Cbiz, Inc. · NYSE:CBZ
Cbiz — BioFlorida 2007
41 slides from Cbiz's conference presentation, October 2007
Slide 1: Credit for Increasing Research Activities
CREDIT FOR INCREASING RESEARCH ACTIVITIES IRC §41 §174, FL Stat. 220.192 Katherine McCray CBIZ Accounting, Tax & Advisory, LLC 200 South Biscayne Boulevard, Suite 830 Miami, FL 33131 305-377-8670 KMcCray@CBIZ.com www.cbiz.com www.cbiz.com/ata-southflorida
Slide 2: CBIZ National R&E Credit Team
CBIZ National R&E Credit Team • Steve Henley (National Tax Director) • Bill Smith (Maryland) • Michael Moore (Kansas, Missouri) • Bob Gellman (San Diego) • Michael Silvio (San Diego) • Katherine McCray (Florida) • David Andrews (Arizona) • David Janosek (Ohio) • David Adams (Los Angeles) • Kevin McC
Slide 3: Why is a discussion timely concerning this credit?
Why is a discussion timely concerning this credit? • New simplified credit computation for 2007 • We moved from a “discovery” test to “experimentation” • Many taxpayers that qualify under the new rules have not conducted studies yet • Specialized firms, national teams and specialist attorneys have n
Slide 4: Why is a discussion timely concerning this credit?
Why is a discussion timely concerning this credit? • New percentages under the alternative incremental credit computation • A 280C election should be made on the original return, there are many implications if it is made or reversed later • New Regulations on Controlled Groups • The IRS has classifi
Slide 5: Goals of this summary presentation
Goals of this summary presentation • Overview of the Credit • What constitutes “Qualified Research Expenditures” • Quick understanding of the computations • Understanding of documentation needed
Slide 6: Change from Discovery to Experimentation
Change from Discovery to Experimentation • Regulations finalized in 2004 dropped the controversial requirement that the taxpayer’s research must seek to obtain knowledge that exceeds, expands, or refines the common knowledge of skilled professionals in a particular field of science or engineering. •
Slide 7: What are R&E Expenses?
What are R&E Expenses? The 4-part Test • A. The Section 174 Test • B. The Discovery Test • C. The Business Component Test • D. The Process of Experimentation Test 3 Additional Internal-Use Software Tests • E. The Innovativeness Test • F. The Significant Economic Risk Test • G. The Commercial Availab
Slide 8: A) Deductible under IRC 174
A) Deductible under IRC 174 • Regulations under Section 174 require “in the experimental or laboratory sense”. The regulations further provide: – Expenditures represent research and development costs in the experimental or laboratory sense if they are for activities intended to discover information
Slide 9: B) The Discovery Test
B) The Discovery Test • The research must be undertaken for the purpose of discovering information which is technological in nature • The determination of whether the research is undertaken for the purpose of discovering information that is technological in nature depends on whether the process of e
Slide 10: C) The Business Component Test
C) The Business Component Test • The research must be undertaken for the purpose of discovering information the application of which is intended to be useful in the development of a new or improved business component of the taxpayer. • “The business component test (which is actually part of the disc
Slide 11: Business Component and Shrink-Back
Business Component and “Shrink-Back” • The requirements of section 41(d) are to be applied first at the level of the discrete business component, i.e., the product, process, computer software, technique, formula, or invention to be held for sale, lease, or license, or used by the taxpayer in its tra
Slide 12: D) The Process of Experimentation Test
D) The Process of Experimentation Test • Substantially all of the activities which constitute elements of a process of experimentation must relate to a new or improved function, performance, reliability, or quality • The term process of experimentation means a process involving the evaluation of mor
Slide 13: Non-Qualified Activities IRC 41(d)(4)
Non-Qualified Activities IRC 41(d)(4) • Research is not qualified if it relates to style, taste, cosmetic or seasonal design factors. • Does not involve the soft sciences such as economics, management sciences….
Slide 14: Activities that may qualify for the credit
Activities that may qualify for the credit • Manufacture products? • Develop new, improved, or more reliable products, processes, or • formulas? • Develop prototypes or models (including computer generated models)? • Design tools, jigs, molds or dies? • Develop or apply for patents? • Perform certif
Slide 15: Examples of Activities that could Qualify
Examples of Activities that could Qualify • If an engineer is hired to design Hurricane-Force Walls where there was uncertainty related to that design that a G/C could not buy “out of the box”, e.g. it was not common to design these curtain walls. • A dress manufacturer who uses equipment differentl
Slide 16: Internal-Use Software
Internal-Use Software • More than just getting Oracle to work with your business • If a customer ‘touches’ the software, it falls out of the additional requirements.
Slide 17: Additional 3-Part Test for Internal-Use Software
Additional 3-Part Test for Internal-Use Software – Innovation: The software is intended to be unique or novel and to differ in a significant and inventive way from prior software implementations or methods. Examples of innovativeness cited in the legislative history include a reduction in costs, or
Slide 18: Internal-use Software: Exceptions to Additional Tests
Internal-use Software: Exceptions to Additional Tests: • The activities related to the development of certain types of software are not treated as internal-use software. Research and experimentation related to these activities are not required to meet the additional tests listed above, if the softwa
Slide 19: Costs to Capture-Qualified Research Expenditures (QREs)
Costs to Capture-Qualified Research Expenditures (QREs) • Form 6765 lines 1-3, 5-8 • W-2 Wages • Supplies • Rental or Lease costs of Computers • Contract Expenses – 100% for qualified energy research performed by eligible small business, university or federal lab IRC 41(b)(3)(D) – 75% for qualified
Slide 20: Computing the Credit
11 S| |e fod fe | *\e ZAR \ ra ; ae ma” ~~ Computing the Credit
Slide 21: Brief breakdown on current rules
Brief breakdown on current rules • 3 methods of computing the credit for 2007 – Regular (includes either Base Period inclusion or Start-Up classification) – Alternative Incremental Research Credit (AIRC)-(if base period documentation is not available and there was a trade or business during the base
Slide 22: Calculating the Base Amount
Calculating the Base Amount • Aggregate Gross Receipts 1984-1988 – Divided by • Aggregate Qualifying Research Expenditures (“QREs”) 1984- 1988 – Equals that year’s Fixed Base Percentage – Multiplied by • Prior 4 Year Average Gross Receipts – Equals • The Base Amount • The maximum fixed-base percenta
Slide 23: Example of Base Period Computation
Example of Base Period Computation Gross Receipts Sal Exp QREs 3% of salary expense QREs/Gross Receipts 7/31/1989 Actual 2,554,526 963,554 28,907 1.1316% 7/31/1988 Actual 1,907,685 74.6786% 694,294 72.0555% 20,829 1.0918% 7/31/1987 Actual 1,301,670 68.2330% 438,975 63.2261% 13,169 1.0117% 7/31/1986
Slide 24: Base amount computation using gross revenues
2002 2003 2004 2005 2006 1998 Gross Revenues 16,804,519 1999 Gross Revenues 17,901,422 17,901,422 2000 Gross Revenues 22,230,957 22,230,957 22,230,957 2001 Gross Revenues 24,863,044 24,863,044 24,863,044 24,863,044 2002 Gross Revenues 32,861,480 32,861,480 32,861,480 32,861,480 2003 Gross Revenues 7
Slide 25: IRS Base Period Targets
IRS Base Period Targets • The IRS will look for: – Proper determination of gross receipts, including prior audit adjustments made to gross receipts. – A spike in the credit year’s QREs relative to the base years. – Acquisitions and/or dispositions of major portions of trades or businesses. I.R.C. §
Slide 26: Calculating the Current Year Limitation
Calculating the Current Year Limitation • First Limitation – Current Year QREs – Less the Base Amount – Equals the Reduced QREs • Second Limitation – 50% of QRE total • QREs allowed – The lesser of the Residual QREs or the 50% limitation
Slide 27: Federal Credit Calculation
Federal Credit Calculation 7/31/2003 7/31/2004 7/31/2005 7/31/2006 Qualifying Expenditures 1,065,299 1,225,914 1,212,359 1,393,002 Less: Base Amount 248,023 402,457 562,934 750,444 Residual Expense 817,275 823,458 649,425 642,558 OR 50% of Qualifying Expenditures 532,649 612,957 606,179 696,501 Smal
Slide 28: Computing the Credit
Computing the Credit • Allowable QREs – Multiplied By • The 20% general credit amount – Or • The 13% reduced credit under IRC 280C(c)(3) (to avoid decreasing your deductions by the amount of the 20% credit taken)
Slide 29: Credit at 20% vs Net at 13%
BASE ON 3% SAL EXP 7/31/2003 7/31/2004 7/31/2005 7/31/2006 Credit at 20% 106,530 122,591 121,236 128,512 Credit Net at 13% 69,244 79,684 78,803 83,533 311,265 No Limit 69,244 79,684 78,803 90,545 318,277 Credit Lost to Base Period 0 0 0 7,013 7,013
Slide 30: Example of Reduced Credit
Example of Reduced Credit $1,000 QREs • 280C Election: 20% $1,000 QREs $200 credit 13% $130 Credit and Final Add back to deductions Benefit $200 Tax rate 35% $70 additional Tax If the tax bracket is less Final Benefit: 200- than 35%, then 70=$130 generally the 280C election would not be advantageous
Slide 31: Electing the Reduced Credit
Electing the Reduced Credit • The election of a reduced research credit (to 13%) is required to be made with the filing of a taxpayer’s original, timely filed return. • The 280C(c)(3) election on an amended return is invalid. The 20% credit and add-back is required.
Slide 32: Start-Up Companies
Start-Up Companies • “start-up company” (which is not preferred): – generally a company that did not have both gross receipts and QREs in at least three of the base period years (84-88), or the first taxable year in which there were both QREs and gross receipts began after December 31, 1988. – Fixed
Slide 33: Alternative Incremental Research Credit (AIRC)
Alternative Incremental Research Credit (AIRC) • There is an alternative incremental research credit which calculates the credit using a maximum percentage of 5.00%, applied to the entire research cost for a period. • If a taxpayer elects to be subject to the AIRC, the taxpayer is assigned a three-t
Slide 34: AIRC-Form 6765 Section B
AIRC-Form 6765 Section B • Must be made on an original return (not an amended return) and is binding on all subsequent years unless formally revoked (with the consent of the Commissioner- simplified by new regulations). • Under the AIRC, a credit rate of: • ... 3% applies to the extent that a taxpay
Slide 35: The New Alternative Simplified Credit-beginning in 2007
The New Alternative Simplified Credit-beginning in 2007 • New Section C of Form 6765 • 12% of qualified research expenses that exceed 50% of the average qualified research expenses for the three preceding years. • If the taxpayer does not have qualifying expenses in all three preceding tax years, th
Slide 36: Some Additional Interactions
Some Additional Interactions • Part of the General Business Credit. In general, the credit cannot reduce the tax liability below the Tentative Minimum Tax. • IRC 199 (Domestic Production Activities Deduction) • IRC 174 trumps 263A-pulls out of capitalization and into expense. • IRC 338(h)(10) electi
Slide 37: Notice 2002-44
Notice 2002-44 • There is a central filing address for R&E Credit C-Corp claims that were not elected on the original return • There is a separate filing process to C- Corps that are under audit and claiming the R&E Credit not on the original return
Slide 38: States that provide a R&D Credit
States that provide a R&D Credit • Allow full credit or credit for certain activities, certain zones, or certain years – AL, AR, AZ, CA, CO, CT, DC, DE, FL (after 1/1/07 for R&D related to renewable energy technologies), GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MI, MN, MO, MS, MT, NC, ND, NE,
Slide 39: Florida Credit: 2007-2010
Florida Credit: 2007-2010 • Credit of 75% of all capital costs, operation and maintenance costs, and research and development costs (including constructing, installing, and equipping) incurred between 7/1/06-6/30/10 of: – Investment in hydrogen-powered vehicles, hydrogen vehicle fueling stations (up
Slide 40: Typical Documentation
Typical Documentation • 3 Ring Binder or Bound Report with: – Interviews (which identify R&E Activities) – Time Sheets per Cost Capture Approach (project, department or hybrid) – Contract Research expenses with contracts and other documentation – Description of Projects – Patents – Company history –
Slide 41: For more information, contact CBIZ National R&E Credit Team
For more information or a free initial interview consultation, contact one of the CBIZ National R&E Credit Team Experts Katherine McCray CBIZ Accounting, Tax & Advisory, LLC 200 South Biscayne Boulevard, Suite 830 Miami, FL 33131 305-377-8670 KMcCray@CBIZ.com www.cbiz.com www.cbiz.com/ata-southflori