Tax Credits for Government Contractors

Transcription

1 Tax Credits for Government Contractors Presented by CohnReznick s Government Contracting Industry Practice Christine Williamson, Partner & Sonny Grover, Sr. Managing Director, Alliant Group

2 PLEASE READ This presentation has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. This presentation and its content are the property of CohnReznick LLP and are protected by applicable copyright laws. Any unauthorized use of the information herein will be considered a violation of CohnReznick LLP s intellectual property rights. Unless stated otherwise herein, no part of this presentation may be copied, distributed, or published, in whole or in part, without the prior written agreement of CohnReznick LLP. 1

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4 THE ADVANTAGE OUR TEAM MARK W. EVERSON Former IRS Commissioner; alliantgroup Vice Chairman ST EVEN M ILLER Former IRS Acting Commissioner; alliantgroup National Director of Tax KATHY PETRONCHAK Former IRS Commissioner of Small Business/Self-Employed Division; alliantgroup Director of IRS Dispute Resolution JIM RAMSTAD Former U.S. Congressman and Chairman of the IRS Oversight Committee; alliantgroup Senior Advisor BLAN CH E LIN COLN Former U.S. Senator; alliantgroup Director BOB RILEY Former Alabama Governor; alliantgroup Director KIT BOND Former Missouri Governor and U.S. Senator; alliantgroup Senior Advisor RICK LAZIO Former U.S. Congressman; alliantgroup Director DEAN ZERBE Former Senior Counsel to the U.S. Senate Finance Committee; alliantgroup National Managing Director DAW N LEVY Former Counsel to the U.S. Senate Finance Committee; alliantgroup Director BOB PRAT ZEL Former HOK CFO; alliantgroup Strategic Advisory Board Member JAM ES FRAN KEL Partner at Arent Fox LLP; alliantgroup Strategic Advisory Board Member 3

5 SMALL V. LARGE BUSINESS EFFECTIVE TAX RATES 4

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7 TAX REDUCTION 101 A TAX CREDIT is a dollar-for-dollar reduction in taxes paid or taxes payable R&D tax credit, foreign tax credit, EIC A TAX DEDUCTION is a reduction in taxable income and is about 1/3 as valuable as a tax credit 179D, home mortgage interest, depreciation TAX CREDITS AND DEDUCTIONS MAY BE AVAILABLE RETROACTIVELY 6

8 R&D TAX CREDIT

9 TRADITIONAL VS. 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 8

10 #1 NEW OR IMPROVED BUSINESS COMPONENT 9

11 #2 TECHNOLOGICAL IN NATURE Includes - Hard Sciences: Research must rely on principals of hard sciences Physics Chemistry Biology Computer sciences Engineering Excludes - Soft Sciences: Research can not be in the soft sciences Economics Psychology Management sciences, etc. 10

12 #3 ELIMINATION OF UNCERTAINTY R&D Activities Must Be Intended to: Discover information Eliminate uncertainty concerning the company s 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? 11

13 #4 PROCESS OF EXPERIMENTATION Development Activities: Must evaluate a process and its alternative Must be designed to achieve a result that was uncertain at the outset May Involve: One or more hypotheses 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 12

14 GOVERNMENT CONTRACTOR ISSUES Who bears risk of R&D? Classified contracts R&D performed abroad Prime/subcontractor relationships who gets the credit? 13

15 R&D CREDITS ELIGIBLE COSTS Wages Form W-2, Partnership Earnings subject to Self-Employment 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 14

16 CREDIT DETAILS Refundable vs. Non Refundable Which credit to take? Gross Credit 20% Reduced Credit 13% ASC 14% Election reduced or ASC Alternative Minimum Tax (AMT) considerations Carryback/carryforward Statute of Limitations 15

17 BASIC R&D CALCULATIONS Qualified Research Expenditures Apply Fixed Base Percentage multiply QRE Floor or Fixed Base 50% of QRE Limitation multiply by 50% 50% of QREs The lesser of 50% or calculated QRE over Fixed Base multiply by 20% or 13% Regular or reduced credit 16

18 VIRGINIA Tax years % VA R&D over VA base amount (3 yrs) Maximum credit $25,050 (15% x $167k) Form RDC due April 1 Credit must be approved before claiming 17

19 MARYLAND Tax years Basic credit = 3% of lesser of MD R&D or MD base amount (4 yr) Browth credit = 10% of MD R&D over MD base amount Application due Sep 15 Credit must be approved before claiming 18

20 179D Energy Efficient Commercial Building Deduction

21 ENERGY EFFICIENT COMMERCIAL BUILDING DEDUCTION (179D) Irc Sec. 179D allows an immediate depreciation deduction of up to $1.80/sq. ft. for commercial buildings that achieve certain reductions in total energy and power costs with respect to interior lighting, HVAC, hot water system, and the building envelope Rewards reductions in power and energy costs Available for commercial buildings, including government owned buildings 20

22 WHAT TYPES OF BUILDINGS AND CONSTRUCTION? Commercial Buildings include: Typical commercial buildings retail, office, industrial Public or federal, state, or local government offices, military bases, courthouses, post offices, prisons, universities, schools, libraries, airports, police, fire, etc. Multi-family structures that are 4 stories or higher Located in the U.S. Construction includes: New construction AND renovations/retrofits of existing buildings 21

23 Domestic Production Activities Deduction IRC SEC. 199

24 IRC Sec. 199 IRC Sec. 199 allows a deduction for manufacturing income, known as the Domestic Production Activities Deduction or DPD Deduction is equal to 3% ( 05-06), 6% ( 07-09), or 9% ( 10 onward) of income from domestic manufacturing income The deduction is limited to 50% of a taxpayer s W-2 wages attributable to domestic production gross receipts 23

25 Case Studies

26 GOVERNMENT CONTRACTING CASE STUDY Systems Engineering & Acquisition Support R&D Tax Credit Year Business Started: 2007 Company Revenue: $9,000,000 Entity Type: S-Corporation Credit Result: $250,440 25

27 GOVERNMENT CONTRACTING CASE STUDY RF and Microwave Systems R&D Tax Credit Year Business Started: 1999 Company Revenue: $16,493,886 Entity Type: C-Corporation Credit Result: $102,511 26

28 GOVERNMENT CONTRACTING CASE STUDY Software for firearms training solutions R&D Tax Credit Year Business Started: 2003 Company Revenue: $24,418,132 Entity Type: C-Corporation Credit Result: $179,435 27

29 GOVERNMENT CONTRACTING CASE STUDY Mechanical Contractor R&D Tax Credit Year Business Started: 1989 Company Revenue: $14,000,000 Entity Type: S-Corporation Credit Result: $153,000 28

30 GOVERNMENT CONTRACTING CASE STUDY Electric Design-Build and Systems Integration R&D Tax Credit Year Business Started: 1949 Company Revenue: $370,000,000 Entity Type: S-Corporation Credit Result: $1,560,000 29

31 SECTION 179D CASE STUDY EXAMPLE Architecture firm in New York retrofitted multiple systems in five elementary schools, averaging 130,000 square feet Total Deduction Awarded: $430,290 30

32 San Diego Based University Student Housing Case Study Example HVAC and hot water system qualified at over 50%: Optimized daylight Natural ventilation Qualified for $1.80 per sq.. ft.. 219,337 square foot building TOTAL DEDUCTION AWARDED: $394,807 31

33 SECTION 179D CASE STUDY EXAMPLE Modeled HVAC, & Hot Water Systems, Lighting Systems & Building Envelope LEED Platinum, Geothermal Heat Source, 100% naturally ventilated, Radiant Floor, Green Roof Qualified for the full $1.80 per square foot 110,659 square foot building Total deduction awarded to Architectural Firm: $ 199,186 32

34 HIGH SCHOOL IN BOSTON CASE STUDY EXAMPLE Converted analog controls to direct digital controls on existing equipment Building automated system Variable fan drives Qualified for $1.80 per sq.. ft.. 81,515 square foot building TOTAL DEDUCTION AWARDED: $146,727 33

35 OKLAHOMA BASED EARLY CHILDHOOD CENTER CASE STUDY EXAMPLE Modeled HVAC & Hot Water Systems, Lighting Systems, & Building Envelope Innovative use of insulated concrete foam Qualified for full building deduction Building envelope achieved 16% Qualified for $1.80 per sq. ft. 49,068 square foot building TOTAL DEDUCTION AWARDED: $88,322 34

36 RESOURCES Christine Williamson, CPA, Partner (703) Sonny Grover, Alliant Group (212) GovCon360 keeps you abreast of the ever-changing regulatory environment that is Government contracting. From reference materials, like searchable pdf copies of the FAR and DCAM, to our past Lunch and Learn seminar slide decks and thought pieces on industry matters, we ve got it covered. Subscribe to our RSS feed to receive short alerts on recent industry changes. It s always been our job to help our clients maintain a competitive advantage by staying ahead of the curve. This website is an extension of the services we ve been providing for over 35 years by putting useful resources and up-to-date information at your fingertips. 35