Corporate Tax Advisors breakout session from the 2018 Hot Firm conference.

1. Permanent + Research Credit =
Competitive Advantage
Presented by:
Dawson Fercho, IRS Enrolled Agent
Partner
Corporate Tax Advisors

2. 2
Dawson Fercho, Founder-Partner
 IRS Enrolled Agent- Admitted to practice before
the Internal Revenue service
 20 years of consulting experience Small and Mid-
size businesses.
 14 Years exclusively focused on the Federal
Research Tax Credit & 179D Energy Efficiency
Deduction.
 Co-Founder of Corporate Tax Advisors, Inc.
 Responsible for all areas of client service and
overseeing CTA’s marketing and business
development.

3. 3
Agenda
 An overview of current rules and legislation governing the R&D tax
credit.
 A clear understanding of exactly how this tax credit applies to the
A/E/C industry.
 Important details on recent law changes and the types of activities
and expenses that qualify for the tax credit.
 Actual examples of how the mechanics of the calculation and
statutory exclusions have benefited A/E/C firms.
 And more!

4. 4
Be Aware
The Research and Development (R&D) tax credit is one of the most substantial
incentives under current U.S. tax law for the A/E industry. Unlike a standard
deduction, it is a dollar-for-dollar credit against your tax liability.
Design Life Magazine 2015
-Innovation begins with a design
- Designers are by nature and profession, innovators
- Innovation is seeing what is not working and initiating change
I.E. How many designers does it take to change a light bulb? Does it have to be a light bulb?

5. 5
Top of MIND

6. 6
What Does this Actually Mean?
At10% At20% At30%
Pretax margin Pretax margin Pretax margin
Cash flow from R&D TaxCredit 50,000 50,000 50,000
Estimated taxrate 40%(federal & state) 40% 40% 40%
Revenue required to generate Similar Cash Flow 833,333 416,667 277,778

7. 7
Section 41: Credit for Increasing Research Related Activities
• Permanently Codified January 1, 2016.
• Initially established 1981- Reagan Administration.
• General Business Credit.
• $1 for $1 tax credit- usability to pay down Federal Tax Liabilities, *State Tax
Liabilities
• Congressional Intent: Reducing the high-cost of U.S. Labor.
• 4 Year Look. I.e. 2015-2018.
• Open to All Tax payer entities- Sole, S. Corp, C. Corp, PSC, Partnerships etc.
• Except non-tax paying entities. I.e. Fully owned ESOP (S. Corps), Non-Profit.
• Primarily Direct Labor Expense Drive.

8. 8
Qualifying Research Expenses- IRC 41
 QUALIFYING WAGES
 Typically largest component
 Calculate & estimate % of employees’
qualifying time
 Multiply % by annual wages
 CONTRACTOR COSTS
 Same pro-rata rules as above
 65% of qualifying costs eligible
Salaries and Wages
Supplies
Contract Costs

9. 9
The “Four Part” Test
Part 1: Development of a New or Improved Design Package
Six categories:
 Products (design packages),
 Process,
 Software,
 Techniques,
 Formulas,
 Inventions
Attempting
New/Improve
d Business
Component

10. 10
The “Four Part” Test
Appropria
te and
final
design
Part 2: Elimination of a Technical Uncertainty
Endeavori
ng to
discover
Informatio
n
uncertain
at outset

11. 11
The “Four Part” Test
Principals of
engineering, physics,
chemistry, biology, or
computer sciences
must be applied
Relying on Principles
of!
Part 3: Technological
in Nature

12. 12
The “Four Part” Test
Part 4: Process of Experimentation
Evolution of
Design, Trial and
Error
Evaluating
one or more
alternatives

13. 13
What is R&D per Congress? The “Quick Test”
Question #1
– Did you do anything today that was “neck-
up” - I.E. Using your head

14. 14
What is R&D per Congress? The “Quick Test”
Question #2
– Did you attempt the above in an effort to make
something better?

15. 15
Types of Qualifying Activities
Design ideas that stretch current engineering expertise;
 Use of 3D modeling;
 Integrate alternate materials
 Improved acoustical qualities;
 Alternative water flow/plumbing systems;
 Alternative electricity conduction systems;
 Improving lighting;
 Improved ventilation;
 Alternative heating and cooling systems;

16. 16
Types of Qualifying Activities- Engineering
 Alternative structural design;
 Waste and toxic waste disposal processes;
 Product and material transportation systems;
 Integrating environmental impact studies; and
 Integration costs related to designing co-dependent features.
 Material Strength Testing
 USE of CAD/CAM to evaluate various configurations
 Reviewing two or more site layouts to identify the best solutions
 Performing roadway simulations to determine the effect on traffic patterns

17. 17
Types of Qualifying Activities: Architecture
 Developing unique energy efficient features
 Designing master plans
 Developing schematic designs
 Developing planning and elevation drawings
 Designing a functional site plan to incorporate or overcome various
environmental concerns
 Developing construction documents
 Designing and developing building facades

18. 18
Types of Qualifying Activities: Architecture
 LEED certification
 Designing building systems
 Designing site orientations
 Designing building shape and form
 Designing or improving HVAC systems
 Developing unique lighting details
 Brownfield redevelopment
 Developing innovative designs for bridges and roadway structures

19. 19
Types of Qualifying Activities: Architecture
 Designing unique water treatment plants to optimize plant capacity or efficiency
 Designing innovative sanitary sewer systems for new residential communities
 Designing unique water pipeline and ancillary systems
 Designing innovative lateral force resistant systems for buildings
 Implementing dampening systems for buildings to account for dynamic loads
 Designing marinas to meet unique structural and load requirements
 Typically designing and developing activities (CAD,CAM)
 Typically not surveying or project management activities

20. 20
Construction and General Contracting
 Means and methods construction
techniques development
 Structure and facility design for
constructability
 Construction equipment
development and improvement
 Structural steel detailing
 Building Information Modeling
 Budgeting and costing
 Project Management
 Construction management
 Construction Implementation
 Scheduling
Tend to Qualify Tend to NOT Qualify

21. 21
Regulatory Changes
 The requirement to disclose contemporaneous
record-keeping (timesheets) was eliminated in
December of 2003, along with the Discovery
Test.
 There is significant case law supporting a
taxpayer’s ability to estimate how much time is
spent on Research & Development

22. 22
Funded Research
 Fixed Price Contracts
 The nature of fixed-price contracts makes them inherently risky to
contractors
 Pure Time and Materials and Level of Effort
 Typically viewed as funded, but there are exceptions
 Cost Plus/Time and Materials Contracts
 Although not inherently risky, like their Fixed Fee counterpart, the
terms comprising Cost Plus and time and Materials Contracts
may be balanced amongst the parties to determine which is
responsible for incurring the cost, and thus the risk, to complete
the final deliverable

23. 23
1. Free ResearchTax Credit Assessment
– Attendees receive a No-Cost Initial Consultation. Includes Research Tax Credit
Estimate analysis.
• The estimate [24 hours turn-around] is a statistical model giving you,
shareholders and accountant a more exacting number as to what your credit
benefit could look like. Analysis will help stake-holders understand if
further exploration is warranted.
• START Assessment HERE http://corporatetaxadvisors.com/digital-form.php
2. AEC Industry White Paper
– Included with Assessment: Highlighting with further specificity how AEC firms
qualify and benefit from the credit.
What To Do Next

24. 24
Contact Me
Dawson L. Fercho
Partner/IRS Enrolled Agent
913-461-6179 cell
dawsonf@corporatetaxadvisors.com
If you have any questions please contact:

25. 25
Q&A