BDO KNOWLEDGE Tax Webinar Series High Growth & Start-Up Companies: What You Need about the R&D Tax Credit from Day 1 Page 1

Transcription

1 BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. Page 1

2 BDO KNOWLEDGE Tax Webinar Series High Growth and Start-up Companies: What You Need to Know About the R&D Credit from Day 1 Chris Bard, National Leader, R&D Tax Services, BDO USA, LLP Jonathan Forman, Regional Leader, R&D Tax Services, BDO USA, LLP Patrick Wallace, Regional Leader, R&D Tax Services, BDO USA, LLP Jim Feeser, Senior Director, R&D Tax Services, BDO USA, LLP February 20, 2014 BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

3 CPE and Support CPE Participation Requirements To receive CPE credit for this webcast: You ll need to actively participate throughout the program. Be responsive to at least 75% of the participation pop-ups. Certificate of Attendance: If you are logged in the entire time and respond to all participation pop-ups, you will be able to print your certificate from the Participation section at the end of the webcast. If you log out before printing your certificate: BDO USA professionals CPE will automatically be issued in CPE Tracking & Reporting at the end of every week. A copy of your certificate will be sent after you have been issued credit. All others will be ed instructions on how to access your certificate. Page 3

4 CPE and Support (cont d) Group Participation To receive credit: Sign-in sheets must list a Proctor name and CPA license number. BDO USA professionals Submit your sign-in sheets using a General Training & Development Request in BDO Service Now found at: BDOWorld > Applications & Resources > BDO Service Now > Click Service Catalog in the left menu, then under Training & Development, Make a Request. Clients and contacts sign-in sheets to cpe@bdo.com within 24 hours of the webcast. Alliance members Should proctor their own group participants. This process is detailed in the LearnLive Participant Guide, which can be found by searching LearnLive Participant Guide on the Alliance Portal. Call LearnLive Support below for questions. Unfortunately, we cannot currently support group CPE for International Firms. Those wanting CPE must register and log in on their own computer. Q&A: Submit all questions using the Q&A feature on the lower right corner of the screen. At the end of the presentation, the presenter(s) will review and answer all questions submitted. Technical Support: If you should have technical issues, please contact LearnLive: Click on the Live Chat icon under the Support tab, OR Call: Page 4

5 With You Today Chris Bard National Leader, R&D Tax Services Chairman, Global R&D Center of Excellence BDO USA, LLP 1888 Century Park East Los Angeles, CA Direct: Mobile: Jonathan Forman Regional Leader, R&D Tax Services Managing Director, Global R&D Center of Excellence BDO USA, LLP 100 Park Avenue New York, NY Direct: Mobile: Patrick Wallace Regional Leader, R&D Tax Services BDO USA, LLP 1100 Peachtree Street NE, Suite 700 Atlanta, GA Direct: Mobile: Jim Feeser Senior Director, R&D Tax Services BDO USA, LLP 90 Woodbridge Center Dr., 4th Floor Woodbridge, NJ Direct: Mobile: Page 5

6 Agenda What s new in the R&D tax credit area? Highlights and overview of the R&D credit What should a start-up company be doing to prepare for the R&D credit? As a start-up grows, organically and through acquisitions, domestically and internationally, what should it do to optimize its R&D credit? Takeaways for start-up, high-growth, and other companies Questions Page 6

7 What s New in the R&D Tax Credit Area? Legislative Update Projected credit renewal Late 2014 or early 2015 Other chatter on the Hill regarding the R&D tax credit Innovators Job Creation Act Permanent extension Credit allowed against Alternative Minimum Tax Permanent five-year carryback for small businesses Election to report the Alternative Simplified Credit on amended returns Enhancements for certain start-up companies Page 7

8 R&D Tax Credit Overview and Highlights Corporations Claiming an R&D Credit for TY 2010 Latest IRS Data Business Receipts $0 - $25, ,828, ,936, ,250,071 $25,000 - $100,000 16,433,000 22,043,881 23,218,552 $100,000 - $250,000 19,493,000 21,012,035 29,091,632 $250,000 - $500,000 25,339,000 23,785,262 33,853,558 $500,000 - $1,000,000 27,475,000 34,440,271 33,297,149 $1,000,000 - $2,500,000 59,325,000 68,593,386 84,405,115 $2,500,000 - $5,000,000 80,777,000 88,233,176 91,134,023 $5,000,000 - $10,000, ,572,000 78,049,047 96,910,397 $10,000,000 - $50,000, ,965, ,726, ,440,613 $50,000,000 - $100,000, ,295, ,425, ,220,867 $100,000,000 - $250,000, ,722, ,972, ,015,413 $250,000,000+ 6,977,509,000 6,380,761,726 6,796,531,701 Total 8,510,733,000 7,773,979,151 8,303,369,091 Page 8 Page 8

9 R&D Tax Credit Overview and Highlights (cont d) Corporations Claiming an R&D Credit for TY 2010 Latest IRS Data Industry Credits Claimed # of Returns Average Claim Manufacturing 5,554,490,000 5, ,352 Information 1,013,552, ,036,352 Professional, scientific, & technical services 797,473,000 3, ,480 Wholesale & retail trade 653,580, ,158 Finance & insurance 203,688, ,684 Management/holding companies 82,301, ,093 Utilities 45,659, ,435 Mining 42,318, ,400 Administrative, support & waste management 32,844, ,644 Other services, e.g., health, entertainment, hospitality 31,342, ,175 Real estate, rental, & leasing 18,577, ,693 Transportation & warehousing 14,757, ,925 Construction 11,675, ,615 Agriculture, forestry, fishing, etc. 8,477, ,324 Total and Average 8,510,732,000 12, ,656 1 "Various Services" include educational services; health care and social assistance; arts, entertainment, and recreation; accommodation and food services; and other services. Source: Research-Credit Page 9 Page 9

10 R&D Tax Credit Overview and Highlights (cont d) Corporations Claiming an R&D Credit for TY 2010 Latest IRS Data Manufacturing Subsector Credits Claimed # of Returns Average Claim Computer and electronic 1,829,303,000 1,204 1,519,355 Chemical 1,344,341, ,861,968 Transportation equipment 1,009,000, ,787,293 Machinery 326,412, ,703 Miscellaneous 282,906, ,927 Electrical 260,361, ,482 Petroleum and coal 114,821, ,443,000 Food 90,844, ,606 Fabricated metal 80,987, ,688 Paper 75,370, ,146 Primary metal 35,312, ,496 Plastics and rubber 33,588, ,683 Nonmetallic mineral 23,802, ,700 Beverage and tobacco 12,401, ,944 Furniture and related 9,830, ,074 Printing and related activities 6,618, ,432 Textile 5,986, ,045 Wood 5,947, ,212 Apparel 5,349, ,313 Leather, etc. 1,312, ,400 Total and Average 5,554,490,000 5, ,352 Page 10 Page 10

11 R&D Tax Credit Overview and Highlights (cont d) Credit Benefit & Calculation Federal R&D Credits Base Amount Rate 2 Regular Credit (Years ) Alternative Simplified Credit ( ASC ) 1 1 Must be elected on a timely-filed, original return. 2 Because of the credit s incremental nature, the option with the highest rate doesn t necessarily deliver the largest credit. 3 Maximum Benefit takes into account the IRC 280C requirement to either (1) reduce the deduction for R&E expenses by the amount of the credit or (2) elect a reduced credit equal, generally, to 65% of the unreduced credit. This 280C election must also be made on a timely-filed, original return. State R&D Credits Ratio of GRs over QREs times the prior 4 YR GRs less the current YR QRE compared to 50% of the current YR QRE (lower) 50% of average annual QREs for prior three tax years Max. Benefit 3 20% 6.50% (50% of current YR QRE) Most of the 42 states with R&D incentives are based on federal rules, with modifications More than 10 offer refundable or saleable incentives, e.g., NJ, CT, PA, IA Start-up Company Benefit Up to 6.50% 14% 9.10% 6% (no QREs exist in any of the prior 3 tax YRs) Page 11

12 R&D Tax Credit Overview and Highlights (cont d) What Activities Qualify? Four-Part Test Intended to develop or improve the functionality, performance, reliability, or quality of a business component, i.e., a: Product; Process; Software; Technique; Invention; or Formula Through a process of experimentation designed to evaluate one or more alternatives to achieve a result where: That process fundamentally relies on the principles of engineering or the physical, biological, or computer sciences To eliminate technical uncertainty regarding the capability or method for developing or improving the business component, or the component s appropriate design. Page 12

13 R&D Tax Credit Overview and Highlights (cont d) What Activities Qualify? (cont d) Qualified Research Examples: Basic R&D Product development Manufacturing process improvements, e.g., to make things better, faster, cheaper Software development, whether software is for sale, license, or internal use Evaluating the efficiency of a third party s technology to perform within an existing production process. Union Carbide Specifying and integrating existing components into an overall design for a new system. Trinity Additional design and engineering to modify molds purchased from third parties to produce desired components. TG Missouri Page 13 Page 13

14 R&D Tax Credit Overview and Highlights (cont d) What Activities Qualify? (cont d) Statutory Exclusions Related to style; taste, except biological taste; cosmetic or seasonal factors Relies on social science, arts, or humanities Funded by an unrelated person or governmental entity Conducted outside the U.S. Management surveys, efficiency studies, market research, etc. Routine data collection and ordinary quality control Intended to develop software primarily for internal-use. Exceptions exist. The following activities, unless they meet the four-part test outlined above: After commercial production Adapting an existing component to a particular customer s requirements Duplicating an existing business component Page 14

15 R&D Tax Credit Overview and Highlights (cont d) What Expenses Qualify? Qualified Research Expenses ( QREs ) Taxable wages for employees who perform or directly support or supervise qualified research Contract research expenses: 65%, 75%, or 100% of payments to contractors, depending on the nature and activity of the contractor, and provided the payments were not contingent on the activity s success and the taxpayer retained substantial rights to the research s results Supplies used in qualified research - costs for tangible, personal property, not of a character subject to the allowance for depreciation Computer rents/leases - Computer cannot be owned or on the premises Recent Court Cases: Shami direct supervision and documentation FedEx internal-use software and Discovery Test GeoSyntec funded research and economic risk Page 15

16 Start-ups: What Should We Be Doing? Considerations Location Legal Structure Treatment of IRC sec. 174 costs Expense vs. capitalize/amortize Elections required on timely-filed, original returns Reduced credit (IRC sec. 280C) ASC Processes and procedures to identify and document QREs and qualified activities Page 16

17 High-Growth Companies: What Should We Do? Considerations - General Location: state and non-u.s. R&D opportunities Some states offer refundable or saleable incentives More than 30 other countries provide incentives for R&D activities Many are more generous than U.S. incentives Double-dip opportunities Acquisitions and dispositions Cost-sharing agreements To what extent does the agreement address U.S. R&D activities? IPO and Exit Strategy optimizing your R&D tax asset Employ an R&D methodology to complement growth Robust data-driven methodology versus tax packages Page 17

18 High-Growth Companies: What Should We Do? (cont d) Considerations How to Identify and Document QREs and Activities Tie your facts to the law and to your documentation using the key test: process of experimentation FACTS LAW DOCUMENTATION Development Process Process of Experimentation ( POE ) Typical Documentation 1. Design Requirements 1. Business component/permitted purpose 1. Design Requirement documents 2. Design Specifications 2. POE and uncertainty 2. Functional/Logical Design Specs 3. Prototyping, Programming, Modeling 3. POE 3. Drawings 4. Testing 4. POE and technological in nature 4. Test plans, test results 5. Redesign and Retesting 5. POE and uncertainty 5. Revised drawings, test plans and results Page 18

19 High-Growth Companies: What Should We Do? (cont d) Considerations How to Identify and Document QREs and Activities (cont d) Make it easy to see how non-core R&D departments are involved in your development process, understood as a process of experimentation: Department Stages of Development Process / Elements of a Process of Experimentation Design Requirements Design Specs Marketing x x Prototyping/ Modeling Concept and Feasibility x x x Testing Redesign/ Retesting R&D x x x x x Engineering x x x x x Manufacturing Engineering x Manufacturing x x x Quality Assurance x x x Field Engineering Customer Service Administration Etc. x x x Production x Page 19

20 Takeaways In General 2014 expenses Who s claiming R&D Start-ups Location Elections Documentation High-Growth Acquisitions and dispositions Optimizing and protecting R&D credits Page 20

21 Questions Page 21

22 Conclusion Thank you for your participation! Certificate Availability: If you participated the entire time and responded to at least 75% of the polling questions, click the Support button below to access the print certificate button. Group Participation Reminder to receive credit: Sign-in sheets must list a Proctor name and CPA license number. BDO USA professionals and Clients and Contacts sign-in sheets to bdoevents@bdo.com within 24 hours of the webcast. Alliance Members should proctor their own group participants. This process is detailed in the LearnLive Participant Guide on Alliance Portal > Resource Center. Call LearnLive Support for questions at Unfortunately, we cannot currently support group CPE for International Firms. Those wanting CPE must have registered and participated from their own computer. Please exit the course by clicking the Exit button in the lower right corner. Page 22

23 Speaker Biographies Page 23

24 Chris Bard National Leader, R&D Tax Services Chairman, Global R&D Center of Excellence Direct: Mobile: Century Park East Los Angeles, CA EXPERIENCE SUMMARY For 20 years Chris has worked full time in the area of U.S. federal, state, and non-u.s. R&D tax services. He has identified more than $1 billion in R&D benefits for companies in virtually every industry and supported over 90% of those benefits on exam or at appeals. Formerly with PricewaterhouseCoopers, LLP, Chris has designed and implemented procedures and technologies for large-, mid-, and small-cap companies to identify and document their R&D costs and activities in the most efficient and effective manner. During this time, he has: Increased his clients R&D benefits by more than 100%, on average; Assisted scores of companies implement FIN 48 for R&D credits; Analyzed the R&D, manufacturing, software development, and other operations and documentation systems of 100s of businesses; Interviewed 100s of engineers, scientists, and software developers regarding their R&D and R&D-related activities; Worked closely with more than 100 IRS and state tax examiners, appeals officers, engineers, CAS, counsel, etc., across the U.S.; Designed software and procedures to optimize the process of identifying and documenting R&D activities and costs; and Been published in a variety of media including The Wall Street Journal, Tax Executive, Washington Business Journal, CFO.com, and others. PROFESSIONAL AFFILIATIONS California State Bar Association The World Is Just a Book Away Foundation, since 2008, Director EDUCATION J.D., Taxation, Boalt Hall, University of California, Berkeley M.A., University of Illinois, University Fellow B.A., Georgetown University summa cum laude Page 24

25 Jonathan Forman Regional Leader, R&D Tax Services Managing Director, Global R&D Center of Excellence Direct: Mobile: Park Avenue New York, NY EXPERIENCE SUMMARY Jonathan has been involved with R&D for 18 years in both technical and taxation capacities and brings a scientific, IT, and business background to our R&D practice. Jonathan has extensive knowledge of both U.S. and international R&D tax law. Prior to joining BDO, Jonathan spent six years with Big 4 firms in the United States and Canada. He created and led the R&D incentives practice for Deloitte & Touche in Calgary, Canada where his practice focused on technology, oilfield services, and exploration and production. In addition, he was the leader of the Energy Industry segment for R&D incentives in Canada. Before specializing in R&D tax, Jonathan designed and led teams in the development of several large multi-platform, n-tier software applications for corporate tax departments. These applications included solutions for managing and documenting R&D incentives, managing maintenance and compliance with global withholding regulations, and maintaining a large-scale like-kind exchange program. Prior to joining Big Four accounting firms, Jonathan was a software applications developer and team leader at MCK Communications ( MCK ), a telecommunications company in Newton, MA. Jonathan has extensive experience dealing with specific issues related to R&D credits and incentives within multiple industries including software, energy, life sciences, telecom, and manufacturing. He specializes in maximizing software and technology related R&D claims, including internal-use software, and identifying international incentives. EDUCATION M.B.A., Centre for Innovative Management, Athabasca University B.Sc., Biological Science, University of Calgary Page 25

26 Patrick Wallace Regional Leader, R&D Tax Services Direct: Mobile: Peachtree Street NE, Suite 700 Atlanta, GA EXPERIENCE SUMMARY Patrick is a Senior Director with BDO s R&D Tax Services Practice for our Atlantic, Central, and Southeast U.S. Regions. Patrick has 13 years of experience advising clients on federal and state tax matters. He has extensive experience leading the implementation of R&D tax credit studies. Patrick has advised a range of small privately held to billion dollar publicly traded companies in an array of industries including engineering, consumer products, food products, defense, software, and a variety of manufacturers. He worked with these companies to identify, document, and calculate their R&D related tax benefits in the most efficient and effective manner. Prior to that, he was with KPMG where he delivered high value services to public and private companies of various sizes in a wide range of industries in the areas of tax compliance, tax consulting, transaction structuring, due diligence, and accounting for income tax consulting. PROFESSIONAL AFFILIATIONS American Institute of Certified Public Accountants Georgia Society of Certified Public Accountants EDUCATION Masters, Taxation, University of Denver B.A., Transylvania University Before joining BDO, Patrick was the Managing Director of Tax Consulting for a professional services firm that specialized in R&D tax credit incentives. Page 26

27 Jim Feeser Senior Director, R&D Tax Services EXPERIENCE SUMMARY PROFESSIONAL AFFILIATIONS Jim is a Senior Director with BDO s R&D Tax Services Practice for our Northeast U.S. Region. American Institute of Certified Public Accountants New Hampshire Certification of Public Accountants jfeeser@bdo.com Direct: Mobile: Woodbridge Center Dr., 4th Floor Woodbridge, NJ Jim has 15 years of experience in the area of U.S. federal, and state, R&D tax services. He has identified billions in R&D benefits for companies in virtually every industry and supported those benefits. Prior to joining BDO, Jim spent 13 years with Deloitte Tax LLP, where he was fully dedicated to the R&D tax credit. Also, during that time he was responsible for managing, designing and implementing a technology platform and processes to identify and document R&D costs and activities across the US. Jim has served companies ranging from multibillion dollar multinational companies to small privately held U.S. based companies. He has worked with these companies to identify, document, and calculate their R&D benefits in the most efficient and effective manner. He has conducted interviews with engineers, scientists, and software developers regarding their R&D and R&D-related activities and managed various IRS and state tax examinations. EDUCATION B.S., Widener University - Accounting Page 27

28 BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 49 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multinational clients through a global network of 1,264 offices in 144 countries. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding taxrelated penalties under the Internal Revenue Code or applicable state or local tax or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. Material discussed in this publication is meant to provide general information and should not be acted on without professional advice tailored to your individual needs BDO USA, LLP. All rights reserved. Page 28