2/25/2015 RESEARCH TAX CREDIT. R&D Credits for Software Development. R. Ashley Thompson Director

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1 RESEARCH TAX CREDIT R&D Credits for Software Development February 26, 2015 R. Ashley Thompson Director 1

2 TO RECEIVE CPE CREDIT Participate in entire webinar Answer polls when they are provided If you are viewing this webinar in a group Complete group attendance form with Title & date of live webinar Your company name Your printed name, signature & address All group attendance sheets must be submitted to within 24 hours of live webinar Answer polls when they are provided If all eligibility requirements are met, each participant will be ed their CPE certificates within 15 business days of live webinar 3 AGENDA History & Legislative Update Definition of Research Internal Use Software Eligible Expenses Credit Calculation Potential Risks & Concerns Documentation 4 2

3 HISTORY & LEGISLATIVE UPDATE 1981 Creation of Credit for Increasing Research Activities Expansion & extension several times over last 30 years Substantial changes in 1986 & 2003 Proposed regulations for internal use software 5 DEFINITION OF R&D THE FOUR-PART TEST New or improved business component Product, process, technique, formula, invention or software item Technological in nature Chemistry, engineering, biology, physics or computer science Elimination of uncertainty Capability, method or appropriate design Process of experimentation Development & evaluation of new ideas 6 3

4 QUALIFIED ACTIVITIES DIRECT RESEARCH Brainstorming alternatives/concept development Requirements analysis Feasibility analysis Architecture design Proof of concept/prototype design & development Programming/coding software Design review Technical meetings 7 QUALIFIED ACTIVITIES DIRECT SUPPORT Testing proof of concept Writing test scripts Alpha testing Regression testing Beta testing Creating test reports Compiling research data 8 4

5 PROPOSED INTERNAL USE SOFTWARE REGULATIONS Definition of internal use software Software developed by the taxpayer for use in general & administrative functions that facilitate or support the conduct of the taxpayer s trade or business General & administrative functions are limited to financial management functions, HR management functions & support services functions Intended to target back-office functions that most taxpayers would have regardless of industry 9 HIGH THRESHOLD OF INNOVATION Qualifying internal use software Software must be innovative Reduction in cost or improvement in speed or other measurable improvement, that is substantial & economically significant Significant economic risk Exists if the taxpayer commits substantial resources to the development & there is substantial uncertainty, because of technical risk, that such resources would be recovered within a reasonable period Not commercially available Software cannot be purchased, leased, or licensed & used for the intended purpose 10 5

6 ELIGIBLE EXPENSES Taxable wages (W-2 amounts) Direct labor, direct support, direct supervision 80% or more rule Supplies Depreciable property is excluded Contract research (at a rate of 65%) Independent contractors, design firms, IT firms & outside testing 11 EMPLOYEES INVOLVED IN RESEARCH Multiple individuals can be involved in qualified research activities Software development (architects, engineers, developers, programmers, etc.) Quality assurance Executive level management Owners 12 6

7 CREDIT CALCULATION Alternative simplified credit (ASC) Credit is equal to 14% of current year expenses over the base amount Base amount is equal to 50% of average annual expenses for the prior three years Reduced credit is equal to 65% of 14% credit Typical federal tax savings will be between 4.5% & 6.5% of qualified expenses 13 POTENTIAL RISKS & CONCERNS Nonrefundable tax credit Must be paying tax to utilize the credit Net operating losses (NOLs) & NOL carryforwards Credit can only be used to offset tax related to entity that generated the credit 20-year carryforward for the federal credit Alternative minimum tax limitations When to start claiming the credit 14 7

8 POTENTIAL RISKS & CONCERNS Internal use software development The high threshold of innovation test can be difficult to apply Higher threshold of uncertainty Documentation Time tracking or time estimates Project narratives 15 DOCUMENTATION No specific record-keeping requirements; however, taxpayers are expected to maintain sufficient documentation to substantiate the credits being claimed Efforts should be made to document qualified research expenses & activities as they occur Emphasis should be placed on documentation quality rather than just quantity Research credit study methodology is important 16 8

9 FINANCIAL DOCUMENTATION Wages Time tracking or time questionnaires W-2s Supplies GL accounts, POs & invoices Contract research GL accounts, contracts, POs & invoices 17 PROJECT DOCUMENTATION Project narrative Supporting documentation Product descriptions Project status updates Project schedule or event log Meeting minutes Bug tracking information Test procedures Test reports Software revision history 18 9

10 CONTINUING PROFESSIONAL EDUCATION (CPE) CREDITS BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: The information in BKD webinars is presented by BKD professionals, but applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor before acting on any matters covered in these webinars. 19 CPE CREDIT CPE credit may be awarded upon verification of participant attendance For questions, concerns or comments regarding CPE credit, please the BKD Learning & Development Department at training@bkd.com 20 10

11 QUESTIONS? THANK YOU! FOR MORE INFORMATION Ashley Thompson

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