legislation does not occur in this session, but it’s still anticipated that hundreds of new bills will be proposed through the January 18th Common themes for primary legislation include  creating a new two-year state budget, address tax reforms (all-the-while dealing with a $900 million budget shortfall) and fixing the state prison system. In addition, and specific to business  incentives, there will be a proposal for a new business incentive legislation (to replace the Nebraska Advantage Act) and additional monies requested for the Customized Job Training fund.

Jim Scheer of Norfolk named as the new Speaker of the unicameral.

Senators voted 27-22 to elect Sen. Scheer, whom will set the Legislature’s daily agenda and play a key role in deciding when legislation gets debated.

New Committee Chairs of the 105th Legislature:

Sen. Lydia Brasch of Bancroft for Agriculture Committee
Sen. John Stinner of Gering for Appropriations Committee
Sen. Brett Lindstrom of Omaha for Banking, Insurance and Commerce Committee
Sen. Joni Albrecht of Thurston for Business and Labor Committee
Sen. Mike Groene of North Platte for Education Committee
Sen. Tyson Larson of O’Neill for General Affairs Committee.
Sen. John Murante of Gretna for Government, Military and Veterans Affairs Committee
Sen. Merv Riepe of Omaha for Health and Human Services Committee
Sen. Laura Ebke of Crete for Judiciary Committee
Sen. Dan Hughes of Venango for Natural Resources Committee
Sen. Mark Kolterman of Seward for Nebraska Retirement Systems Committee
Sen. Jim Smith of Papillion for Revenue Committee
Sen. Curt Friesen of Henderson for Transportation and Telecommunications Committee
Sen. Justin Wayne for Urban Affairs Committee
Sen. Mike Hilgers of Lincoln for Rules Committee
Sen. Dan Watermeier of Syracuse for Executive Board

Performance Audit Results (of Tax Incentives) are in.

In November 2016, as a result of the passage of LB 1022 (during the 2016 legislative session), the Legislative Audit Office completed their performance audit of Nebraska’s tax incentive programs (100+ pages). The audit identified that, as of 2014, there were 78 incentivized companies that had earned $736 million in benefits through the Advantage Act. Nearly two-thirds of those benefits were tax credits on investments such as new construction, while 16 percent were credits on pay for new workers. A link to the report is located at the Nebraska Legislative website at http://www.nebraskalegislature.gov/pdf/reports/audit/naa_2016.pdf.

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Economic Development around the Country.

During the past two years, Amazon.com has announced eight fulfillment centers in Illinois alone. In December, Amazon has made public additional plans to build a $90 million distribution hub in/near Lavonia, Michigan and another in Aurora, Illinois. The plant in Aurora will employ 1,000 associates and contain approximately 1 million square feet. Once construction is complete for the most recent announcements, Amazon will have created more than 7,000 full-time jobs in Illinois.

Carrier, in November, reached an agreement to keep approximately 1,000 factory jobs at its furnace plant in Indiana. Earlier in the year, Carrier had plans to relocate the plant’s manufacturing activity to Mexico.

CF Industries Holdings, a global leader in the manufacturing and distribution of nitrogen products, during December, successfully commissioned its new ammonia and urea plants at the company’s Nitrogen Complex in Port Neal, Iowa. The construction project cost in excess of $2B and at peak construction, there were approximately 4,500 employees working at the site.

A Minnetonka, Minnesota based company (CliqStudios), which is an online retailer of semi-custom kitchen cabinets, will invest $1.95 million to locate a new cabinet design center in St. Louis, Missouri. The company plans to hire 98 associates.

CoStar Group, a leading provider of commercial real estate information, analytics and online.