Tax Credits and Incentives Archives - MGO CPA | Tax, Audit, and Consulting Services

How to Keep Your Growing Tech Company State and Local Tax Compliant

Key Takeaways:

Tech companies have historically faced complex state and local tax challenges, particularly regarding nexus and sales tax.
Understanding product and service classification, customer types, transaction documents, and research and development activities is crucial to navigating tax challenges.
Regular nexus reviews and proactive tax planning can help companies determine compliance, mitigate risks, and identify savings opportunities.

For technology companies, state and local tax (SALT) — particularly issues related to nexus and sales tax — can be a minefield. Here is what you need to know to stay compliant and avoid costly mistakes.

Understanding Nexus and Protected Activities

Nexus determines whether your company has a taxable presence in a state. For today’s tech businesses with customers spanning across the U.S., nexus can be triggered more easily than you might think.

For sales tax purposes, in addition to physical presence, most states have statutes that establish a “bright line test” based on sales revenue and/or transactions. Generally, the rule is $100,000 or more in sales and/or more than 200 transactions occurring in a state. This is referred to as “economic nexus.”
For state/local income tax purposes, in addition to physical presence, some jurisdictions also have a “bright line test” based on the presence of certain factors including property, payroll, or sales in a state. This test is referred to as “the factor presence test.”

Additionally, for net income tax purposes, there is a federal law that protects certain activities performed by taxpayers selling tangible personal property. Public Law 86-272 (PL 86-272) shields most sales solicitation activities — which would normally be subject to income tax — from a state’s jurisdiction. However, assisting with installations, calibrations, or training are among activities typically not protected (even though these tasks may support the sales process). This common selling practice in the tech industry often creates income tax nexus without companies realizing it.

PL 86-272 does not apply to service providers. Thus, to the extent the revenue generated by a tech company is for services (as defined by each state) and the company solely solicits sales in the state, the activity will nonetheless create income tax nexus in that state.

For franchise tax, gross receipts tax and other state/local taxes, nexus thresholds may be far lower than the ones discussed. In addition, the PL 86-272 protections do not apply.

The application of nexus rules by tax type to the tech industry is extremely complex and requires a review by a state tax law professional.

Navigating Sales Tax Complexities

In addition to nexus, sales tax rules can vary significantly from one jurisdiction to another, making compliance challenging for tech companies. Two main factors drive this complexity:

1. Product and Service Classification and Documentation

Different states may classify your product/service in different ways, affecting its taxability. This is especially true in the tech industry where states are continuously examining the definition of software as a service (SaaS). For example, one state might conclude your product/service is software while another state may classify it as data processing. State auditors will review your revenue streams, documentation, etc., to make the determination. This conclusion matters as some states tax data processing while others may not.

The classification also matters in the application of sourcing rules by state. For example, sourcing software revenue may differ state by state. It may be sourced based on where the software or server is located in one state and where the user is located in another state. The complexity arises in applying two (2) sets of rules on the revenue generated from the same transaction.

2. Customer Type

The taxability of your product/service can also depend on the type of customer you sell to. Nonprofit organizations, healthcare facilities, government entities, and wholesalers may be exempt from sales tax in certain jurisdictions. Keeping accurate exemption certificates is essential when selling to a mix of taxable and exempt customers to avoid over collecting or under collecting taxes.

Exploring Tax Credits and Incentives

In addition to understanding your nexus and sales tax obligations, your company may also benefit from exploring tax credits and incentives available at the state and local level such as:

R&D Tax Credits

Tech companies frequently engage in research and development (R&D), which can qualify for substantial tax benefits. Similar to federal R&D tax credits, many states offer R&D credits that can help reduce your overall tax burden.

Environmental Incentives

As your company expands, you may invest in new office space or facilities, incorporating environmentally friendly technologies. Some states offer environmental tax credits that can help you reduce costs while contributing to sustainability initiatives.

4 Key Strategies for Staying SALT Compliant

Keeping up with state and local tax laws can be overwhelming — especially when they are constantly changing. Here are strategies to help you stay compliant:

1. Understand Your Obligations

Staying compliant starts with understanding how your products and services are classified for both income and sales tax purposes. Each state may treat your offerings differently and understanding whether your product and/or service is taxable, and at what rate, is critical. Additionally, you need to assess your support and sales activities to determine whether they are protected activities, such as those covered by PL86-272, or if they create taxable presence (nexus).

2. Simplify with Software

Sales tax software can help streamline your compliance process. Many tech companies operating in multiple states use this tool to add sales tax automatically to customer invoices. The software calculates the tax rate for each location based on state, local, and district level rules. It can also help with tracking transactions and automating sales tax filings, reducing errors, and saving time.

3. Document Your Decisions

Meticulous documentation is key to maintaining compliance, especially if your company is subject to an audit. Keep records of decisions on tax classifications, nexus determinations, and exemptions. This documentation will be invaluable during an audit — helping you prove that your company acted in good faith and followed the appropriate processes.

4. Conduct Regular Reviews

As your business grows, so do your tax obligations. It is important to periodically review your nexus footprint — especially when expanding into new states or hiring remote employees. A nexus review assesses your corporate and selling activities by state to determine if your company has tax nexus and therefore potential tax exposure and filing obligations. Regular nexus reviews will help you collect and remit sales taxes and pay income and gross receipts taxes in all necessary jurisdictions and avoid penalties for non-compliance.

Taking a Proactive Approach to SALT

As your tech company expands into new markets, staying ahead of state and local tax (SALT) obligations becomes increasingly important. Regular nexus reviews and proactive tax planning not only helps you avoid costly mistakes but also positions your company for sustainable growth.

How MGO Can Help

With extensive experience working with technology companies and a dedicated SALT team, we can help you effectively navigate the complexities of state and local taxes. Through our nexus review process, we analyze your multistate activities — including sales, payroll, and property presence — to develop a tailored SALT compliance plan and resolve outstanding liabilities resulting from unpaid taxes in various jurisdictions.

In addition, our Tax Credits and Incentives team can help you determine if you qualify for any state and local tax credits to offset your tax burden.

Reach out to our team today to gain clarity on your SALT obligations and protect your business.

You’ve Pre-Filed for the Energy Tax Credit, Now What?

Key Takeaways:

Navigate the crucial “now what?” phase after pre-filing by focusing on cost allocation, credit computation, and timely return filing by November 15.
Tackle complexities like multiple credits, thorough documentation, and tight timelines to maximize your clean energy tax benefits.
Leverage professional guidance to optimize your credits and potentially secure substantial refunds for reinvestment in your community.

You’ve taken the first step towards benefiting from clean energy tax credits by completing your pre-filing registration. But what comes next? For state or local government entities, navigating the world of energy tax credits can be complex. Let’s break down the crucial next steps to help you maximize your benefits and meet the necessary deadlines.

Understanding the Timeline

After pre-filing registration, you’re now in the “now what?” phase. This critical period involves two main steps:

Cost allocation and credit computation, and
Filing of the return (due November 15).

It’s essential to maintain momentum during this phase to receive the full benefits of the tax credit.

Cost Allocation and Credit Computation: Key Considerations

As you prepare to file your return, keep these important factors in mind:

Multiple Credits and Projects

If your entity is filing for more than one credit or managing multiple projects, the process becomes more intricate. Each credit may require separate forms and documentation, and careful management is needed to avoid errors that could delay your refund.

Documentation and Support

Given that this is a relatively new process for many governmental entities, thorough documentation is essential. From initial project costs to ongoing expenses, every financial detail must be meticulously recorded. Proper documentation not only supports your credit claims but also protects your entity in the event of an audit.

Timeline Considerations

The timeline for filing is tight. After prefiling registration, you have a few months to complete cost allocation, credit computation, and the final tax return. Missing the November 15 deadline could result in forfeiting your refund for the year. Working with knowledgeable tax professionals can help you streamline this process and meet all necessary deadlines.

MKT000200-Youve-filed-you-preregistration-now-what

How Professional Guidance Can Help Your Government

Given the complexities involved, your government may benefit from tax credits and incentives professionals to help you navigate the intricacies of:

Proper assessment of eligible expenses
Gathering and organizing necessary documentation
Verifying compliance with all IRS requirements
Maximizing your potential benefits

Filing the Return: The Final Step

Once your cost allocations and credit computations are complete, you’ll move on to filing your tax return. For 2023 tax filings, this return is due by November 15, 2024. Meeting this deadline is crucial to secure your refund.

A few key notes on filing your return:

Your filing must include the registration number(s) provided after your pre-filing registration review.
This is where you will make the formal election for elective pay (also referred to as “direct pay”).
Complete and accurate filing will help you receive the full value of your eligible credits.

What If You Missed the Pre-Filing Registration?

If you haven’t completed your pre-filing registration yet, it’s crucial to act quickly. While the IRS recommended a July 15 deadline, it’s not a hard cutoff. However, delays from a late pre-filing could impact your ability to meet the November 15 filing deadline. Contact a professional as soon as possible to avoid missing out on potential opportunities.

Elective Pay: A Quick Refresher

Elective pay allows governmental entities to benefit from certain clean energy tax credits. The amount of the credit is treated as a payment of tax, and any overpayment results in a refund. This means you can receive the full value of your investment tax credit even if you don’t owe other federal income taxes.

For example, a Northern California city recently computed over $6 million in credits for a $28 million clean energy project. This city stands to receive a substantial refund, which can be reinvested in further sustainable initiatives or other community needs.

Unlock the Full Potential of Your Energy Tax Credits

By staying informed and proactive, you can navigate this process successfully and maximize the benefits of clean energy investments for your community. As you move forward, remember that you don’t have to go it alone — engaging with a tax credits and incentives professional can help you optimize your credits and create a smooth process from start to finish.

How MGO Can Help

Need assistance with your cost allocation and credit computation to meet the filing deadline, or just want to learn more about what energy incentives could be applicable for your entity? Visit our Renewable Energy Investments and Credits page or reach out to our Tax Credits and Incentives team today.

Unlock Savings with State and Local Tax Credits and Incentives

Key Takeaways:

Many businesses may miss out on significant savings by not fully using state and local tax (SALT) credits and incentives. But there are thousands available across state and local jurisdictions.
SALT programs offer valuable credits for job creation, capital investment, and research and development (R&D) — but companies often struggle with awareness, eligibility, and administrative challenges in utilizing these programs.
Third-party advisors can help businesses identify and maximize SALT savings while maintaining compliance. Properly leveraging SALT credits can provide a strong return on investment.

State and local tax (SALT) credits and incentives programs continue to be underutilized by taxpayers. Despite the substantial value they can add for businesses, BDO’s 2024 CFO Outlook Survey found that just 34% of CFOs plan to optimize costs by claiming tax credits in the next 12 months. This suggests that many companies could be leaving significant savings on the table.

There are myriad reasons why businesses do not take full advantage of SALT credits and incentives, even though those programs can be instrumental in unlocking cost savings for business activities such as upgrading existing facilities, relocating, building new facilities, and research and development (R&D).

There are thousands of credits and incentives available across state and local jurisdictions. Some companies lack awareness of the full range of credits and incentives available to them, while others may be aware of the programs but unsure of how to take advantage of them. The administrative burden of fully implementing awards once obtained can also be a barrier.

The benefits of tax credits and incentives can be a strong return on investment for companies able to take advantage of them, but many businesses lack the internal resources or expertise to navigate these opportunities effectively. This is where engaging with a third-party advisor may be a strategic value-adding measure.

Tax Credits and Incentives Refresher

Statutory tax credits can reduce a company’s overall tax liability — or in some cases provide a cash benefit for refundable or transferable credits — and may be available retroactively if applications are supported with appropriate documentation. Examples include statutory income/franchise tax credits and unique sales tax exemptions.

Tax incentives are generally broader than tax statutory credits and can come in the form of discretionary cash grants, negotiated abatements, unique exemptions and exclusions, and preferential tax rates. In many cases, they can offer above-the-line savings, making them appealing even to businesses operating at a tax loss. Examples include payroll tax rebates or property tax abatements.

Common SALT Credits and Incentives

The thousands of SALT credits and incentives available in the U.S. can vary widely, but some of their themes are consistent across jurisdictions. Below are a few of the most common SALT programs that are relevant to a large range of businesses.

Job Creation

Many jurisdictions offer credit and incentive programs to promote job creation. The most effective and typical incentive is a rebate of a portion or all of future payroll/withholding taxes for new jobs created for an expansion project. This type of incentive is highly lucrative because it is generally in place for at least 10 years. Negotiated incentives to reward job creation can generally be found in most states, but the Southeast continues to offer some of the best incentives.

Capital Investment

Capital investment incentive programs are designed to boost local economic development by supporting projects such as constructing new facilities, acquiring production equipment, or upgrading existing facilities. For example, an energy company that commits to a large-scale project to purchase a new piece of equipment may be eligible for income tax credits to offset a percentage of its investment costs. Other common opportunities include real and personal property tax abatements for new or improved facilities and investing in new equipment.

Utilities

As businesses across industries look to reduce their environmental impact, they might want to consider projects that may be eligible for credits and incentives, such as upgrading utility infrastructure, implementing energy-efficient systems, and enhancing water conservation. Across the nation, several jurisdictions offer utility tax credits, energy efficiency grants, renewable energy tax incentives, and utility rate reductions. These initiatives are often not limited to specific industries and can even be available to large nonprofit organizations such as hospitals, which may be eligible for a utility rate reduction without having to make any new investments.

Research and Development

States and jurisdictions across the country are vying to attract innovation by offering a variety of R&D credits to businesses in all industries. These programs can offset the cost of developing new products and processes, testing new or improved products and processes, enhancing existing products and processes, and creating prototypes. For example, an auto manufacturer seeking to develop longer-lasting batteries for electric vehicles may be eligible for credits or incentives to support researching or prototyping a new battery.

Benefits of Working with an Advisor

Lack of awareness of or a failure to understand eligibility are two of the most common reasons businesses miss out on available SALT credits and incentives programs. Many companies do not have in-house expertise to uncover these savings opportunities, but third-party advisors have the skills, relationships, and experience necessary to conduct the planning and analysis needed to determine which credits and incentives businesses should pursue.

Advisors can help tax leaders review their companies’ profiles and business strategies to uncover any past, current, or future opportunities. For example, a review of prior income tax returns could result in identifying retroactive refund opportunities.

Advisors can also review the programs offered by the various jurisdictions where the company operates, which, depending on the company’s size and scope, could represent savings opportunities in dozens of locations.

Advisors can take a comprehensive approach to reviewing all available opportunities or can tailor credit reviews to the most pertinent and strategic business needs.

They can also help leaders stay abreast of new credits in the locations where they operate and identify incentives and explore eligibility as they expand operations.

Further, advisors are critical in helping businesses collect the extensive documentation required to qualify for, take advantage of, and report their use of credits and incentives programs. This compliance work can be challenging for a company’s in-house tax team to navigate, so outsourcing it can provide valuable time savings. It can also help ensure companies are taking full advantage of their awards.

How MGO Can Help

As a third-party advisor, we uncover credits and incentives applicable to your business profile and strategy, particularly in areas where you plan to operate or expand. Staying at the forefront of new incentives and programs, our team helps you benefit from the latest opportunities — matching your needs to available programs at the federal, state, and local levels. We work with both statutory and non-statutory programs, collaborating closely with relevant authorities.

SALT credits and incentives are a critical component of tax planning and should be explored to determine how they can support your overall business strategy or create opportunities for retroactive or above-the-line savings. To learn more, reach out to our team today.

Are Your Employee Retention Credit (ERC) Claims at Risk? What You Need to Know

Key Takeaways:

Employers should promptly respond to IRS notices regarding ERC claims to avoid disallowance and potential legal action.

Accurate documentation is essential, particularly regarding qualifying government orders and the eligibility period for ERC claims.

Understanding IRS-identified risks, such as overstating claims and calculation errors, is crucial to avoid costly compliance issues.

UPDATE (AUGUST 2024):

The IRS is advancing its processing of Employee Retention Credit (ERC) claims while extending the moratorium on new claims to January 31, 2024. The IRS will now start processing claims filed between September 14, 2023, and January 31, 2024. This shift allows the IRS to expedite payments for legitimate claims and crack down on improper filings. What this means is that taxpayers who filed ERC claims after the prior moratorium date of September 14, 2023, and have been waiting for them to be processed, should now see progress on these claims in the coming months. This is a very positive development for taxpayers who have submitted pending claims.

Recently, 28,000 disallowance letters were sent, potentially saving $5 billion in erroneous payouts. The agency’s actions reflect a careful balance between protecting taxpayers and ensuring eligible businesses receive due funds. The IRS also recently reported that it has identified 50,000 valid ERC claims and is quickly processing them and sending refunds in the weeks ahead.

For those taxpayers who have received denial letters or believe their claims were wrongly rejected, there are several paths to address these issues. Consulting with a tax controversy advisor is advisable to determine the best course of action, including the possibility of appealing the decision. In some cases, taxpayers may consider pursuing legal action through tax court, U.S. District Court, or the Court of Federal Claims, either as an alternative to an appeal or following an unsuccessful one. Engaging an attorney early in the process is recommended to explore all available options.

To combat a wave of frivolous Employee Retention Credit (ERC) claims, the IRS has sharply increased compliance action through audits and criminal investigations, with more activity planned in the future. In this heightened enforcement-focused environment, employers are advised to act swiftly when responding to IRS notices regarding ERC claims.

Immediate Action Required for Employers Receiving IRS Audit Notifications

Employers must be aware that failing to respond to IRS notices within the time frame specified can lead the IRS to disallow the entire ERC claim and issue a notice of disallowance. Once the IRS formally disallows a refund claim, the taxpayer may be permitted to first file a protest with the IRS Office of Appeals or, in some cases, the taxpayer may decide to file a lawsuit in federal court to litigate the issue. Both scenarios subject employers to the necessary defense of an often burdensome and costly refund claim controversy, further delaying the much-needed ERC relief promised by Congress.

The successful defense of any ERC examination will depend greatly on an understanding of the risks and eligibility criteria to avoid the costly repercussions of noncompliance, including the potential for general examination. In Notice IR-2024-39, the IRS highlighted warnings signs that ERC claims may be incorrect, urging businesses to revisit their eligibility.

Key Examination Risks Identified by the IRS

Claiming Too Many Quarters: It is unusual for employers to qualify for the ERC in all available quarters. A meticulous review of eligibility for each quarter is advised to avoid overstating claims.

Non-Qualifying Government Orders: The IRS has clarified that not all government orders related to COVID-19 qualify for the ERC. Orders must have directly affected the employer’s operations, and mere guidance or recommendations do not suffice. Businesses must be able to document and substantiate the impact of qualifying government orders.

Employee Counts and Calculation Errors: Thanks to changes in the law throughout 2020 and 2021, employers must now be vigilant in their calculations, adhering to the dollar limits and credit amounts for qualified wages.

Supply Chain Disruptions: Qualifying for the ERC based solely on supply chain issues is rare. Employers must demonstrate that their supplier was affected by a qualifying government order.

Overstating the Eligibility Period: Claiming the ERC for an entire calendar quarter is possible only if the business was impacted for the full duration of the quarter. Employers are entitled to claim ERC only for wages paid during the actual suspension period and must maintain accurate payroll records.

Navigating Refund Claim Controversies Amid Increased IRS Action

Employers should seek guidance from trusted tax professionals to maintain compliance and effectively manage the challenges of the IRS’s ongoing enforcement actions.

How MGO Can Help

MGO can assist you in navigating IRS audits and ERC claims — helping you meet compliance standards, provide accurate documentation, and address tax controversies. For detailed assistance, visit our Tax Advocacy and Resolution services.

Is Your Manufacturing Company Missing Out on R&D Tax Credits?

Key Takeaways:

R&D tax credits reduce tax liability and provide a financial boost for manufacturing companies investing in innovation.

Qualifying for R&D tax credits involves creating new or improved products or processes and requires thorough documentation.

Misconceptions about R&D tax credits limit potential benefits. Both large and small companies can qualify for incremental improvements.

In the ever-evolving landscape of manufacturing, innovation is still the cornerstone of success. Yet, amidst the constant drive for advancement, many manufacturing companies overlook a valuable opportunity to enhance their financial health: research and development (R&D) tax credits.

These incentives are designed to reward your company for research and development efforts, providing a significant financial boost. Understanding and using these credits can make a substantial difference to your company’s bottom line.

Understanding R&D Tax Credits

R&D tax credits are federal incentives aimed at encouraging companies to invest in innovation. These credits are available to businesses that engage in activities related to developing new products, processes, or technologies. The scope of qualifying activities is broad — encompassing everything from developing new software systems to refining manufacturing processes.

For manufacturing companies, this means a wide range of projects could potentially qualify for these credits. Whether you are creating a new product line, improving existing products, developing more efficient production methods, or designing, there is a good chance your efforts could be eligible for R&D tax.

The Financial Impact

The financial benefits of R&D tax credits are considerable. These credits directly reduce your tax liability on a dollar-for-dollar basis. Essentially, for every dollar invested in qualifying R&D activities, a part of this cost can be recouped through these credits.

This reduction in tax liability can significantly enhance your company’s financial statements — freeing up capital for reinvestment in further innovation and growth. Additionally, for certain taxpayers under qualifying criteria, R&D tax credits also can be used to offset payroll tax liabilities.

R&D tax credits are not limited to federal taxes either. Many states offer other incentives, creating an even greater opportunity for financial savings. By taking advantage of both federal and state R&D tax credits, your manufacturing company can maximize its benefits.

Qualifying for R&D Tax Credits

To qualify for R&D tax credits, your company must engage in activities that align with the Internal Revenue Service (IRS) definition of research and development. The IRS uses a four-part test to decide eligibility:

Permitted purpose: The activity must aim to create a new or improved product or manufacturing process. This could involve designing a new part, developing a more efficient assembly line, or creating a product with enhanced functionality.

Elimination of uncertainty: The activity must look to analyze and eliminate technical uncertainty about the development or improvement. For example, this might involve deciding the best materials to use in a new product or figuring out how to streamline a production process to reduce waste.

Process of experimentation: The activity must involve a process of experimentation, such as systematic trial and error. In a manufacturing context, this could mean testing different prototypes, experimenting with various production techniques, or conducting pilot runs to evaluate the feasibility of new methods.

Technological in nature: The activity must be based on principles from physical or biological sciences, engineering, or computer science. For manufacturers, this often includes using advanced engineering principles, integrating new software systems into production lines, or applying scientific research to improve product quality.

Documentation is critical in this process. Detailed records of your R&D activities — including project descriptions, expenses, and outcomes — will support your claim and confirm compliance with IRS requirements. From the first hypothesis to final testing, keep thorough documentation of every step to substantiate your eligibility for R&D tax credits.

Common Misconceptions

Many manufacturing companies believe R&D tax credits are only for large corporations with dedicated research labs. This is far from the truth. Businesses of all sizes can qualify for R&D credits, and the types of activities that qualify are often broader than many realize.

Other common misconceptions:

R&D tax credits only apply to groundbreaking innovations.

The process to identify and capture these credits is too cumbersome.

In reality, both these beliefs are unfounded. It’s not just groundbreaking innovations — incremental improvements to products or processes can also qualify. If your company is making strides in efficiency, quality, or performance, these efforts may be eligible for R&D tax credits. And capturing these credits doesn’t have to be cumbersome. Engaging the services of a trusted professional will help you efficiently and effectively work through the process.

Maximizing Your R&D Tax Credits

R&D tax credits are not just a way to reduce your current tax liability; they are also a significant tax-planning tool. These credits can reduce estimated tax payments and income taxes, thereby increasing cash flow and influencing future financial planning as your company grows.

To maximize the benefits of R&D tax credits, you need to implement a strategic approach. Consider these key steps:

Find qualifying activities: Conduct a thorough review of your operations to find all potential R&D activities. Look beyond obvious projects to uncover less clear qualifying activities.

Maintain detailed documentation: Keep comprehensive records of your R&D projects — including goals, methodologies, and expenses. Proper documentation is essential for substantiating your claims.

Consult with tax professionals: Work with tax advisors who specialize in R&D tax credits. They can help you navigate the complexities of the application process and improve your claim.

Review and update annually: Regularly review your R&D activities and expenses to confirm you are capturing all eligible credits. As your company evolves, so will your R&D activities.

Unlock Your Potential with R&D Tax Credits

R&D tax credits are a powerful tool for manufacturing companies striving for innovation and growth. By understanding the eligibility criteria and keeping diligent documentation, your company can unlock significant financial benefits.

Do not let misconceptions prevent you from exploring this valuable opportunity. Engage with knowledgeable tax professionals to navigate the process and maximize your benefits.

How MGO Can Help

Our dedicated Tax Credits and Incentives team can help your manufacturing company leverage R&D tax credits to support your innovation. Reach out to our team today to learn more.

Case Study: How MGO Helped a Startup Manufacturer Maximize the R&D Credit

Background:

Since the 1980s, the Research and Development (R&D) credit has offered companies a financial incentive to invest in innovation. Once limited to those passing a stringent discovery test, the credit has expanded to include a broader spectrum of businesses, thanks to the more inclusive four-part test.

This shift provides companies investing in innovation a critical opportunity to reduce their tax burden and support cash flow. However, recent legislation has changed how businesses deduct research and experimentation (R&E) expenses.

Before 2022, companies could deduct R&E expenses in the year paid or amortize them over 60 months. However, legislation passed in 2017 that didn’t go into effect until 2022 mandates that companies must amortize R&E expenditures over 60 months rather than immediately deducting them.

This has been financially devastating to many companies. Due to this change, many can’t afford to pay their tax liabilities and some are even struggling to survive.

In this environment, it’s essential for companies investing in research and development to optimize the R&D credit.

The Challenge:

A startup company focused on developing autonomous driving mechanics faced a significant challenge due to the high costs of R&D. With total investments exceeding $700,000 and annual revenue of just $5,000, they were not yet profitable and, therefore, had no income tax liability to offset.

Despite this, the innovative spirit of the company necessitated substantial investment in R&D, which was not supported by immediate tax deductions per the new regulations.

Approach:

MGO, with its deep understanding of tax regulations and R&D credits, stepped in to navigate the complex landscape of R&D incentives.

The solution leveraged the payroll tax offset, allowing the startup to apply R&D tax credits against their payroll tax liability. Prior to the 2023 tax year, claims were limited to the $250,000. Starting from the 2023 tax year, these claims can be maximized even further.

The payroll tax offset provision, available to startups with less than $5 million in gross receipts and less than five years of operation, proved vital for this early-stage company.

This strategy was crucial for the company, given its high payroll expenses and lack of taxable income.

Value to Client:

Through the strategic application of the R&D credit, MGO secured a $150,000 benefit for the company, effectively reducing its payroll tax expenses.

Using the R&D credit to offset payroll taxes provided the much-needed liquidity to support ongoing innovation efforts, demonstrating the transformative power of R&D incentives for startups.

MGO’s knowledge and experience enabled this autonomous driving startup to fully utilize R&D tax credits despite having limited revenue. By applying the credit to payroll taxes, the company could sustain its innovation journey in a challenging economic landscape.

Your Trusted R&D Tax Credit Advisor

At MGO, our professionals bring more than 30 years of R&D tax experience to help you document, file, and defend your R&D tax credit claim.

Contact MGO today to discover how we can help you maximize R&D tax credits to support your growth and innovation journey. We welcome the opportunity to provide a complimentary R&D tax credit eligibility analysis to determine whether this valuable tax incentive can fuel your business’s investment in innovation and growth.

4 Step Guide to Securing R&D Tax Credits for Your Company

Key Takeaways:

Thorough documentation is essential for maximizing R&D tax credit claims by linking innovative projects to the required criteria set by authorities.

Critical documentation methods include maintaining project plans, reports, communications, time sheets, expense logs, and categorizing all records by project with clear dates.

To substantiate experimentation, continuously update digital records like lab notes and version-controlled documents to detail hypotheses, trials, iterations, findings, and modifications.

For companies in industries like manufacturing, biotech and life sciences, and technology, navigating the complex world of research and development (R&D) tax credits can be challenging. Thorough documentation is the key to maximizing your claim. Effective R&D tax credit claims hinge on robust documentation. Establishing the link between your innovative projects and the tax credit criteria set by authorities is non-negotiable.

Maximizing R&D Tax Credits: A Checklist for Robust Documentation

From ideation to execution, every step of your R&D project must be documented with precision. Follow these guidelines to assist your efforts:

1. Foundation and Focus of Documentation

Lay the foundation for your R&D tax credit claim by aligning your innovative endeavors with the IRS’s qualifications. It is critical to consistently document every aspect of your projects, from initial goals and research stages to the hurdles you overcome and the novel outcomes you achieve. Your documentation needs to center on and address how your activities relate to the required four-part test: developing a business component, relying on science or technology, aiming to eliminate uncertainty, and involving a process of experimentation.

2. Documentation Methods and Best Practices

Incorporate a variety of records into your R&D documentation system — such as project plans, reports, and communications. For optimal organization, make sure each document is clear, concise, and bears a date stamp. Then categorize all documents by project, which aids in retrieval and review. Keep detailed records of project developments, discussions, and decisions to facilitate a straightforward audit process.

3. Tracking and Proving Your R&D Work

Maintain a log of your qualifying R&D activities and concurrent developments, clearly articulating how these relate to expenses. Accurate and up-to-date records like time sheets and expense logs are essential. Organize and categorize all R&D costs — from personnel and materials to outsourcing and cloud computing — employing accounting software for uniform expense coding. This methodical record-keeping is essential for connecting R&D endeavors with their associated costs, ensuring this support is available and complete in the event of an IRS audit.

4. Showcasing Experimentation

Substantiate technological progress with thorough records of your experimental activities. Continuously update digital records to reflect the evolving nature of your R&D projects, capturing each hypothesis, trial, and iteration. Make certain these digital records, like lab notes and version-controlled documents, comprehensively detail the experiments, findings, and any modifications to procedures or products.

Unlock R&D Tax Credits to Drive Your Business Forward

Navigating the intricacies of R&D tax credits is a continuous process that demands thorough documentation and strategic planning. By adhering to the four guidelines above and meeting the four-part test, businesses can not only ensure compliance but also maximize their potential benefits. As you embark on this journey, remember each detail documented is a step towards fostering innovation and technological advancement within your company.

MGO offers a comprehensive suite of strategic financial services to support your R&D endeavors. Reach out to us today to find out how we can help you.

Fueling Your Future: Harnessing R&D Tax Credits for Innovative Growth

Key Takeaways:

R&D tax credits incentivize innovation by reducing tax liability and providing cash flow for companies to reinvest in research.

Current legislation proposes delaying R&D cost amortization, advocating immediate expensing through 2025 to boost U.S. innovation.

To maximize R&D tax benefits, companies must strategically align projects with eligibility criteria, maintain documentation, choose the optimal claim path, and tailor strategies to industry-specific nuances.

In the competitive global market, staying at the forefront of innovation is not just a goal but a necessity for businesses of all sizes. Noting this, the U.S. government established a pivotal incentive to reward and encourage investments in research and development (R&D). R&D tax credits serve as a cornerstone for companies pushing the boundaries of innovation and technological progress.

Empowering Innovation Through Tax Incentives

The beauty of R&D tax credits lies in their dual benefit structure. Not only do they reduce tax liability for your business, but they also enhance cash flow — allowing reinvestment back into your company’s innovation pipeline. This reinvestment is vital for continuous improvement and long-term success, particularly for startups dreaming big and established companies refining processes and products. R&D tax credits are not just a tax strategy; they are a fundamental part of your growth narrative.

Whether you are a fledgling tech startup aiming for the next big breakthrough or a seasoned manufacturer improving existing processes, R&D tax credits offer widespread applicability. They represent a commitment to supporting the growth and innovation journey of businesses across various sectors, from AI and green energy to biotech and manufacturing.

Legislative Efforts Amidst Challenges

The Tax Cuts and Jobs Act (TCJA) introduced in 2017 made significant changes to R&D tax incentives, shifting from immediate expensing of R&D costs to a more burdensome five-year amortization. However, in a move to rejuvenate the innovation landscape, the Tax Relief for American Families and Workers Act of 2024 has been proposed to delay this amortization, championing immediate expensing through 2025. This legislative initiative underscores the economic imperative for the U.S. to maintain its global leadership in innovation and technology.

While there is bipartisan support for the importance of R&D incentives, with key proposals awaiting Senate action, the legislative landscape is not without its challenges. The proposed Fiscal 2025 Budget by President Biden earmarks substantial investments in innovative sectors to complement the tax incentives. However, the legislative progress faces hurdles with ongoing debates over government funding, potentially delaying critical policy adjustments necessary for the R&D tax incentives to realize their full potential.

Strategizing to Maximize Your R&D Benefits

For your business to capitalize on these incentives, you must align with the stringent four-part test that stipulates qualifying R&D activities must be:

Technological in nature

Aimed at permitted purposes

Directed towards the elimination of uncertainty

Entail a process of experimentation

Maintaining rigorous documentation is essential, linking projects directly to these eligibility criteria. Choosing the right claim path — against income or payroll tax — can also determine the extent and immediacy of the benefit. Furthermore, industry-specific insights can guide your company on how to tailor your R&D strategies — acknowledging that some activities may qualify more readily based on your industry’s nature.

How We Can Help

MGO’s Tax Credits and Incentives team can help you turn tax expenses into positive cash flow. Reach out to our team today to find out how you can leverage R&D tax credits to grow your business.

Are You Ready to Optimize Your Tax Efficiency for Rescheduling?

Key Takeaways:

Cannabis companies face critical tax decisions following the notice of proposed rulemaking to reschedule cannabis.
Areas of consideration include reviewing open and estimated tax years, as well as assessing your current structure and its costs/benefits moving forward
Companies should also prepare for potential M&A opportunities and explore tax credits and incentives that could become available in a post-rescheduling world.

The federal government’s proposal to move cannabis from Schedule I to Schedule III carries significant tax implications beyond the (non-)application of 280E. It’s essential for your business to navigate this new landscape and make informed decisions to optimize your tax position.

Here are four key areas to consider:

1. Reviewing Open and Estimated Tax Years

Now is the time to review prior year tax returns, considering recent court cases and other factors to determine if protective claims or amended returns are warranted and could be beneficial. Evaluating how recent events should impact your 2024 quarterly estimated tax payments and future tax strategies is crucial.

2. Structuring for Post-280E Tax Efficiency

Legal and operating structures designed for a 280E environment may no longer be optimal post-rescheduling. Assess the costs and benefits of maintaining your current structure and explore tax-efficient alternatives to avoid phantom income and simplify transactions between related companies.

3. Navigating M&A Tax Considerations

With merger and acquisition (M&A) activity expected to accelerate, it is crucial to optimize your company’s tax structure for potential transactions. Whether you’re an acquirer or a target, understanding the tax due diligence process and making informed decisions in light of the rescheduling announcement is essential.

4. Leveraging Tax Credits and Incentives

Post-rescheduling, cannabis companies can finally take advantage of federal, state, and local tax credits and incentives previously unavailable. Identifying and qualifying for credits related to research and development, employees, clean energy, and more will be beneficial for your business.

How MGO Can Help You

MGO’s dedicated Cannabis practice has the experience and knowledge to help you navigate the complex tax implications and opportunities of rescheduling. Reach out to our team today.

Your Guide to Final Rules on Electric Vehicle Tax Credits

Key Takeaways:

The final rules for the $7,500 electric vehicle (EV) tax credit, effective July 5, 2024, define eligibility for new and used EVs and allow credit transfer to dealers.

Automakers must trace battery supply chains to meet U.S. content requirements, with a $3,750 credit for using qualified critical minerals.

Critical minerals and battery parts from entities with ties to hostile foreign governments (e.g., China, Iran) are excluded from credit eligibility.

On May 3, 2024, the U.S. Treasury Department unveiled the final IRS regulations for the electric vehicle (EV) tax credit of up to $7,500 for new and previously owned EVs. These new requirements are intended to enhance aspects of the 2022 Inflation Reduction Act (also called the “climate law”) and incentivize automakers to supply battery components from companies with ties to countries with a U.S. free trade agreement. Unless otherwise noted, the new rules become effective on July 5, 2024.

Navigating New EV Tax Credit Regulations

The final regulations contain:

Definitions and rules regarding taxpayer and vehicle eligibility for the credit for new and previously owned clean vehicles.
Guidance for taxpayers who purchase qualifying vehicles and intend to transfer the amount of any vehicle credit to dealers that are entities eligible to receive advance payments of either credit.
Guidance for dealers to become eligible entities to receive advance payments of previously owned clean vehicle credits or new clean vehicle credits.
Rules regarding recapture of the credits

The final rules depart from the proposed rules released on April 17, 2023 and December 4, 2023 in several key ways. They:

Address the foreign entity of concern (FEOC or “excluded entity”) restriction by imposing a detailed tracing process for automakers to track the origin of all components in the battery supply chain to qualify for the credit’s domestic content requirements.

Fulfill the critical minerals and battery components requirements by implementing a new critical minerals test.

Provide guidance for taxpayers to transfer EV credits when their vehicles are purchased by dealers, and for dealers to obtain advance EV credits and to obtain recapture of those credits.

The tracing process is the most prominent feature of the new final rule. The “traced qualifying value test” requires automakers to conduct thorough supply chain tracing to quantify the amount of minerals in the battery that meet the U.S. domestic content requirements.

Critical minerals from excluded entities (see below) cannot be included in the calculation. Automakers that satisfy the new test will be eligible for a $3,750 “critical minerals” credit.

Meeting Critical Minerals Requirements

The new rules provide three ways to meet the “critical minerals” (as defined in Section 45X(c)(6) of the Internal Revenue Code) requirement and thus be eligible for the full credit.

Minerals in the EV battery must be:

Extracted in the U.S. (or in any country with which the U.S. has a free trade agreement in effect), OR

Processed in the U.S. (or in any country with which the U.S. has a free trade agreement in effect), OR

Recycled in North America

In addition, to qualify for the credit, the domestic content of the battery must be equal to or greater than the applicable percentage (as certified by the qualified manufacturer) based on when the vehicle is placed in service:

Before January 1, 2024: 40%
2024: 50%
2025: 60%
2026: 70%
After December 31, 2026: 80%

In applying the critical minerals test (and under which manufacturers can use the previously proposed 50% “roll up” as a transition rule until 2027), the new rule adopts without any major changes the controversial proposed provision prohibiting battery parts and critical minerals from excluded entities (defined as FEOCs) — which comprise businesses with known ties to foreign governments deemed hostile to U.S. interests (currently China, Iran, North Korea, and Russia). FEOCs are ineligible from qualifying for the credit. Many of these FEOCs have ties to China, which dominates the EV battery supply chain. The FEOC battery component rules took effect on January 1, 2024.

In connection with the FEOC restrictions, the regulations require that manufacturers use the allocation-based accounting rules for the critical minerals outlined in the proposed rules. The new rules also confirm that certain battery components (such as graphite contained in anode materials) are impractical to trace and permit manufacturers to continue excluding those materials in certifying that their products have met the due diligence requirements through 2027.

How MGO Can Help

MGO can support your business in understanding and complying with the new EV tax credit regulations. With deep knowledge in renewable energy investments and credits, MGO offers guidance on meeting eligibility requirements, tracing supply chains, and adhering to critical mineral standards.

Our team provides strategic insights to help you optimize tax benefits while complying with the latest IRS rules. Discover how we can assist your business in leveraging these new opportunities by visiting our Renewable Energy Investments and Credits page.