Business Breakfast Seminar: "Give Yourself Credit for Innovation, Technology, and More: How to take...

Business Breakfast Seminar:

"Give Yourself Credit for Innovation, Technology, and More: How to take advantage of U.S. and International

R&D tax credits and other tax incentives"

Presented by: Tony Burke, Director-Tax Services, RSM McGladrey, Inc. Bruce J. Kletsky, Vice President-Business Development,

Braithwaite Global Inc.Serge de Blois, CEO, Braithwaite Global Inc.

Many thanks to RSM McGladrey, Inc. and Braithwaite Global Inc. for sponsoring this event

Tony BurkeDirector, Tax Services

[email protected]

Give Yourself Credit: US Tax Credits and Incentives

McGladrey RSM McGladrey: professional services firm providing

accounting, tax and business consulting services McGladrey & Pullen: partner-owned CPA firm providing audit

and attest services When considered together, the companies rank as the 5th

largest US provider of audit, tax, and business consulting services

More than 90 U.S. offices Alternative practice structure Largest member of RSM International

3

RSM International

One of the most highly integrated and robust professional service resources in the world today

6th largest worldwide association of independent accounting and consulting firms*

32,000 professionals in 736 offices throughout 76 countries U.S. $3.8 billion in combined fees in 2009 Global methodologies and quality assurance Organized like the Big Four but scaled to fit the global needs of

the companies we serve

*International Accounting Bulletin

4

US Credits and Incentives

Goals of Today’s Presentation• What is the credit or incentive?• Do I Qualify?• What’s The Benefit?

5

IC-DISC

What is it?• A special purpose entity that is not subject to tax owned by US

operating entity• Reports income from qualifying export sales as taxable

income which is then paid back to the taxpayer as a qualified dividend

Do I qualify?• US Corporation, S Corporation, Partnership, and Limited

Liability Companies can use this• Set up an IC-DISC legal entity• Profits on qualifying export sales included in IC-DISC tax filing• Declare a dividend on the qualifying income from the IC-DISC

• What’s the benefit?• Taxable income on qualifying export sales is taxed at 15%

versus 35%

6

Domestic Manufacturer’s Deduction (DMD)

What is it?• Deduction for tax purposes of up to 9% on qualifying

taxable income from domestic production• Deduction is limited to lesser of qualified production

activity income (QPAI) or taxable income times 9% Do I qualify?

• Domestic Manufacturing, Producing, Growing, or Extracting product

• Adding more than 20% of the product cost through domestic manufacturing

What is the benefit? Permanent deduction from taxable income of up to

9% of QPAI Reduction of overall effective tax rate (C Corps)

7

100% Bonus Depreciation

What is it?• Ability to expense 100% of qualifying fixed asset

additions for tax purposes

Do I qualify?• Acquire new fixed assets with a 20 year tax life

or less during 2011 (decreases to 50% in 2012)

What is the benefit? Immediate expensing of the cost of the asset Time value of money savings on the accelerated

deduction

8

Cost Segregation

What is it?• Opportunity to accelerate depreciation on new

construction projects, expansion of existing facilities, and acquired buildings

• Accelerated depreciation happens through re-classifying assets with a long depreciable life to shorter lives

Do I qualify?• Build a new facility, expand an existing facility, or

acquire an existing facility What is the benefit?

Time value of money savings on accelerated depreciation

Shorter lived assets may qualify for 100% depreciation

9

Energy Incentives - §179D Deduction

What is it?• A tax deduction up to $1.80 per square foot to owners

or tenants of new or existing buildings that invest into certain energy efficient commercial building property.

Do I qualify?• Install new lighting, heating, ventilation, HVAC, hot

water heaters, or overall building upgrades that are certified to reduce the annual energy and power costs by 50% or more.

What is the benefit? Time value of money savings due to immediate

expensing of costs that would otherwise be capitalized for tax purposes

10

Work Opportunity Tax Credit (WOTC)

What is it?• Credit for percentage of qualifying wages paid in the

first year of employment to certain new hires who are qualifying veterans, ex-felons, and troubled youths to name a few (many other groups of people qualify as well)

Do I qualify?• Hire a qualifying employee• Complete necessary paperwork to obtain the credit

What is the benefit?• Credit based on a percentage of wages paid up to

40% of wages paid• Credit is capped at differing amounts based on the

group the hire falls into. Credit could be as much as $9,000 depending on the qualifying employee

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State Credits/Incentives – Illinois Edge Credit

What is it?• Incentive program to increase economic development in

Illinois. (Almost all states have similar type programs either statute based or negotiated). Credit based on the IL withholding for new jobs created or retained in Illinois.

Do I qualify?• Look to expand employment in Illinois or re-locate operations

to Illinois• Need to have another option outside of Illinois• Minimum $5 million in capital improvements and 25 new jobs

created What is the benefit?

• Non-refundable income tax credit based on a percentage of the IL withholding on wages paid to newly created or retained jobs

• Credit is available for 10 years once the project is completed

12

Give Yourself Credit for Your Innovation

Bruce J. KletskyVice President Business Development

[email protected]

Atlanta, Georgia (hdq), with offices in Massachusetts, Texas, Illinois, Connecticut, Canada, UK, Ireland, Spain, France, Brazil

Have over 100 professionals worldwide CPAs and Attorneys Engineers, Software Programmers, Scientists

Only provide research tax credit and audit support services Works with CPA firms and Industry

Be your back office Introduce R&D tax credits to CPA clients

Historical Perspective

Not a new tax law – In existence since early 80’s

Political Agendas – Interpretative Guidance

Treasury writes law – IRS enforces and collects

2001 Regulatory Intent

Final Regulations – Taxpayer victory

Activity Definition Documentation Standards

What is Research and Development? Seeks to solve a technical problem Eliminates uncertainty Innovation Process improvement and development Research and Development does not have to be……

Top secret, Classified or Rocket Science!

Why companies Don’t Take the R&D Credit?

• Too good to be true

• It’s some sort of “tax shelter”

• I will get audited

• I won’t qualify

• I don’t understand it

• Our work is confidential

• Too much work to be worth it

• I’m too busy

• I didn’t know about it

• My CPA has it handled

• Not doing R&D

• We get paid for all our R&D

R & D regulations from 1981-2001 Identify the QRAs – qualified research activities

Was discovery test (patents, inventions) Was extensive documentation

Calculate the QREs – qualified research expenditures

Wages Supplies Contractors

Calculate the Credit – IRS Form 6765

New Regulations Proposed 2001, Final 2004

To keep innovation and creativity in the U.S. The proposed and final regulations:

1. Eliminated the Discovery Requirement

2. Modified the Documentation Standard R&D is no longer only:

scientists, lab coats, patents, etc. Clearly Defined: Congress made it clear through legislative history that

the credit should NOT impose unreasonable record-keeping requirements.

New Funding

$ 13 B in new funding has been made available to allow for the enhancements to the program

Activities must meet a four part test to be considered R&D for tax purposes

Test # 1 – Uncertainty - Activities must be directed towards elimination of uncertainty as to capability or method or appropriate design

Test # 2 – Activity must be for the purpose of discovering something

technological in nature Activity must be useful in the development or

improvement of a product, process, computer software, technique, formula or invention would meet this test.

Discovery must rely on physical, biological, engineering or computer science.

2.

Test # 3 – Activities must constitute elements of a process of experimentation

Must be a process designed to evaluate one or more alternatives to achieve a result where the capability or method or appropriate design is uncertain at the beginning of the research

Involves the identification of an uncertainty, one or more alternatives to remove the uncertainty, and the conduct of a process of evaluating the alternatives

Test # 4 – New or improved business component

Must relate to new or improved function, performance, reliability or quality, production process or technique

Example of Project that Meets the Four Tests# Test Name

1 Uncertainty Company wanted to improve an existing chair control mechanism and was uncertain as to how to design it.

2 Technology The chair mechanism would be used in a new office chair. The work would rely on mechanical engineering sciences.

3 Experimentation Two design alternatives were considered. A prototype of each was prepared, tested and evaluated to attempt to eliminate the uncertainty.

4 Purpose/Improved Process

The purpose of the research was to improve the life cycle performance of the mechanism.

Eligible Costs

Wages – W-2, Box 1 Supplies – consumed in the research process 65% of Qualified Contract Research

Examples -Qualifying Industries Tool & Die Biotech Musical Instruments Wineries Apparel Waste Management Food Processing

Ag-Business Hi-Tech Gov’t Contractors Manufacturing Chemicals Engineering Firms Game Developers

.

BGI is an independent tax advisory firm that works with industry, CPA firms, and their clients, to assist in achieving the benefit of Federal and State sponsored R&D tax credit incentive programs. For more information please visit our web site at: www.braithwaiteglobal.com

Bruce J. Kletsky

[email protected]

Vice President Business Development

888.802.5999, ext 323 630.258.4981

29

Presented to: French American Chamber of Commerce

Chicago, September 19, 2011

30

Agenda Why and How Governments invest in private R&D Overview of six R&D tax incentive programs Where are they Spending the Money?

31

Why Governments invest in private R&D

32www.globalr-d.com 32

•Produce Technological

Advancements

•Contribute to

• Productivity

• competitivity and

• growth

•Improve our living standards

33

How Governments invest in private R&D


Four Major Mechanisms:

• Public research centers

• Research contracts

• Grants and contributions

• Tax incentives (credit and super-deductions)


Why Tax Incentives:

• Cheaper to deliver (no prior approval)

• Not subject to trade retaliations (GATT)

• Industrial secret better protected

• Not a discretionary process but a legal one

• And

36

You decide where to put your R&D money !You decide where to put your R&D money !

http://www.americandryer.com/aa.html

37

Overview of six R&D tax incentive programs


The tax definition R&D is not that you think!

• It is more than white lab-coat

• It’s Experimental Development

• As defined in Frascati Manual (OECD, June

1963 and revised)

39

Legal designation, Claiming principles, Type of incentives

Credit for Increasing Research

activities/Research Tax Credit

(RTC) or Alternative

Simplify Credit (ASC)

Crédit d’impôt recherche

(CIR)

Scientific Research and Experimental Development

(SR&ED)

R&D Tax Relief

Research and Development Tax Credit

Incentivos Fiscais à Pesquisa,

Desenvolvimento e Inovação

(P,D&I),

“Lei do Bem”.

Incremental in comparison to

base years (Regular or

ASC)

Volume with additional credits for 2 first years Volume Volume

« Incremental » with 2003 as base year.

Now volume based

Volume

Non refundable Credit

Refundable Credit

Non refundable credit only refundable for SME

Super deduction only refundable for SME

Refundable Credit

Super deduction not refundable

40

Statute of limitation (prescription), Incentives and Savings

Regular credit: 3 years after the

filing date

ASC: Timely

Generally one year

18 months after fiscal year end

Deadline is 24 months after the

taxation year

Timely Timely

ASC: 14% of QREs less 50% of average QREs for 3 preceding years

Or 7% if no QREs for the 3 preceding taxable years

Regular Credit: 20% of QREs exceeding the Base Amount limited to 50% of QREs of the current year

2011 and after:

50% of expenditures for the 1st year and

40% of expenditures for the 2nd year

Following years:

30% up to €100 M of expenditures and

5% on expenditures over €100M

20% deferrable

SMEs: 35% refundable on the 1st $3M of expenditures

Super Deduction of 130%

SMEs: Super Deduction (SD) 175%

or

Tax credit (TC) of 24.5% limited to the amount

income tax paid on salaries

Tax credit of 25% plus a super tax

deduction of 12.5%

(12.5%x12.5%=1.5625%)

amounting to savings up to 26.5625%

Super Deduction of qualified

expenditures can range from 160% to 200%

41

Eligible Expenditures

Wages √ √ √ √ √ √

Supplies √ √ √ √ √ √

Contracting √(65%) √ √ √(65% SME)

√ √

Overheads √(50% of Salaries)

√(65% of Salaries)

√

Patent Cost √

Equipment √ √ √

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Special Features

Credit above the line (IFRS & GAAP)

√

Restriction on IP retention

√ √

Refunda-bility √ √(SME

)√(SME

)√

Carry back and forward

1 back

20 forwardN/A

1 back

20 forward

Indefini-tively N/A N/A

Restriction on capitalizing R&D

√

43

Effective Saving Range

Effective rate of assistance

6.5% to 14%

30% to 50%

6% to 14%

8% to 24.5%

26.56%

20% to 34%

Significant other R&D incentives (Provinces/States)

√ √ √ √

44

Where are they Spending the Money?

45Source: Own computation from U.S. Department of the Treasury Report - March 25,2011; Internal Revenue Service

http://braithwaiteglobal.com/

49Source: Own computation from US, Canada, UK, France, Brazil and Ireland Statistics and Treasury Departments



2004-2010 2004-2009 2006-2009 2004-2008 2004-2007 2006-2008



2004-2010 2004-2009 2006-2009 2004-2008 2004-2007


55

2004 -Utilization Rate – US vs. Canada

Source: Own computation from US and Canada Statistics and Treasury Departments


56

2008 -Utilization Rate – US vs. Canada

Source: Own computation from US and Canada Statistics and Treasury Departments

57www.braithwaiteglobal.com 57

Thank You ! Merci ! Obrigado !

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