Ep. 24 | Research & Development Credits
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Speaker 2:Thank you for joining us back on Teaching Tax Flow, the podcast. Today, we got another fantastic episode where we're gonna dive into research and development credits. You heard me right, r and d credits. But before we do that, let's just take a brief minute and hear from our sponsor.
Speaker 3:This podcast is sponsored by Strategic Associates. If you are a high income earner, real estate investor, or successful entrepreneur with 75,000 or more of annual tax liability, Strategic Associates can help. Your first step to saving thousands, if not hundreds of thousands, is to contact Roger Roundy at roger@strategicag.net or (801) 641-2956, and be sure to tell them TTF sent you.
Speaker 2:Welcome back to the Teaching Tax Full podcast episode 24. Once again, I'm gonna say it. Great topic. We actually have back with us the ladies from Engineered Tax Services. So we have Stacy Giroux and Heidi Henderson.
Speaker 2:But before I hand it over to them, Chris, how are you doing, buddy?
Speaker 4:Oh, John. Thanks for thinking for me. I am great. I'm so excited. Back by popular demand, we have this BrainTrust with us today.
Speaker 4:And, yeah. I'm really excited.
Speaker 2:And we got so excited about it again, we forgot to introduce ourselves. So if you if you don't know, we're gonna now now we'll take take the mic back a little bit. John Topolsky from the teaching tax flow team as well as Chris Pacure, our our brainchild behind teaching tax flow. So enough about us. I'm sure you're tired of hearing about it.
Speaker 2:We do have our topic today, which is research and development credits. So let let's talk let's hand it over to you, Lace. First off, again, thank you for for joining us back. And I know me and this this guy next to me sometimes harass each other a little bit. So we'll be kind to each other.
Speaker 2:So how are you guys doing today?
Speaker 5:Good. We're great. Happy to be back again, and and the two of you are very entertaining. So yeah.
Speaker 2:Oh, but Well, we practice comedy, but we're not really good at it. So we're stuck here on a podcast. Before jumping into details, give us actually the the definition or or just define for us on a high level what exactly is this so called research and development credit?
Speaker 5:So the research and development credit, it at its core, it's actually a wage based credit. And the idea behind it is to encourage, you know, US based companies to hire domestically and to be be innovative on an ongoing basis so that we continue to be competitive with with the world stage on a broader sense. And and really that's that's the simplest simplest way to look at it.
Speaker 2:They they work. And and so r and d to me and, again, I'm I'm not in the space every single day like you guys are. So anytime I hear r and d, I think of either engineering, which ironically, techs engineered services. Engineering, we're, like, in a med lab somewhere. So so as far as for the those types of industries, what would what would we I should say, what are we confined to?
Speaker 5:So we're really not confined to anything, actually. You know, there there's a four part test that you're looking at when you wanna find out if something is going to to qualify for r and d. Is it a permitted purpose? So has, you know, has something new been created? Has has there been once again, that that word of innovation.
Speaker 5:And you can be innovative with anything, really. It doesn't have to be technology, pharmaceuticals, you know, the the obvious low hanging fruit, industries. And then they have to go into it not knowing for sure what's going to happen. So there there has to be some sense of of risk taking going into this so that the costs that they are incurring, they could come out on the other end and it not turn out well. You know, even if they're relatively, you know you know, sure of themselves, we've done things like this before and we're gonna take it on, there still has to be some risk.
Speaker 5:And that's where you're coming into that idea too of multiple iterations. So you have to have some some attempts and some failures going into this. It can't just be, you know, you walk out, you, you know, plug something into the, you know, the machinery out on your floor, it pops out, it's perfect, and you're all set. There there really needs to be some, you know, some additional attempts, and then you are looking at it as hard science though too. So something that's technological or scientific in nature.
Speaker 5:But once again, that can be you know, that that could apply to any industry, especially, you know, when you look at our lives these days, everything. You could have r and d on a farm.
Speaker 2:Mhmm. Push that out. That's actually a great example because that's I know that's actually industry or an industry, that I'm surrounded with by our primary residence that that really takes place. And those that are innovated in that space, some do very well. Some of them kind of get on the verge of giving away the farm, pun intended.
Speaker 2:But it's still, like, a bad example, which would absolutely not qualify one bit for for this credit would be, hey. I'm a marketing agency, and I'm I wanted credit because I decided to start drinking coffee backwards on one leg on Tuesdays, and now I want a credit for this because it impacted the way that my mornings go. Like, completely ridiculous stuff. I'm sure people try to spurt through.
Speaker 5:Well yeah. And, you know, hey. We we came up with, you know, the the best way to have the most efficient meetings. Or Right. You know, we we we, you know, drawing a cartoon and then printing it screen printing that on a t shirt, those sort of things are not going to qualify.
Speaker 5:But some areas you know, I'll give you a a real world example that I think it's the first time it really kinda opened my eyes to to the different scenarios that it could apply to. I had a client, and they were a high end cabinet maker. And they had developed a, a software to use with their ordering system because once again, high end cabinet maker delivering to custom homes all around the world, and they had their their ordering SKUs were that was ridiculous. It was, you know, it was bigger than what the yellow pages used to be when you get that and, you know, flatten things out with it. And so they they created this technology to streamline that so that people could order online.
Speaker 5:So our initial thought was, hey. This is where the the r and d credit is. Right? It's a software. And so took the r and d, you know, expert in there.
Speaker 5:We're sitting down and, yes, granted there is definitely hours of work and time that had gone into creating this. It was going to qualify for r and d. Nothing huge, but it was going to qualify. Well, as we're leaving these, you know, these cabinet maker, you know, woodworking geeky guys, right, that are so excited about their new line of samples, stop to show them to us. And they just have board after board of all their new samples with all the different finishes, with all the different colors.
Speaker 5:And you could see the r and d expert, his little gerbil, started to run-in his head, and he's getting excited because he's asking, well, how many times did it take you to get this finish? Oh, I, you know, I I I used this tool, then I had to go back and, you know, start over with this. And then I then I had to get sand involved. And then I had and he's going through all of these different trial you know, areas of trial and error. And the R and D specialist said, this this is where all your R and D is on these boards right here.
Speaker 5:It's all your samples for your new line.
Speaker 2:It's interesting when you start to peel back on the onion. Right?
Speaker 4:Well, I would say we have a client in our private CPA practice. That's a marketing agency, that has developed something proprietary that they get an r and d credit every year. And, one thing is that I'm really excited to continue to work with, engineer tax services is that, you mentioned it, John, but they they marry the science of engineering and principles of tax and accounting together. So it's it could be a beautiful marriage. And even though accountants, CPAs, and engineers usually don't don't get to get don't get along very well.
Speaker 4:So, couple of questions, Stacey, on my hand, that a lot of people might not you know, eligibility, we understand those tests. But, when you say wage based credit, does does someone have to be earning w two wages to qualify for that expenditure, or can they be a subcontractor?
Speaker 5:You can have subcontractors as well. It you know, obviously, they want people to be w two, so that that is where the credit is going to have the most impact. But, yes, any contractors as long as they're domestically based. So if you're hiring contractors in The Philippines or Costa Rica or, you know, all the the places that come up, that's not going to count.
Speaker 4:Exactly. And that's something that that a lot of time you know, app developers and that sort of stuff brought into that where where the labor's overseas and, Right. But it's really we talk about one of the three laws of teaching tax flow is that, tax agencies are your involuntary business partner. They're encouraging and discouraging behavior. They are encouraging this credit encourages domestic companies to use domestic labor to be creative and and and evolve.
Speaker 4:So here's a question that complicated for both of you. So I just I just thought
Speaker 2:of this one. And this so this happened this happens a lot in in my world and has. Right? So say you're say you're working on a project regardless what the project is. You hire a we'll just call it a development company, and that company is US based, but they contract out all of their work offshore.
Speaker 2:So does that complicate things, or does that completely throw everything out of the water? Like, how far do you drill down as far as for who those employees are?
Speaker 5:I know I have had this come up once. I'm going to tap Heidi in on that one because I I've only had that come up one other time, and I I know it did throw a wrinkle into it.
Speaker 6:Yeah. Yeah. So, it that's a really good question. We can still qualify that if the entity is US based. They're paying taxes in The US.
Speaker 6:We're treating them just simply as a contractor. So direct employees or direct individuals paid as ten ninety nines. If it's a company, we're looking for the company being based in The US. But but the other interesting thing is even for individuals who are working in The US, if they do work offshore and they're doing projects offshore and they travel, say, to Europe for certain projects, we actually have to exclude all of that time. Even though they're usually based in The US, we're actually extrapolating that as well.
Speaker 4:That's where time I mean, for a lot of these companies, time tracking and location is so important. And it's, you know, as a c p a private CPA, when we work on a tax return, it the tax return itself doesn't we don't have to identify where someone worked. I mean, there's some nexus issues with states and local not to get the weeds there, but, that's why you need to work with a company like Engineer just because they it's beyond in you know, it's beyond the scope of of a practicing CPA even if they're in a specific industry niche, I really think that you should be working with someone specifically in that on that credit. And I think a lot a big misconception, maybe, Stacy, you could touch on this as far as the ideal of business owner. You know, the tax credit's not just for Amazon, and I know they've we've had the secure two point o act to kinda chip away at them and all.
Speaker 4:That'll be another podcast one day, and we'll keep our opinions ourselves over here, right, for now. But, but anyway, you know, what what type of business this credit is not just for the Amazon, it's for Google's. It's for it's for a lot of Main Street USA Business Owners, I believe.
Speaker 5:It is. It definitely is. So, I mean, businesses of any size and even start ups. So there there are opportunities for start ups even though they don't have revenue. So, you know, the immediate idea would be, well, there's nothing to apply a credit to, but they can put that back toward payroll taxes.
Speaker 5:And so the the IRA actually has increased that as well.
Speaker 4:Mhmm. And I'm I'm gonna
Speaker 5:three employees and they're all engineers. Go ahead.
Speaker 4:Sorry. We Stacy cut out for a quick second, but I think that one of the things that we're I'm sorry. Talking about is eligibility. And, you know, this isn't just for big companies. This isn't just for employees.
Speaker 4:We would like to see the person be an employee, but it's US based labor. And it also it it's something that not only a business, but a person can obtain. You know, that credit, there there's I'm gonna ask say ask Heidi this because we talked about this on the previous podcast. Talking about statute of limitations, we you might run into a taxpayer that says, golly, I've been doing these activities to you know, in 2020. COVID hit.
Speaker 4:I started working at home. I, maybe I started brewing my own beer, and it just blew up or something. Right? Could someone go back to 2020 and 2021 and grab those credits?
Speaker 6:Yeah. Yeah. Chris, exactly. It's it's bound same by the statute of limitations where we can go back three years to activity that they did. We see this a lot with taxpayers who who just to your example, they do some startup.
Speaker 6:They have some brainchild light bulb idea, and they kinda start working on it. And last thing that they thought about was an r and d credit. They didn't even know if the idea would work. It was premarket. It was premanufacture or whatever.
Speaker 6:So they have no idea. So, yes, we can look back three years to still retroactively be able to capture that. One thing I'll tell you is a lot of times in these startups, these people, they don't pay themselves. So that's one thing as Will usually say is sometimes educating someone in a startup company can be helpful in in saying, look. Even if you're putting guaranteed payments in there that you're not paying yourself yet, maybe you're accruing payables.
Speaker 6:The money isn't there for them to pay you. But, eventually, someday, it will be able to pay you that stuff that's just sort of accruing. Those will actually be reflecting in the entity to be able to accrue some of the applicable credits because that's the one caveat is that some of these startup companies, they do everything they can to not spend any money because they don't have any money.
Speaker 5:Mhmm.
Speaker 6:But the RD credit is a percentage of their costs. So we always kinda weigh that.
Speaker 4:That is a great point. And when you start diving in in for many of our clients and the r and d credit is really part of their budget, part of because it part of their expectation and their tax planning. And and for some clients, we've actually done some research and and pivoted on entity selection, because I know there's a there's a profitability component as well. So it's
Speaker 6:Yeah. Well, and, Chris, to that point, since you bring that up really quick, that's one thing is, yes, there are instances where being a c corp is helpful, but when it comes to things like incentives or depreciation or tax credits like the r and d, it can be difficult because the those credits will come out of a c corp. They get stuck there at the corporate level. Most companies don't pay tax at the corporate level. They're gonna push everything out to distributions.
Speaker 6:So if you're in an LLC or a partnership or a s corp, those then push down to the owners personally. So if you get a $5,000 tax credit, that's gonna come down from your company to the owner, and that owner is essentially gonna get a $5,000 check against what he would have owed, on his personal tax return. So, yes, entity selection is always a a a great thing to consider.
Speaker 4:It is. And those credits will you know, not to get too technical, but they're gonna flow through on a k one form. But I would say is is, if you are a business owner and you are creating something and you think you might even potentially qualify for the r and d, get get engineer tax services involved as early as possible. They might you might talk to them. They might say, you know what?
Speaker 4:You're on the right path at this point. You know, the the credit's not there for you. It's not the the cost benefit's not there. But, don't be the person that's I I've seen it where, oh, I could have qualified for six the last six years. Good news.
Speaker 4:I can go back three years and amend returns, but I left left money on the table. So, Stacy, anything to add as far as someone that something we should be looking out for and and before we ask you how to how best way to get a hold of you?
Speaker 5:Yeah. I mean, definitely, I I agree with you on that point of, you know, not making assumptions. But I would throw out something else that, you know, can can be overlooked. I mean, it it's a federal tax credit, but a lot of states have some very lucrative r and d credits as well. You know, Tennessee where I am located, does not happen to be one of them, unfortunately, but Utah, you know, you mentioned Roger at the beginning of the of the podcast.
Speaker 5:In in Utah, you're basically doubling your tax credit, on the r and d. So, you know, it's kind of a location location thing on on those sort of items, and you really wanna make sure that, you know, you're you're taking full advantage of all of those opportunities.
Speaker 4:Well, I appreciate it. Stacy, you're gonna go on the hot seat this time, though, for special guest rapid fire questions. And then we're gonna make sure that that, we get everyone the way to, the best way to get ahold of you. Alright. Are you ready for some fun?
Speaker 5:Sure.
Speaker 4:Alright. What's your favorite type of vehicle?
Speaker 5:Favorite type of vehicle? Anything that goes fast.
Speaker 4:Alright. And what color?
Speaker 5:Like, gunmetal gray.
Speaker 4:Your fay the I like it. Your favorite vacation spot?
Speaker 5:Italy.
Speaker 4:Alright. Favorite cereal?
Speaker 5:Oatmeal.
Speaker 4:We have the healthiest guests ever. So these ladies are very impressive. Alright. That's cool. I I wish I liked I wish I didn't learn Golden Grange.
Speaker 4:Alright. Favorite store to shop at?
Speaker 5:Whimsy in Park City.
Speaker 4:Oh, and final question, ideal weekend?
Speaker 5:Ideal weekend would be probably hanging out with my family either if it's, you know, three days, there's a possibility to take a trip somewhere, do some exploring. Everyone in my family enjoys food a lot, right down to my nine year old who asks me to bring escargot home for him. Oh. So we we we like to go out and kinda do the, you know, the food hopping, in in locations. So stop in and get an appetizer, stop in somewhere else and get something to eat, and just kinda make our way through eating our new town.
Speaker 4:That's fine. Yeah. We my wife and I like to if we don't have the kids with us, we went to Savannah about a year and a half ago, and we didn't need a meal, but we ate, like, eat appetizers. We would just bounce around at different places walking and get an appetizer at different places. So, finally, best way to get a hold of you so we can make sure that, Teaching Tax School community hopefully, they're gonna see you in the defeating taxes private Facebook group, obviously, but best way to get a hold of you.
Speaker 5:You know, it's, so there's there's email. It's, sderu,deru,@engineeredtaxservices.com. If anybody wants to connect to me on LinkedIn, they're more than welcome to. Stacy Derue. I'm kind of like Tigger.
Speaker 5:I'm the only one out there. So it's That sounds so good. Find me. It's not a common name. And, they're also welcome anybody's welcome to, give me a call as well.
Speaker 5:It's (801) 558-4906.
Speaker 2:Awesome. Excellent. Well, thank you ladies for joining us again back. I mean, obviously, we couldn't have been too wild for you because you literally came back and dealt with us again. But, yeah, we we really appreciate your time, your insight into this as well.
Speaker 2:I mean, this is something that, again, a lot of people may not know what it is. If they do, they may I wouldn't say have incorrect information, but they may not have all of the information. So it's it's a fantastic topic. I'm glad we dove into it. Again, if anybody has any specific questions on this, please feel re please feel free to reach out to them, or drop it into the, the feeding taxes Facebook page.
Speaker 2:Feel free. So we all we always welcome those questions, comments, and
Speaker 4:And we'll have everyone's contact information. One more time, thanks again for Strategic Associates, and everyone have an awesome rest of the day. Oh, rate with you. Subscribe five stars. Tell everyone how much they love John Chipolsky.
Speaker 2:I'm listening. I love it. I love now you're giving me a big head. You you may you may have the ball to have it. I'm getting the big one now.
Speaker 2:But thank you everybody for for joining in once again. Thank you, ladies, as always.
Speaker 4:Yeah. And we will see everybody next week. Take care.
Speaker 2:Hey, everybody. John Topolsky here, obviously, cohost of this podcast as well as the vice president of marketing at Teaching Tax Flow. Just wanted to take a quick second, and thank you for joining us here on this show. We love doing it. A couple of things I wanted to drop at the end of this episode for you.
Speaker 2:First off, a huge thanks. We've done this for almost six months. That's half a year. That's half the distance between one tax day and another, to put in perspective. Episode 24.
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