R&D Tax Credits for the Food Sciences and Bio-Flavoring Industry

The food sciences and bio-flavoring industry continues to invest on a large scale every year to develop healthier food choices that contain:

  • No Trans Fat;
  • No MSG;
  • Reduced Sugar;
  • Reduced Sodium;
  • Gluten Free;
  • No Artificial Flavors;
  • No Artificial Preservative; and
  • No GMOs.

These scientific advancements within the food sciences industry are significant for these new food products. Moreover, to extend the shelf life of these food choices, companies are researching new forms of packaging to extend the life of products and reduce their environmental impact and overall carbon footprint. However, many of these companies are unaware that their research and development efforts can constitute qualified research and development spending and be eligible to claim a research tax credit on their tax returns. The following are some of the activities that may qualify for the R&D tax credit program:

  • Designing and developing new healthier food choices
  • Designing and developing new packaging or redesigning existing packaging for the purposes of: Eco-Friendly Manufacturing (e.g., biodegradable, recyclable, energy efficient) and Shelf Life Improvement Manufacturing (e.g., radiating food to extend shelf life)
  • Designing and developing food formulas for desired flavor or aroma profiles;
  • Improving existing food product formulations to achieve specified analytical metrics (i.e., pH level, acid content, and product viscosity);
  • Developing new production process specifications and techniques for the production of new food products, including mixing times, batching sequences, and cooking temperatures and durations;
  • Successful scale-up from the laboratory to the plant level for commercialization of the new product; and
  • Improving existing production processes for efficiency and waste reduction

Veritax Advisors’s professionals are available today to provide tax savings while mitigating tax compliance risk! Please contact us today at 888-939-3309 or tax@veritaxadvisors.com to see if you qualify for the R&D Tax Credit Program!

Use the R&D Credit to Offset Payroll Taxes – Even if you Aren’t Yet Profitable

The R&D credit program was permanently extended as part of the Protecting Americans from Tax Hikes Act of 2015. It contains many significant enhancements starting in 2016, including offsets to the alternative minimum tax and payroll tax for eligible businesses.

The R&D credit program is still based on credit-eligible R&D expenses, but payroll tax offsets apply only to those expenses incurred beginning in 2016. The new payroll tax offset allows companies to receive a benefit for their research and development activities regardless of whether they are profitable.

  • The new payroll tax offset is available exclusively to companies that have:
  • Gross receipts for five years or less
  • Less than $5 million in gross receipts
  • Qualifying research activities and expenditure

The maximum benefit an eligible company is allowed to claim against payroll taxes in 2021 is $250,000.

If your company meets the criteria for this payroll tax offset, you should consult an R&D professional who can help you understand how to start tracking your R&D activities to take maximum advantage of this program.

The CHIPS Act Ushers in Next-Level Manufacturing Tax Credits

On August 9th, President Biden signed into law the CHIPS Act of 2022 offering billions of dollars in grants and a generous income tax credit to jump-start semiconductor manufacturing within the United States. The CHIPS Act passed with strong bi-partisan support as a vehicle to bolster semiconductor manufacturing activities within the United States.

The CHIPS Act introduced I.R.C. Sec. 48D, the new manufacturing tax credit program into the Internal Revenue Code. This tax incentive provides a tax credit of 25% of qualified investment in a facility that manufactures semiconductors or the equipment to manufacture semiconductors.

The scope of the tax credit program applies to qualified property placed in service after December 31, 2022, for which construction begins before January 1, 2027. For property where construction begins after August 9th of 2022 through December 31st of 2022, the credit applies only to the basis of the property attributable to construction, reconstruction, or erection of the property to manufacture semiconductors.

The CHIPS Act also establishes a Creating Helpful Incentives to Produce Semiconductors for America Fund as well as a Creating Helpful Incentives to Produce Semiconductors for America Defense Fund to implement provisions of the William M. Thornberry National Defense Authorization Act for fiscal year 2021. The NDAA authorized financial assistance for establishing facilities in the United States to manufacture semiconductors but did not include appropriations. The CHIPS Act appropriates funds for grants and loans for this purpose.

Veritax Advisors Insights: Taxpayers considering constructing or purchasing a semiconductor manufacturing facility within the United States should contact us today to determine if your fact pattern aligns with the scope of the federal program requirements to capture this valuable tax credit.

Federal Tax Alert: The IRS Updates Transition Period for the R&D Tax Credit

On Friday, September 30th, the IRS announced that the transition period during which taxpayers are provided 45 days to cure a R&D tax credit claim for refund under Sec. 41 of the Code prior to the IRS’s final determination on the claim has been extended through January 10th of 2024.

Taxpayers are still required to provide Form 6765 with all of the following data at the time of the filing of the amended tax returns including:

  • A listing of the business components to which the R&D tax credit claim relates
  • A listing of the R&D activities performed at the business component levels
  • A listing of the individuals who conducted R&D by business component
  • All the information each individual sought to discover by business component
  • The total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year.

 

 The IRS will be better able to determine upfront whether to pay the refund immediately or further review the claim. In the event the IRS determined there is missing information, a taxpayer will have 45 days to cure the claim with a possible resubmittal before the IRS makes their final determination. If a claim is accepted, there will still be three open statute years for the IRS to conduct a full audit and possible disallowance at a later time. To that end, it is critical to ensure compliance with all the rules and regulations under Sec. 41 of the Code have been satisfied to avoid paid preparer penalties.

Veritax Advisors Insights: Taxpayers considering filing a R&D tax credit claim for refund should contact us today to determine if your fact pattern aligns with the scope of the federal program requirements to capture this valuable tax credit.

Discussing Cost Segregation with your CPA

Cost segregation is a powerful tax strategy used by commercial and residential rental property owners to help free up cash flow and mitigate tax liability. It involves a detailed study of your building assets to identify which parts of your property qualify for accelerated depreciation expense. By this point you are probably thinking to yourself that your accountant has this covered, and they might…but they also might not.  

Cost Segregation is not a routine part of your annual taxes, and it is never required to be done. It is an elective add-on that many CPAs perform and many do not. Confused yet? The first thing you need to do if you own real property is ask your accountant if they can help you do a cost segregation study or if they can help connect you with someone who does. Not all CPAs are comfortable performing this work, as it requires specialized knowledge that is often outside the CPAs skillset.  They likely have a trusted third-party partner that does possess such expertise. 

Having this discussion early is beneficial to both you and your CPA. You both might have assumed that the other would bring it up if it were important – ultimately letting this opportunity slip through the cracks.  

The bottom line is, if you own real property for business (commercial or residential rental) and have not had a cost segregation study performed (or don’t know if you have), reach out to your CPA and start the conversation. 

How Does Cost Segregation Work?
So, what exactly is cost segregation? It’s a study performed on your property that reclassifies both building components and land improvements into their shortest allowable class lives. Cost Segregation front-loads depreciation, giving you extra cash early on when you need it the most. 

Studies should be performed by experienced and reputable professionals who understand the engineering-based approach required to break out building assets. Interview providers and ask questions.  It is important that you understand the work being done, and trust the provider who is handling your job.  

A cost segregation study often begins with a site inspection where a specialist walks your property taking detailed notes and pictures of the land and building. With this information, the professional can reclassify your assets and calculate your savings based on depreciation, bonus, and other technical strategies.  

Your provider will present all findings and final calculations to you in the form of a report, the results of which will be incorporated into your annual taxes by your CPA. Another important point is to verify that your cost segregation provider offers complete audit protection. If you find yourself the subject of an audit, you want to be sure that the people who performed your study can back up their work and advocate on your behalf. 

 How Does it Benefit Me
For such a complex strategy the benefit is simple – do you prefer the government return your depreciation money slowly over time? Or, would you rather collect as much money as possible early on so that you can earn your own interest or reinvest it how you want?  

While the biggest and most obvious benefit of a cost segregation study is cash flow, it also provides the property owner with enough detailed information to help determine treatment of future improvements.  

 Why Doesn’t My CPA do it For Me?
A CPA is a broad term for someone certified to do many types of accounting, including taxes. While a CPA can certainly choose to study niche aspects of the tax code, like cost segregation, they don’t have to. Conversely, someone does not necessarily need to be a CPA to perform cost segregation studies. 

How We Can Help 
Veritax Advisors offers a unique advantage.  Our founder is a licensed CPA who has a targeted focus in cost segregation. This does not mean we want to do your taxes.  We are not looking to take the job of your CPA.  It means we speak their language and want to work with them!  We understand the nuances of cost segregation and we come at it from a practical approach.  

We have extensive experience working with all types of property owners and we guarantee our results. Our goal is to work directly with you and your CPA to create a powerful team and ensure you are taking advantage of all possible tax savings. 

For more information or to chat about your property, reach out to our founder and licensed CPA, Chris Ostler. 

Cost Segregation for the Cannabis Industry: Keep More of Your Money in Your Pocket

Cannabis conjures up an array of emotions in many people. It has become a very hot topic in the recent past, drawing passion from both sides. With many states legalizing cannabis for both medicinal and recreational use – it is shocking that it’s still not legal at the federal level.

With all of the controversy and stigma that still exists around cannabis, having an open discussion about your business can be daunting, to say the least. If you are involved in the cannabis industry, you know that there are strict rules every step of the way from growing to manufacturing, dispensing, and even marketing. 

That being said, there are significant incentives for those in the industry. Similar to any other agriculture, manufacturing, or retail business – tax incentives exist that can return cash to your pocket. Running a business is a challenging endeavor, especially in the early years. A cash infusion that can be reinvested in your growth is worth exploring.

What is Cost Segregation
Cost segregation is the reclassification of building components and assets into their shortest allowable class life. This strategy front-loads depreciation and offsets tax liability giving you extra cash when you need it the most. Engineering-based Cost Segregation Studies should always be performed by an experienced and credible firm. Much like the cannabis industry, corporate taxes are complicated and often sticky – you want to be sure you trust the people handling your finances.

A Cost Segregation Study involves a multi-step process including a physical inspection of the building and all related assets, and calculations which are prepared and presented in the form of a report. This report is delivered to the client and their tax preparer. These reclassified amounts are included in the annual tax return to realize the savings.  It is worth noting that your cost segregation provider should offer complete audit protection in the unlikely event that you find yourself under additional tax scrutiny.

Consider Cost Segregation for your Cannabis Business
So why the focus on cannabis – what makes this industry so unique? Between the retail, agricultural, and manufacturing activities associated with cannabis, there is an abundance of specialty lighting and equipment. The majority of components that fall into the “specialty” category can be reclassified into class lives as short as 5 years. This alone makes the cannabis business an ideal candidate for Cost Segregation. 

Outside of those reasons, anyone who owns commercial property should consider a cost segregation study. Overlooking this tax strategy means leaving money (your money) on the table.  If you own your cannabis facility in a separate LLC from your operating company, your tax preparer may be able to file a Grouping Election to help take maximum advantage of a cost segregation study. 

It will be Challenging, but also Rewarding
If you’re still reading this article, you are likely in the business of cannabis, so we don’t need to tell you how complicated the subject matter is. The industry is rapidly gaining momentum and becoming more widely accepted. Laws around the growing, manufacturing, and distribution of cannabis are constantly changing. But even with all the forward progress, it is still a very gray area – especially when you combine it with taxes. 

What we can tell you is that we are incredibly experienced in tax law and we have taken the time to understand your industry. With Veritax Advisors as your trusted specialty tax advisor, you can rest assured that you are in good hands. We guarantee excellent results, will defend you in the unlikely event of an audit, and will strictly adhere to all local and federal laws.  

For more information or to chat about your property reach out to Chris, founder, and licensed CPA, today. 

The Inflation Reduction Act of 2022 becomes Law with Sweeping Changes affecting Specialty Tax Incentives

On August 16th, the Inflation Reduction Act of 2022 (the “Act”) was signed into law by President Biden. This sweeping Act contains over 300 pages, yet still represents a scaled-back version of President Biden’s former Build Back Better Act from 2021 which was never passed into law. The 2022 Act passed the House by a 220-207 vote on August 12th, followed by passage in the Senate by a narrow margin of 51-50 with a tie-breaking vote cast by Vice-President Harris.

The Act includes the extension and expansion of many energy tax incentives, the expansion of the R&D tax credit payroll credit program, a corporate alternative minimum tax of 15%, and an extension of the Affordable Care Act premium reductions from President Obama’s administration. The Act also contains a colossal increase in funding for the Internal Revenue Service to hire field agents, revenue agents, members of the criminal investigation unit, taxpayer phone assistance and much more to ensure full tax compliance amongst all taxpayers.

The Act has expanded the R&D tax credit program to increase the amount of the R&D tax credit that can be applied by a qualified start-up against payroll tax liability from $250,000 to $500,000 for tax years beginning after December 31, 2022. The first $250,000 of the credit limitation would be applied against the employer portion of the FICA payroll tax liability and the second $250,000 would be applied against the employer portion of the Medicare payroll tax liability.

The Act also extended the I.R.C. § 45L credit for homes sold or leased during 2022 with slight modifications. Consequently, residences sold or leased in 2022 may qualify for the I.R.C. § 45L credit using the 2021 energy efficiency standards. However, between Jan. 1, 2023, through Dec. 31, 2032, the Act significantly changes the I.R.C. § 45L energy efficient home credit with new requirements.

Beginning in 2023, the Act provides an increased credit of $2,500 for single family and manufactured homes when constructed according to the standards set forth pursuant to the Energy Star Residential New Construction Program or the Manufactured Homes Program.

  • Single-family homes must meet the Energy Star Single Family New Homes Program, Version 3.1 for homes constructed before Jan. 1, 2025, and Version 3.2 thereafter; and
  •  Manufactured homes must meet the latest Energy Star Manufactured Home National Program requirements as in effect on the latter of Jan. 1, 2023, or Jan. 1 of two calendar years prior to the date the dwelling is acquired.

The Act further provides a higher credit of $5,000 for both single family and manufactured homes when they are certified as a DOE Zero Energy Ready Home (“ZERH”).

To ensure compliance with the new provisions within this Act, contact Veritax TODAY and get Verified with Veritax!

The IRS Issues New Administrative Authority Governing the I.R.C. § 179D deduction for Building Envelope Efficiency

On May 26th of 2022, the Internal Revenue Service’s (the “Service” or the “Service’s”) Large Business and International Practice Unit (“LB&I”) released new administrative authority governing the I.R.C. § 179D deduction for building energy efficiency. As a background, the LB&I unit is responsible for tax administration activities for domestic and foreign businesses with a United States tax reporting requirement and assets equal to or exceeding $10 million, as well as the Global High Wealth and International Individual Compliance programs. The scope of this practice guidance is to serve as a blueprint for this area of the tax law under I.R.C. § 179D for the Service’s examiners (e.g., Revenue Agents, Field Agents, etc.) It is meant to provide guidelines for how to correctly conduct an official examination, with a focus on designers of government-owned buildings by creating more procedures to review during examinations of the I.R.C. §179D energy tax deduction.

Since the Energy Policy Act of 2005, government building owners can allocate I.R.C. §179D tax deductions to the designers of the building. Administrative authority pursuant to I.R.S. Notice 2008-40 has long defined an eligible designer as “a person that creates the technical specifications” for the energy-efficient property. Several examples defining the designer role could include “an architect, engineer, contractor, environmental consultant or energy services provider who creates the technical specifications for a new building or an addition to an existing building that incorporates energy-efficient commercial building property.” The Service’s practice unit emphasizes that examiners determine eligibility for the allocation of I.R.C. §179D deductions by reviewing actual contracts to properly ascertain a taxpayer’s responsibilities in designing energy-efficient green government buildings. The actual design responsibilities for a building are typically designated by the underlying contract. The new guidance dictates that the eligible designers should be able to present a design contract, the technical specifications, stamped or sealed drawings, or additional contemporaneous documentation establishing designer status with preliminary design reviews, critical design reviews, or other supporting documentation.

The Service’s new LB&I Practice Unit guidance can be referenced here.

For compliance purposes, get your I.R.C. § 179D contracts Verified with Veritax TODAY!

Raise the BAR with Veritax Advisors Next-Level TPR Compliance Services

By A. Chris Ostler, CPA 

Tangible Property Regulations compliance services are best rendered by an engagement team made up of skilled tax professionals to interpret the latest tax laws and engineers to truly comprehend the building envelope including all its components and systems. The purpose of the “BAR” test is to determine whether the costs incurred for repair and maintenance expenditures should be expensed or capitalized. The “BAR” test encompasses three critical components for analysis: Betterment, Adaptation, and Restoration.  At Veritax Advisors, we have engagement teams comprised of leading tax professionals and engineers that work seamlessly together to ensure we optimize sustainable deductions while reducing compliance risk through systematic qualitative and analytical quantitative phases ranging from feasibility to assessment to implementation and execution.   

Raise the “BAR 

The “B” is for Betterment and the most common types of betterment are simply improvements that make a property better.   Assets that will increase the physical space or capacity of a property, or will increase the efficiency, strength, productivity or quality of the property are all considered betterments and must be capitalized. For example, strengthening a rooftop to add additional bearing weight for additional HVAC units and solar panels to be placed on the rooftop betters the roof and these costs must be capitalized.   

The “A” is for Adaptation and improvements are considered an adaptation if it adapts the “Unit of Property” (“UoP”) to a use other than the original use of the UoP at the time the building was placed in service. The classic example of an adaptation highlighted in the treasury regulations considers a taxpayer who opens a manufacturing facility, which functions for several years manufacturing goods.  The taxpayer decides to take a portion of the manufacturing space and convert it into to sales showroom space.  The costs required to modify the building would be considered adaptations, since they are adapting a portion of the property to a different use – a showroom – and must be capitalized.   

The “R” is for Restoration and costs are deemed a restoration if it is paid for the:

  • Replacement of a component of property after the taxpayer deducted a loss for that component;
  • Replacement of a property component that was sold, assuming the taxpayer has adjusted the basis of the component based on gain/loss realized from the sale;
  • Replacement of a property component after the taxpayer claimed casualty loss;
  • Restoration of a property component to like-new condition, after the end of its class life; or
  • Replacement of a major component or significant portion of a UoP, building system, or subset of UoP that has its own discrete function (i.e., more on this next time).

Costs incurred when returning a property component to its ordinary operating condition would also be considered restorations and would consequently require capitalization.   It’s important to note that this doesn’t refer to normal maintenance performed to manage normal wear and tear such as repairing rooftops so that they can be maintained over their useful class lives.  In contrast, if a rooftop is restored to “like-new” condition, then these costs would need to be capitalized.   

Please schedule your complimentary consultation today with one of our engineers to raise the bar for next-level client service at https://outlook.office365.com/owa/calendar/VeritaxAdvisorsLLC@veritaxadvisors.com/bookings/  

The Federal-Level R&D Tax Credit Program remains a top priority on the Hill

The Federal-Level R&D Tax Credit Program (the “Program’) was born out of the Economy Recovery Act of 1981 under the President Reagan Administration over 40 years ago. The Program has been credited to helping the US economy not only come out of our then deep recession of the early 1980’s, but also helped foster enormous growth across diverse industry sectors within the US economy for the last four decades!

Consequently, it is not surprising that there is strong bi-partisan support to reinstate the Program retroactively to January 1st of 2022 (i.e., the effective date requiring capitalization treatment of R&D expenditures as required under President Trump’s TCJA of 2017). This past May, dozens of House members sent a letter to party leaders calling for immediate action to restore a more generous tax break for US-based companies’ research and development spending.

The bipartisan letter led by Reps. John B. Larson, D-Conn., and Ron Estes, R-Kan., and signed by 67 other lawmakers argues that reviving businesses’ ability to fully and immediately deduct research and development costs is a matter of global competitiveness, particularly as the U.S. tries to compete economically with India’s and China’s growth.

In the meantime, a bipartisan Senate duo teed up a nonbinding motion to instruct conferees to restore the Program as part of a bill aimed at boosting U.S. industrial competitiveness in part by providing financial aid for domestic semiconductor manufacturing. The letter to Speaker Nancy Pelosi and House Minority Leader Kevin McCarthy comes as the House and Senate are beginning negotiations to reconcile differences between competitiveness bills.

The nonpartisan Joint Committee on Taxation estimates that the absence of full and immediate expensing will cost companies $29 billion by the end of the third quarter this year, with about $8 billion already due at tax time last month.

While the elimination of the Program could result in job losses and a competitive disadvantage globally, all indications on the Hill are pointing to strong bi-partisan support to reinstate the Program retroactively back to January 1, 2022 through December 31, 2025. My bold prediction is that the Program will be reinstated with other tax extenders after the midterm elections in November with unified bills ultimately passed into law by President Biden during the upcoming holiday season in December which will bring much needed joy to all for the holidays.

 

Please schedule your complimentary consultation today with one of our subject matter experts at: https://outlook.office3