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Research Tax Credit: The R&D tax credit rewards companies for the development or improvement of their products, processes, techniques, formulas, inventions or software applications(1). It's a wage-based credit, meaning it's determined by quantifying each staff member's time spent on research and experimental activities and multiplying by his wages; consequently, the credit is most financially beneficial to multi-million dollars laboratories that have the staff wages and time to spend enough hours to qualify for the credit.
Eligible activities for laboratories may include:
• Experimenting with the latest processes and technology.
• Researching different substructure materials.
• Testing new porcelains, composites, acrylics or other materials.
• Developing new techniques and formulas.
It's a dollar-for-dollar credit against the taxpayer's federal income tax liability. Taxpayers benefit from the deduction in the year the expenditure is paid or incurred and by claiming the credit(2). In addition, approximately 30 states also have incentives for research and development, based upon the federal definition of qualified research. California has the best state credit; it basically mirrors the federal credit so you get double the bang for your buck.
Depending upon the methodology elected by the laboratory owner, the credit is equal to 14% (alternative simplified credit method) or 20% (traditional credit method) of the research expenditures in excess of a base amount.
Work Opportunity Tax Credit (WOTC): This allows taxpayers to claim a federal income tax credit equal to 40% of the first $6,000 of wages paid to a member of these specific groups of employees:
• Veterans in a family receiving supplemental nutrition assistance, unemployed veterans and service- related disabled veterans discharged from active duty.
• Qualified ex-felons.
• Families receiving benefits under the Temporary Assistance to Needy Families program.
• Designated community residents.
• Vocational rehabilitation referrals.
• Qualified food and nutrition recipients.
• Qualified Supplemental Security Income recipients.
• Long-term family assistance recipients.
• Qualified summer youth employees.
Further, the WOTC is one of the few credits that may offset the Alternative Minimum Tax (AMT), making it particularly advantageous to small laboratory owners who might be subject to the AMT.
Have You Upgraded Your Laboratory?
While not part of the 2012 Act, it's important to remember that federal tax laws provide a significant tax benefit (179D Accelerated Deductions for Commercial Energy-Efficient Buildings) for owners of newly constructed or renovated energy-efficient buildings(3).
An owner can immediately deduct the cost of the energy-efficient commercial building property expenditures—such as lighting, HVAC and hot water systems and building envelope—up to $0.60/sq. ft. per each building element with a cap of $1.80 per square foot of the energy-efficient commercial building property expenditures that are made.
In addition to the 179D deduction, if you own your building, a cost segregation study can help you find additional tax-saving opportunities. It's an analysis of the drawings, documents and costs relating to a building and its improvements. In any facility project, the costs of real property and personal property are combined. The difference between real property, land improvements and personal property is significant in the way these assets are treated for income tax purposes.
A cost segregation study identifies which assets qualify for depreciation over a shorter recovery period and provides you with: identification of costs to determine appropriate asset class life; improved project cash flow which can be used to finance future repairs; accelerated and maximized depreciation of your assets for tax purposes; and better detail for your fixed asset records and classification of assets.
(1) IRC §41
(2) Depending upon whether the taxpayer claims the credit on the originally filed income tax return, the taxpayer may be required to reduce research expenditures by the amount of the credit.
(3) Code section 179D
Douglas Kolker, CPA, and Adam Herman, CPA/ABV/CFF, CVA, ASA, CFE, work for Mueller Prost PC, a team of St. Louis CPAs and business advisors that has been assisting laboratories in taking advantage of tax credit programs for the past 10 years.
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