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R & D Tax Credits:
         Claim what you deserve

                Zweig White


                 Presented by:

                     Sonny Grover
                      Dean Zerbe
                     Justin DiLauro


www.zweigwhite.com
alliantgroup, LP
                            National Consulting Firm
                   Focused on supporting CPA firms nationwide

•   alliantgroup ‐ Houston (national office), New York, Boston, LA, Atlanta, 
    Orange County, San Francisco, San Diego, Seattle, Chicago, Denver and Miami
•   alliantgroup ‐ Has over 170 professionals nationwide
     – Former “Big Four Partners” and Managers
     – CPAs and Attorneys (Dedicated Tax Controversy Team – 16+ attorneys)
     – Engineers, Software Programmers, Chemists, Biologist, etc. 

•   alliantgroup ‐ Only specializes in government sponsored incentive programs.

•   alliantgroup ‐ Only works with CPA firms
     – Be your back office 
     – Introduce specialized tax incentives to your clients



      www.zweigwhite.com
Sonny Grover, CPA
              alliantgroup Senior Managing Director

               Specializes in the Research & Development Tax Credit
               More than 20 years of tax, M&A, structuring, and operational consulting
               worldwide
               Former Tax Partner, Deloitte & Touche - managed national consulting
               team of 30 professionals in 12 cities
               Member, AICPA and California Society of CPAs
               Masters in Tax, University of Texas




www.zweigwhite.com
Justin DiLauro, J.D.
              alliantgroup Associate Director & Team Director

               Assisted numerous companies in obtaining millions of dollars in R&D tax
               credits
               Member of several Industry Specialization Programs within the firm’s R&D
               implementation department
               Frequent author and speaker on the R&D Tax Credit for Architecture and
               Engineering firms
               Well-versed in an array of technical topics and their application to research
               and development incentives
               Developed a team to serve engineering companies
               Licensed to practice law in the State of Texas
               Member of the Institute of Industrial Engineers




www.zweigwhite.com
Dean Zerbe, J.D., LL.M.
           National Managing Director, alliantgroup – Washington D.C.

             Former Sr. Counsel and Tax Counsel, Senate Finance Committee:
             Involved with almost every major piece of tax legislation
             alliantgroup’s ultimate tax policy expert
             Focused on federal and state tax credits and incentives, and U.S. tax
             policy
             Media “go-to” source for commentary on tax policy and other issues




www.zweigwhite.com
Mark Everson Joins alliantgroup
                                          • Served as Commissioner of Internal
                                            Revenue from 2003 until 2007
                                          • Appointed Vice Chairman for
                                            alliantgroup
                                          • Will advise alliantgroup on strategic,
                                            operational, and client service
                                            initiatives

“Many companies do not take advantage of all the tax incentives to
which they are entitled. alliantgroup can help. Based on my
meetings with alliantgroup personnel and a number of the
accounting professionals with whom they work across the country,
it is clear the firm has achieved a great deal since its founding and
is well positioned for further expansion.” – Mark Everson

                                                                                6
          www.zweigwhite.com
www.zweigwhite.com
R&D Tax Credit Extension Part of the Emergency Economic 
                    Stabilization Act of 2008..
                Retroactive to January 1, 2008!
The research credit was part of the individual and business tax breaks extended by 
   the Act.
The R&D Credit had previously expired on December 31, 2007. The new law 
   enacted three  changes to the R&D tax credit:

•   It extends and keeps the ‘relaxation of the criteria’ of the R&D tax credit for 
    two more years, retroactive to January 1, 2008 through December 31, 2009.

•   Increases the alternative simplified research credit rate to 14%, for tax years 
    ending after Dec. 31, 2008

•   Provides that no election to elect an alternative incremental research credit 
    applies for tax years beginning after Dec. 31, 2008.




       www.zweigwhite.com
R&D Background Discussion
•   When was it originally put in place?
•   What was the intent of congress and eligible QRA’s?
•   What code section details the eligible costs / QRE’s?
•   What code section details the credit calculation?
     – Credit calculated at what %
     – Net benefit calculated at what %
•   How many dollars were claimed yearly under the old 
    regulations?  
•   When were proposed regulations issued? 
•   What were the changes? 
•   What was the impact of the changes? 

      www.zweigwhite.com
R&D Background
• R&D Credit:
  – 1981
• Two major hurdles:
  – Discovery Test (patents, inventions)
  – Extensive Documentation Requirement
• $5B in credits claimed annually:
  – Primarily Fortune 1000 companies



     www.zweigwhite.com
Rule Change ‐ New Regulations
• Effective: December, 2003
    – 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, “white lab coats”, patents, etc.

• Clearly Defined: Congress made it clear through legislative history that 
   the credit should NOT impose unreasonable record‐keeping requirements.

• Increase in budget to:
    – $9B



        www.zweigwhite.com
Applicable Code Sections

Section 41    20 percent credit for increasing 
              research and experimentation 
              expenditures
Section 174   Research and experimentation 
              expenditures




 www.zweigwhite.com
R&D Credits Eligible Costs
• Wages 
  – Form W‐2, Partnership Earnings subject to SE Tax, Schedule C
  – Excludes 401(k) & benefits


• Supplies
  – Cost to fabricate prototypes / items consumed in R&D process



• 65% of Contract Research
  – Fees paid to outside consultants / engineers / software developer




    www.zweigwhite.com                     13
“Traditional” Versus “Tax”

Traditional Definition             Tax Definition
     “Discovery Test”          “Four Main Requirements”

                              1.   New or Improved Business 
                                   Component

                              2.   Technological in Nature

                              3.   Elimination of Uncertainty

                              4.   Process of Experimentation




   www.zweigwhite.com    14
Business Component Purpose Matrix
The Project’s        The Purposes of the R&D Activities Related to the:
Business Component
                     Function   Performance   Reliability   Quality   Durability


Product               Yes          Yes          Yes         Yes         Yes
Process               Yes          Yes          Yes         Yes         Yes
Computer Software     Yes          Yes          Yes         Yes         Yes
Technique             Yes          Yes          Yes         Yes         Yes
Formula               Yes          Yes          Yes         Yes         Yes
Invention             Yes          Yes          Yes         Yes         Yes




   www.zweigwhite.com                    15
Technological in Nature
• Includes ‐ Hard Sciences: Research must rely on principals of 
  hard sciences
   – Physics
   – Chemistry
   – Biology
   – Computer sciences
• Excludes ‐ Soft Sciences:  Research can not be in the soft 
  sciences
   – Economics 
   – Psychology
   – Management sciences, etc.

      www.zweigwhite.com
Elimination of Uncertainty
• R&D Activities Must Be Intended to:
   – Discover information
   – Eliminate uncertainty concerning the companies 
     capability, process or   final design. 

• Exists if Taxpayer is Uncertain:
   – Can We? – Can company develop the business 
     component?
   – How? – How can company develop the business 
     component?
   – Final Design ? – What will the final business 
     component look like?

      www.zweigwhite.com
Process of Experimentation
• Development Activities:
   – Must evaluate a process and it’s alternative
   – Must be designed to achieve a result that was uncertain at the 
      outset 
• May Involve:
   – One or more hypothesis
   – Testing and analyzing the hypothesis
   – Refining or discarding the hypothesis as part of a design process
• Must Engage in Process of evaluating & testing alternatives 
  through: 
   – Modeling
   – Simulation 
   – Systematic trial and error
• Failure:  The taxpayer does not need to “succeed”

       www.zweigwhite.com
§ 41   CREDIT for INCREASING RESEARCH ACTIVITIES
1981        QRA (Sec 41)                    QRE (Sec 174)                     R&D Credit (Sec 41)
$5B/Yr      NEW to the WORLD
                   -------------            US W‐2s                           20 %
                    ‐TO YOU
            Contemporaneous                 US Contractors                    6.5%
               Documentation
                  ‐RELAXED                  US Supplies

2001        Proposed Regs
          1) New or Improved             2) Based in         3) Uncertainty       4) Experimentation
$8B/Yr                                     Hard Sciences
             Business Component
                • Product
                • Process
                • Technique / Design
                • Formulation
                • Invention
                • Software
2004         Final Regs – “Jobs Creation Act"
$10B/Yr


            www.zweigwhite.com
Credit Details
 •   Refundable vs. Non Refundable
 •   Gross Credit
 •   Reduced Credit
 •   Statute of Limitations
 •   Implication of Passive Shareholders
 •   Other Considerations




www.zweigwhite.com
The Fixed Base Limitation
Fixed base % =   Average QREs in Base Period
                 Average Gross Sales in Base Period

Example:
   Fixed Base %  =        $100,000         =          1%
                          $10,000,000
   Assuming Last 4 years average sales     =          $50,000,000

   Fixed Base Limitation                   =          $50,000,000 x 1%
                                           =          $500,000




     www.zweigwhite.com
Basic R&D Calculations
                   Qualified Research Expenditures


 Apply Fixed Base Percentage                             50% of QRE Limitation

             multiply                                   multiply by 50%


QRE Floor or Fixed Base                                          50% of QREs



                          The lesser of 50% or calculated
                          QRE over Fixed Base

             multiply by 20% or 13%

                            Regular or reduced credit


      www.zweigwhite.com
Example of ASC Calculation
            Increasing R&D Spending

 Spending         2005 2006 2007      2008
 QRE              $85M     $90M     $95M    $100M
 50% "base"‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐$45M
 Creditable amount‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐$55M
 Credit (14%)‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ ‐‐‐$7.7M
 Effective credit rate‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐7.7%




www.zweigwhite.com
Example of ASC Calculation
                       Declining R&D 

Spending       2005        2006         2007        2008
QRE            $115M $110M    $105M     $100M
50% "base"‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐$55M
Creditable amount‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐$45M
Credit (14%)‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐$6.3M
Effective credit rate‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐6.3%




 www.zweigwhite.com
Applicable Code Sections
Section 41      20 percent credit for increasing research 
                and experimentation expenditures
Section 56      Adjustments in computing alternative 
                minimum taxable income
Section 174     Research and experimentation 
                expenditures
Section 469(h) Passive activity losses and credits 
               limited/Material Participation defined




  www.zweigwhite.com
State R&D Opportunities
• Currently 38 states have an added credit/incentive 
  for qualified research and development activities

• The State Credit can be in addition to the Federally 
  offered Credit




   www.zweigwhite.com
What Makes this Credit so Powerful?
1.   New Regulations Finalized December 2003 – JOBS CREATION ACT

     •    Easier for a broader array of companies to qualify their activities as R&D

     •    They provide greater flexibility in satisfying certain record keeping 
          requirements

2.   Apply new regulations for all open tax years – (i.e.  2005, and 2006) = 
     Significant Cash Refunds Plus Interest

     •    Need to file 2005 / 2006 amended returns before statute of limitation 
          expires

3.   Middle‐Market Companies typically conduct more R&D as a percentage of 
     revenue   (i.e., CEO on down…. Marketing / Production / Administration / 
     Purchasing / Information Technology, Quality Assurance / Engineering / Other)

4.   Conservative / Government Sponsored Incentive



         www.zweigwhite.com
Architecture & Engineering
• Areas related to design of buildings and 
  infrastructure
• Disciplines Include:
  – Architecture
  – Structural and MEP Engineering
  – Civil Engineering
  – Environmental Engineering



    www.zweigwhite.com
Architecture Activities
Tend to Qualify                      Tend to Not Qualify
• Building design related to:        • Purely aesthetic design
   –   Energy efficiency             • Non‐design related:
   –   Structure
                                        –   Feasibility studies
   –   Site orientation
                                        –   Project budgeting
   –   Functional features
                                        –   Construction admin
• Market sectors:
                                        –   Project management
   –   Commercial office buildings
   –   Hospitals                     • Market Sectors:
   –   Educational facilities           – Interior design
   –   Airports                         – Retail stores
   –   Stadiums


       www.zweigwhite.com
Structural and MEP Engineering
Tend to Qualify              Tend to Not Qualify
• Building superstructure    • Forensic engineering
  design                     • Construction management
• Foundation design          • Permitting
• HVAC system design         • Feasibility studies
• Electrical systems         • Peer review
• Piping systems




     www.zweigwhite.com
Civil Engineering
Tend to Qualify               Tend to Not Qualify
• Bridges                     • Surveying
• Waste water systems         • Soil and materials testing
• Foundations and earthwork   • Traffic engineering
• Retaining structures and    • Subsurface evaluations
  walls                       • Landscape architecture
• Roadway design
• Airport infrastructure
• Site development


    www.zweigwhite.com
Environmental Engineering
Tend to Qualify               Tend to Not Qualify
• Brownfields redevelopment   • Site assessments and 
• Remediation design            investigation
• Solid waste system design   • Permitting
• Drainage system design      • Regulatory compliance
• Flare station design




    www.zweigwhite.com
Case Study #1 – Office Building
•   Commercial Office Building
•   20 stories
•   400,000 square foot
•   LEED Certified
•   Many “players” involved:
    – Architecture Firm
    – Engineering Firms
    – MEP Contractors


     www.zweigwhite.com
Case Study #1 – Office Building
• Architecture
  – Building Envelope
  – Site Orientation
• Civil Engineering
  – Foundations
  – Retaining Walls




   www.zweigwhite.com
Case Study #1 – Office Building
• Structural Engineering
  – Steel Column Design
  – Connection Detailing
• MEP Engineering
  – HVAC System Design
  – Duct and Piping Design




   www.zweigwhite.com
Case Study #1 – Office Building
• Examples of Qualifying Research Activities:
   • Design Evaluations
   • Solar orientation and site planning
   • Energy modeling and studies
   • Structural load calculations and modeling
   • Heating/cooling load calculations and modeling




                                                      36
    www.zweigwhite.com
Case Study #2 – A&E Firm
Background : 
  Industry: Architecture & Engineering
  Product : Building Design Specifications
  Entity Type: C‐Corp 
  Year business started: 1981
  4 year Ave Gross Receipts: $27,800,000
  Total Labor: $11,900,000



    www.zweigwhite.com
Case Study #2 – A&E Firm
Examples of Qualified Projects:
•   Commercial Building Project: To design and develop a new energy efficient 
    building by optimizing natural lighting elements versus heat gain.
•   Flooring System Project: To design and develop a unique glass flooring system over 
    a man made stream bed to meet specific load bearing, slip resistant, and 
    condensation proof requirements.
•   Ventilation System Project: To design and develop an new under floor air 
    displacement ventilation system to improve energy efficiency and airborne 
    contaminant removal performance.
•   Piping System Project: To design and develop an improved dual pipe system to 
    utilize a public reclaimed water system for building sewage conveyance.




       www.zweigwhite.com
Case Study #2 – A&E Firm 
Qualified Research Expenses:        Salary of 
  $2,060,000 for a total of $2,060,000
Base year %: 2.53%
Base amount: $ 703,340 (Average GR X 2.53%)
50% limitation: $ 1,030,000

Credit Calculation:
Qualified Expenses          $2,060,000
Less Base Amount            (1,030,000)
Total                        1,030,000
Credit (20% of 1,030,000)   $  206,000


    www.zweigwhite.com
Taxes Present
• Jobs Bill – outlook for action
• Hiring Credit

• AND Extenders  ‐‐ payfor black liquid
  Including R/D




     www.zweigwhite.com
The R&D Tax Credit
                   For clients who design, develop or
               improve a product, process, technique,
                      formula, invention, or software.




    www.zweigwhite.com
The R&D Tax Credit
                      X Marks the Spot!
                                   R&D Activities Related to:
                      Function   Performance   Reliable   Quality   Durability

  Product
                                                                      X
  Process

  Computer Software

  Technique

  Formula

  Invention




     www.zweigwhite.com
www.zweigwhite.com   NEXT
The R&D Tax Credit
                      X Marks the Spot!
                                   R&D Activities Related to:
                      Function   Performance   Reliable   Quality   Durability

  Product
                                                                       X
  Process
                                   X
  Computer Software

  Technique

  Formula

  Invention




     www.zweigwhite.com
The R&D Tax Credit
                      X Marks the Spot!
                                   R&D Activities Related to:
                      Function   Performance   Reliable   Quality   Durability

  Product
                                                                       X
  Process
                                   X
  Computer Software

  Technique

  Formula

  Invention
                                                X
     www.zweigwhite.com
“Their educated and knowledgeable staff plays a huge role in the 
    success of our Study's, which is why we continue to use your 
services… It was apparent to me that alliantgroup approaches their 
   business very seriously and with a deep commitment to serving 
 their clients through their due diligence in addressing the rigorous 
    documentation that is necessary to perform a Study that is so 
complex in nature… It would be my pleasure to recommend you to 
     anyone who would benefit from your professional services”

                  ~ Charles Pruitt, CFO of LPA, Inc.




  www.zweigwhite.com
“alliantgroup clearly has the expertise to deal with the issues around the R&D 
     tax credit, and were instrumental in our ability to calculate the credit for 
    our last tax year.  We would not have attempted to tackle this complex an 
       issue with out the advice of a well qualified expert in the area, which 
    definitely applies to alliantgroup.  I would highly recommend alliantgroup, 
    as they provided personnel with the knowledge experience to conduct our 
       R&D study effectively, efficiently, and with minimal intrusion into our 
                                      business.

                        ~Judy Peterson, CFO of Callison




      www.zweigwhite.com
“The experience we had with alliantgroup has taken our company to another 
   level of tax planning, opening tax savings avenues previously untapped by 
     Baskervill… I would definitely recommend their professional services to 
    other firms that could benefit from the reinvestment of tax refunds they 
                are entiled to as the result of their R&D activities.”

               ~Margaret Hood, CFO/Treasurer of Baskervill




      www.zweigwhite.com
“I strongly recomment alliantgroup on their outstanding service for the R&D 
         Tax Credit Study.  The resultant study is detailed, accurate and 
     compelling… I would recommend alliantgroup to other companies who 
     have a commitment to quality and only work with those who share that 
                              same high standard.”

     ~ Lawrence DeRose, Vice President of DeRose Design Consultants




      www.zweigwhite.com
Questions & Answers




www.zweigwhite.com
ZWEIGWHITE
                321 Commonwealth Road
                        Suite 101
                   Wayland, MA 01778
            Tel: 800‐466‐6275, 508‐651‐1559
             M‐F 8:30 AM to 5:30 PM (EST)

                        Anytime:
           Fax: 800‐842‐1560 or 508‐653‐6522
                  info@zweigwhite.com




www.zweigwhite.com

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R&D Tax CreditsR & D Tax Credits:Claim what you deserve

  • 1. R & D Tax Credits: Claim what you deserve Zweig White Presented by: Sonny Grover Dean Zerbe Justin DiLauro www.zweigwhite.com
  • 2. alliantgroup, LP National Consulting Firm Focused on supporting CPA firms nationwide • alliantgroup ‐ Houston (national office), New York, Boston, LA, Atlanta,  Orange County, San Francisco, San Diego, Seattle, Chicago, Denver and Miami • alliantgroup ‐ Has over 170 professionals nationwide – Former “Big Four Partners” and Managers – CPAs and Attorneys (Dedicated Tax Controversy Team – 16+ attorneys) – Engineers, Software Programmers, Chemists, Biologist, etc.  • alliantgroup ‐ Only specializes in government sponsored incentive programs. • alliantgroup ‐ Only works with CPA firms – Be your back office  – Introduce specialized tax incentives to your clients www.zweigwhite.com
  • 3. Sonny Grover, CPA alliantgroup Senior Managing Director Specializes in the Research & Development Tax Credit More than 20 years of tax, M&A, structuring, and operational consulting worldwide Former Tax Partner, Deloitte & Touche - managed national consulting team of 30 professionals in 12 cities Member, AICPA and California Society of CPAs Masters in Tax, University of Texas www.zweigwhite.com
  • 4. Justin DiLauro, J.D. alliantgroup Associate Director & Team Director Assisted numerous companies in obtaining millions of dollars in R&D tax credits Member of several Industry Specialization Programs within the firm’s R&D implementation department Frequent author and speaker on the R&D Tax Credit for Architecture and Engineering firms Well-versed in an array of technical topics and their application to research and development incentives Developed a team to serve engineering companies Licensed to practice law in the State of Texas Member of the Institute of Industrial Engineers www.zweigwhite.com
  • 5. Dean Zerbe, J.D., LL.M. National Managing Director, alliantgroup – Washington D.C. Former Sr. Counsel and Tax Counsel, Senate Finance Committee: Involved with almost every major piece of tax legislation alliantgroup’s ultimate tax policy expert Focused on federal and state tax credits and incentives, and U.S. tax policy Media “go-to” source for commentary on tax policy and other issues www.zweigwhite.com
  • 6. Mark Everson Joins alliantgroup • Served as Commissioner of Internal Revenue from 2003 until 2007 • Appointed Vice Chairman for alliantgroup • Will advise alliantgroup on strategic, operational, and client service initiatives “Many companies do not take advantage of all the tax incentives to which they are entitled. alliantgroup can help. Based on my meetings with alliantgroup personnel and a number of the accounting professionals with whom they work across the country, it is clear the firm has achieved a great deal since its founding and is well positioned for further expansion.” – Mark Everson 6 www.zweigwhite.com
  • 8. R&D Tax Credit Extension Part of the Emergency Economic  Stabilization Act of 2008.. Retroactive to January 1, 2008! The research credit was part of the individual and business tax breaks extended by  the Act. The R&D Credit had previously expired on December 31, 2007. The new law  enacted three  changes to the R&D tax credit: • It extends and keeps the ‘relaxation of the criteria’ of the R&D tax credit for  two more years, retroactive to January 1, 2008 through December 31, 2009. • Increases the alternative simplified research credit rate to 14%, for tax years  ending after Dec. 31, 2008 • Provides that no election to elect an alternative incremental research credit  applies for tax years beginning after Dec. 31, 2008. www.zweigwhite.com
  • 9. R&D Background Discussion • When was it originally put in place? • What was the intent of congress and eligible QRA’s? • What code section details the eligible costs / QRE’s? • What code section details the credit calculation? – Credit calculated at what % – Net benefit calculated at what % • How many dollars were claimed yearly under the old  regulations?   • When were proposed regulations issued?  • What were the changes?  • What was the impact of the changes?  www.zweigwhite.com
  • 10. R&D Background • R&D Credit: – 1981 • Two major hurdles: – Discovery Test (patents, inventions) – Extensive Documentation Requirement • $5B in credits claimed annually: – Primarily Fortune 1000 companies www.zweigwhite.com
  • 11. Rule Change ‐ New Regulations • Effective: December, 2003 – 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, “white lab coats”, patents, etc. • Clearly Defined: Congress made it clear through legislative history that  the credit should NOT impose unreasonable record‐keeping requirements. • Increase in budget to: – $9B www.zweigwhite.com
  • 12. Applicable Code Sections Section 41 20 percent credit for increasing  research and experimentation  expenditures Section 174 Research and experimentation  expenditures www.zweigwhite.com
  • 13. R&D Credits Eligible Costs • Wages  – Form W‐2, Partnership Earnings subject to SE Tax, Schedule C – Excludes 401(k) & benefits • Supplies – Cost to fabricate prototypes / items consumed in R&D process • 65% of Contract Research – Fees paid to outside consultants / engineers / software developer www.zweigwhite.com 13
  • 14. “Traditional” Versus “Tax” Traditional Definition Tax Definition “Discovery Test” “Four Main Requirements” 1. New or Improved Business  Component 2. Technological in Nature 3. Elimination of Uncertainty 4. Process of Experimentation www.zweigwhite.com 14
  • 15. Business Component Purpose Matrix The Project’s The Purposes of the R&D Activities Related to the: Business Component Function Performance Reliability Quality Durability Product Yes Yes Yes Yes Yes Process Yes Yes Yes Yes Yes Computer Software Yes Yes Yes Yes Yes Technique Yes Yes Yes Yes Yes Formula Yes Yes Yes Yes Yes Invention Yes Yes Yes Yes Yes www.zweigwhite.com 15
  • 16. Technological in Nature • Includes ‐ Hard Sciences: Research must rely on principals of  hard sciences – Physics – Chemistry – Biology – Computer sciences • Excludes ‐ Soft Sciences:  Research can not be in the soft  sciences – Economics  – Psychology – Management sciences, etc. www.zweigwhite.com
  • 17. Elimination of Uncertainty • R&D Activities Must Be Intended to: – Discover information – Eliminate uncertainty concerning the companies  capability, process or   final design.  • Exists if Taxpayer is Uncertain: – Can We? – Can company develop the business  component? – How? – How can company develop the business  component? – Final Design ? – What will the final business  component look like? www.zweigwhite.com
  • 18. Process of Experimentation • Development Activities: – Must evaluate a process and it’s alternative – Must be designed to achieve a result that was uncertain at the  outset  • May Involve: – One or more hypothesis – Testing and analyzing the hypothesis – Refining or discarding the hypothesis as part of a design process • Must Engage in Process of evaluating & testing alternatives  through:  – Modeling – Simulation  – Systematic trial and error • Failure:  The taxpayer does not need to “succeed” www.zweigwhite.com
  • 19. § 41   CREDIT for INCREASING RESEARCH ACTIVITIES 1981 QRA (Sec 41) QRE (Sec 174) R&D Credit (Sec 41) $5B/Yr NEW to the WORLD ------------- US W‐2s 20 % ‐TO YOU Contemporaneous US Contractors 6.5% Documentation ‐RELAXED US Supplies 2001 Proposed Regs 1) New or Improved 2) Based in 3) Uncertainty 4) Experimentation $8B/Yr Hard Sciences Business Component • Product • Process • Technique / Design • Formulation • Invention • Software 2004 Final Regs – “Jobs Creation Act" $10B/Yr www.zweigwhite.com
  • 20. Credit Details • Refundable vs. Non Refundable • Gross Credit • Reduced Credit • Statute of Limitations • Implication of Passive Shareholders • Other Considerations www.zweigwhite.com
  • 21. The Fixed Base Limitation Fixed base % =   Average QREs in Base Period Average Gross Sales in Base Period Example: Fixed Base %  =   $100,000 = 1% $10,000,000 Assuming Last 4 years average sales  = $50,000,000 Fixed Base Limitation =  $50,000,000 x 1% = $500,000 www.zweigwhite.com
  • 22. Basic R&D Calculations Qualified Research Expenditures Apply Fixed Base Percentage 50% of QRE Limitation multiply multiply by 50% QRE Floor or Fixed Base 50% of QREs The lesser of 50% or calculated QRE over Fixed Base multiply by 20% or 13% Regular or reduced credit www.zweigwhite.com
  • 23. Example of ASC Calculation Increasing R&D Spending Spending  2005 2006 2007      2008 QRE    $85M     $90M     $95M    $100M 50% "base"‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐$45M Creditable amount‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐$55M Credit (14%)‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ ‐‐‐$7.7M Effective credit rate‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐7.7% www.zweigwhite.com
  • 24. Example of ASC Calculation Declining R&D  Spending 2005        2006 2007        2008 QRE $115M $110M    $105M     $100M 50% "base"‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐$55M Creditable amount‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐$45M Credit (14%)‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐$6.3M Effective credit rate‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐6.3% www.zweigwhite.com
  • 25. Applicable Code Sections Section 41 20 percent credit for increasing research  and experimentation expenditures Section 56 Adjustments in computing alternative  minimum taxable income Section 174 Research and experimentation  expenditures Section 469(h) Passive activity losses and credits  limited/Material Participation defined www.zweigwhite.com
  • 26. State R&D Opportunities • Currently 38 states have an added credit/incentive  for qualified research and development activities • The State Credit can be in addition to the Federally  offered Credit www.zweigwhite.com
  • 27. What Makes this Credit so Powerful? 1. New Regulations Finalized December 2003 – JOBS CREATION ACT • Easier for a broader array of companies to qualify their activities as R&D • They provide greater flexibility in satisfying certain record keeping  requirements 2. Apply new regulations for all open tax years – (i.e.  2005, and 2006) =  Significant Cash Refunds Plus Interest • Need to file 2005 / 2006 amended returns before statute of limitation  expires 3. Middle‐Market Companies typically conduct more R&D as a percentage of  revenue   (i.e., CEO on down…. Marketing / Production / Administration /  Purchasing / Information Technology, Quality Assurance / Engineering / Other) 4. Conservative / Government Sponsored Incentive www.zweigwhite.com
  • 28. Architecture & Engineering • Areas related to design of buildings and  infrastructure • Disciplines Include: – Architecture – Structural and MEP Engineering – Civil Engineering – Environmental Engineering www.zweigwhite.com
  • 29. Architecture Activities Tend to Qualify Tend to Not Qualify • Building design related to: • Purely aesthetic design – Energy efficiency • Non‐design related: – Structure – Feasibility studies – Site orientation – Project budgeting – Functional features – Construction admin • Market sectors: – Project management – Commercial office buildings – Hospitals • Market Sectors: – Educational facilities – Interior design – Airports – Retail stores – Stadiums www.zweigwhite.com
  • 30. Structural and MEP Engineering Tend to Qualify Tend to Not Qualify • Building superstructure  • Forensic engineering design • Construction management • Foundation design • Permitting • HVAC system design • Feasibility studies • Electrical systems • Peer review • Piping systems www.zweigwhite.com
  • 31. Civil Engineering Tend to Qualify Tend to Not Qualify • Bridges • Surveying • Waste water systems • Soil and materials testing • Foundations and earthwork • Traffic engineering • Retaining structures and  • Subsurface evaluations walls • Landscape architecture • Roadway design • Airport infrastructure • Site development www.zweigwhite.com
  • 32. Environmental Engineering Tend to Qualify Tend to Not Qualify • Brownfields redevelopment • Site assessments and  • Remediation design investigation • Solid waste system design • Permitting • Drainage system design • Regulatory compliance • Flare station design www.zweigwhite.com
  • 33. Case Study #1 – Office Building • Commercial Office Building • 20 stories • 400,000 square foot • LEED Certified • Many “players” involved: – Architecture Firm – Engineering Firms – MEP Contractors www.zweigwhite.com
  • 34. Case Study #1 – Office Building • Architecture – Building Envelope – Site Orientation • Civil Engineering – Foundations – Retaining Walls www.zweigwhite.com
  • 35. Case Study #1 – Office Building • Structural Engineering – Steel Column Design – Connection Detailing • MEP Engineering – HVAC System Design – Duct and Piping Design www.zweigwhite.com
  • 36. Case Study #1 – Office Building • Examples of Qualifying Research Activities: • Design Evaluations • Solar orientation and site planning • Energy modeling and studies • Structural load calculations and modeling • Heating/cooling load calculations and modeling 36 www.zweigwhite.com
  • 37. Case Study #2 – A&E Firm Background :  Industry: Architecture & Engineering Product : Building Design Specifications Entity Type: C‐Corp  Year business started: 1981 4 year Ave Gross Receipts: $27,800,000 Total Labor: $11,900,000 www.zweigwhite.com
  • 38. Case Study #2 – A&E Firm Examples of Qualified Projects: • Commercial Building Project: To design and develop a new energy efficient  building by optimizing natural lighting elements versus heat gain. • Flooring System Project: To design and develop a unique glass flooring system over  a man made stream bed to meet specific load bearing, slip resistant, and  condensation proof requirements. • Ventilation System Project: To design and develop an new under floor air  displacement ventilation system to improve energy efficiency and airborne  contaminant removal performance. • Piping System Project: To design and develop an improved dual pipe system to  utilize a public reclaimed water system for building sewage conveyance. www.zweigwhite.com
  • 39. Case Study #2 – A&E Firm  Qualified Research Expenses: Salary of  $2,060,000 for a total of $2,060,000 Base year %: 2.53% Base amount: $ 703,340 (Average GR X 2.53%) 50% limitation: $ 1,030,000 Credit Calculation: Qualified Expenses $2,060,000 Less Base Amount (1,030,000) Total  1,030,000 Credit (20% of 1,030,000) $  206,000 www.zweigwhite.com
  • 40. Taxes Present • Jobs Bill – outlook for action • Hiring Credit • AND Extenders  ‐‐ payfor black liquid Including R/D www.zweigwhite.com
  • 41. The R&D Tax Credit For clients who design, develop or improve a product, process, technique, formula, invention, or software. www.zweigwhite.com
  • 42. The R&D Tax Credit X Marks the Spot! R&D Activities Related to: Function Performance Reliable Quality Durability Product X Process Computer Software Technique Formula Invention www.zweigwhite.com
  • 44. The R&D Tax Credit X Marks the Spot! R&D Activities Related to: Function Performance Reliable Quality Durability Product X Process X Computer Software Technique Formula Invention www.zweigwhite.com
  • 45. The R&D Tax Credit X Marks the Spot! R&D Activities Related to: Function Performance Reliable Quality Durability Product X Process X Computer Software Technique Formula Invention X www.zweigwhite.com
  • 46. “Their educated and knowledgeable staff plays a huge role in the  success of our Study's, which is why we continue to use your  services… It was apparent to me that alliantgroup approaches their  business very seriously and with a deep commitment to serving  their clients through their due diligence in addressing the rigorous  documentation that is necessary to perform a Study that is so  complex in nature… It would be my pleasure to recommend you to  anyone who would benefit from your professional services” ~ Charles Pruitt, CFO of LPA, Inc. www.zweigwhite.com
  • 47. “alliantgroup clearly has the expertise to deal with the issues around the R&D  tax credit, and were instrumental in our ability to calculate the credit for  our last tax year.  We would not have attempted to tackle this complex an  issue with out the advice of a well qualified expert in the area, which  definitely applies to alliantgroup.  I would highly recommend alliantgroup,  as they provided personnel with the knowledge experience to conduct our  R&D study effectively, efficiently, and with minimal intrusion into our  business. ~Judy Peterson, CFO of Callison www.zweigwhite.com
  • 48. “The experience we had with alliantgroup has taken our company to another  level of tax planning, opening tax savings avenues previously untapped by  Baskervill… I would definitely recommend their professional services to  other firms that could benefit from the reinvestment of tax refunds they  are entiled to as the result of their R&D activities.” ~Margaret Hood, CFO/Treasurer of Baskervill www.zweigwhite.com
  • 49. “I strongly recomment alliantgroup on their outstanding service for the R&D  Tax Credit Study.  The resultant study is detailed, accurate and  compelling… I would recommend alliantgroup to other companies who  have a commitment to quality and only work with those who share that  same high standard.” ~ Lawrence DeRose, Vice President of DeRose Design Consultants www.zweigwhite.com
  • 51. ZWEIGWHITE 321 Commonwealth Road Suite 101 Wayland, MA 01778 Tel: 800‐466‐6275, 508‐651‐1559 M‐F 8:30 AM to 5:30 PM (EST) Anytime: Fax: 800‐842‐1560 or 508‐653‐6522 info@zweigwhite.com www.zweigwhite.com