Transcript GALLINA LLP PowerPoint Template GLLP-2-484

How Manufacturers Can
Take Advantage of Tax
Credits and Incentives
GALLINA LLP
 Largest accounting firm in the Sacramento
region
 Top 10, largest accounting firms in
California / “Top 100 Firm” nationally
 Several teams of specific industry specialists
 2014 Corporate Citizen of the Year recipient
from the Boy Scouts of America, Golden
Empire Council
Today’s Topics
 Research & Development Tax Credit
 California New Employment Credit (“NEC”)
 Work Opportunity Tax Credit (“WOTC”)
 Sales Tax Exemption for Manufacturing or
R&D
Research &
Experimentation Tax
Credit
Credit for Increasing Research Activities
What is the Benefit?
 Manufacturing client that designs and manufactures
compressors for various applications.
 Just of $1.5 million of qualifying R&D expenses.
– $1,100,000 spent on salaries & wages (28 people
internally spending an average of 39% of their time
performing qualifying R&D activities).
– $450,000 spent on prototype materials and testing
various sealant materials.
– $32,000 paid to 3rd parties to perform qualifying
research on behalf of our client.
 Resulted in a tax credit of $176,000.
The Benefit
 Manufacturer’s taxable wages, supply costs,
and contractor costs are “deductions” which
are all fully deductible on the tax return.
 A tax “credit” is an additional benefit that is
a dollar for dollar offset against the amount
of taxes you owe.
What is a “Qualifying” Activity?
• Qualifying Activities
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Engineering Efforts
New Product Design
Substantial Improvements
Computer Modeling
Experimentation Efforts
Laboratory Testing
Developing Prototypes
Technical Discussions
Unsuccessful but Otherwise
Qualifying Initiatives
• Non-Qualifying
– Reverse Engineering
– Market Research
– Research Related to Style or
Consumer Taste
– Research Related to
Management Techniques
– Adaptation (simple) of an
Existing Product or Process
– Research Conducted Outside
the U.S.
From Concept to Production
Concept
Development
Applied
Research
Design
Prototype
First Run &
Testing
Customer
Deliverable
Subsequent
Revisions
Statutory Qualifying Criteria
Permitted Purpose
Technological in Nature
The activity must relate to a new or substantially
improved product or process intended to improve:
- Function
The activity must fundamentally rely upon principles of:
- Engineering
- Physical Science
- Performance
- Computer Science
- Reliability
- Biological Science
- Quality
Four-Part Test
Technological Uncertainty
Process of Experimentation
The activity must be intended to discover information to
eliminate technological uncertainty related to:
Substantially all (80%+) of the activities must relate to a
systematic process of experimentation involving:
- Appropriateness of a product design
- Evaluation of one or more alternatives
- Method of a product or process
- Confirming hypothesis through trial/error, testing and/or
- Capability of a product or process
modeling/simulation
From Concept to Production
Concept
Development
Applied
Research
Design
Prototype
First Run &
Testing
Customer
Deliverable
Subsequent
Revisions
Research Pursuant to Contract
• Substantial Rights
– Must retain rights to I.P.
and be able to use what
is learned on
subsequent projects.
– Rights do not have to
be exclusive
• Risk
– Fixed-price fee
arrangement
– Payment contingent on
success of the research
– Warranty provisions
– Cannot be T&M, Cost +,
or GMP unless there is
a compelling case to be
made
What Expenses Can Be Included?
 Salaries and Wages
– Typically largest component (roughly 90%+)
 Supply Costs
– Cannot include capitalized assets (equipment)
 Contractor Costs
– 65% of qualifying costs are eligible
R&E Credit Study Process

Identify Qualifying Business Components
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Identify Personnel Who Were Involved
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Identify Hours By Employee By Activity For Each Qualifying Business
Component
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Identify Supplies Consumed While Performing Qualifying Activities
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Identify Contractor Costs Related to the Performance of Qualifying Activities on
Qualified Projects (Business Components)
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Calculate the Tax Credit Amount
Any Questions?
?
California New
Employment Credit
California Hiring Incentive
Enterprise Zone Credits
 The “Enterprise Zone” hiring credit has
expired as of December 31, 2013.
 Unused credits may carry forward for up to
10 years.
 Qualifying new hires under the old program
who were previously vouchered, will
continue to generate credits for up to 5
years from their original hire date.
New Employment Credit (NEC)
 The NEC credit applies to hiring beginning January 1, 2014 and is
worth up to $56,000 per qualifying new hire, over 60 months (5 yrs)
 Not available for retailers, food service, temporary employment
agencies, casinos, bars, or sexually oriented businesses
 Allows businesses to claim NECs in certain economic development
areas (former EZs and LAMBRAs, with some exceptions), as well as in
designated census tracts with high unemployment and poverty rates
 Available for hiring employees who are long-term unemployed;
unemployed veterans; ex-felons; or recipients of the federal earned
income tax credit, CalWORKS, or general assistance
 Only available to employers that create net new jobs statewide
New Employment Credit (NEC)
 Tentative Credit Reservation (TCR) for each
qualified employee must be made within 30 days of
hire date
 Hiring Credit may be taken only on an originally
filed income tax return (no amended returns)
 Computation of an “applicable percentage”
– The net increase in full-time employees in CA is the
numerator of the fraction while the denominator is the
number of “qualified” full-time employees in the state
Example 1 Situation (NEC)

Taxpayer A operates entirely within California and has a location within the
DGA. As of December 31, 2013, Taxpayer A has a total workforce of 250
employees which consists of 150 part time and 100 full-time employees.
During its taxable year 2014, Taxpayer A hired new full-time employees, 2 of
which were qualified full-time employees. Taxpayer A received a tentative
credit reservation for these employees as required. Assume the following facts:

Qualified Employee 1 was hired on January 1, 2014, at an hourly wage of $17
and worked 2,000 hours during taxable year 2014. Qualified wages for
Employee 1 are $5 per hour ($18.50 - $13.50). Qualified Employee 2 was hired
on July 1, 2014, at an hourly wage of $18 and worked 1,000 hours during
taxable year 2014. Qualified wages for Employee 2 are $6 per hour ($19.50 $13.50). The Base Year is taxable year 2013. In its base year, annual full-time
equivalent employees were 100. Full-time equivalent employees in 2014 were
108. The net increase in annual full-time equivalent employees over the base
year is 8.
Example 1 Calculation
Tentative Credit Amount:
$5,600
Qualified Employee 1:
$3,500 ($5 x 2000 hours x 35%) plus
Qualified Employee 2:
$2,100 ($6 x 1000 hours x 35%)
Applicable Percentage:
100%
Numerator:
108-100 = 8 (Net Increase in full-time
employees)
Denominator:
2 qualified full-time employees
Computation:
8/2 = 100% (the applicable percentage
cannot exceed 100%)
Credit Allowable:
$5,600 ($5,600 x 100%)
Example 2 Situation
 The qualified taxpayer has a net increase in
full-time employee equivalents – receives a
partial amount of the tentative credit.
 Assume the same facts as Example 1, except
due to attrition the annual full-time equivalents
for taxable year 2014 was 101. The net
increase in annual full-time equivalent
employees over the base year is 1 (101-100).
Example 2 Calculation
Tentative Credit Amount:
$5,600
Qualified Employee 1:
$3,500 ($5 x 2000 hours x 35%) plus
Qualified Employee 2:
$2,100 ($6 x 1000 hours x 35%)
Applicable Percentage:
50%
Numerator:
101-100 = 1 (Net Increase in full-time
employees)
Denominator:
2 qualified full-time employees
Computation:
1/2 = 50%
Credit Allowable:
$2,800 ($5,600 x 50%)
Example 3 Situation
 The qualified taxpayer does not have a net
increase in full-time employee equivalents –
receives no amount of the tentative credit.
 Assume the same facts as Example 1, except
due to attrition the annual full-time equivalent
for taxable year 2014 was 98. The net increase
in annual full-time equivalent employees over
the base year is zero (98-100 but it cannot be
less than 0).
Example 3 Calculation
Tentative Credit Amount:
$5,600
Qualified Employee 1:
$3,500 ($5 x 2000 hours x 35%) plus
Qualified Employee 2:
$2,100 ($6 x 1000 hours x 35%)
Applicable Percentage:
0%
Numerator:
98-100 = 0. (Net Increase in full-time
employees cannot be less than zero)
Denominator:
2 qualified full-time employees
Computation:
0/2 = 0%
Credit Allowable:
$0 ($5,600 x 0%)
Work Opportunity Tax
Credit (“WOTC”)
Federal Hiring Incentive
WOTC
 Currently expired as of December 31, 2013
but expected to be retroactively extended
through 2015 with the EXPIRE Act.
 Worth up to $9,600 per qualifying new hire.
WOTC Qualifying New Hire
 Credit for hiring qualifying persons. A qualifying person is:
1.
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A member of a family that is a Qualified Food Stamp Recipient
A member of a family that is a Qualified Aid to Families with
Dependent Children (AFDC) Recipient
Qualified Veteran
Qualified Ex-Felon, Pardoned, Paroled, or Work Release Individual
Vocational Rehabilitation Referrals
Qualified Summer Youth
Qualified Supplemental Security Income (SSI) Recipient
Qualified Individuals living with an Empowerment Zone or Rural
Renewal Community
Long Term Assistance Recipient (TANF) – formerly known as Welfare
to Work
Claiming the WOTC
 Complete Form 8850 by the day the offer is
made.
 Complete ETA Form 9061 or ETA Form 9062
 Submit the completed and signed IRS and
ETA forms to your state workforce agency
(California EDD) within 28 calendar days of
the employee’s start date.
Manufacturing and
Research & Development
Equipment Exemption
Sales Tax Exemption
Planned Purchases?
Does anyone here plan on making purchases
of manufacturing or R&D equipment?
Real World Example
 Client plans purchase of $17 million of
manufacturing plant equipment
 GALLINA received a private opinion from
the State that these purchases would qualify
 Client will save in excess of $700,000
Manufacturers Sales Tax Exemption
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Beginning July 1, 2014 - allows manufacturers to obtain partial exemption
(currently 4.1875%) of state sales and use tax on certain manufacturing and
research and development equipment purchases.
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To be eligible under AB 93, a Taxpayer must meet all three of the following
conditions:
1.
2.
3.
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Be engaged in certain types of business, also known as “qualified person”,
Purchase “qualified property”, and
Use that qualified property for the uses allowed by this law
“Qualified Person” = Someone primarily engaged (50% or more of the time) in
those lines of business described in the North American Industry Classification
System (NAICS) Codes 3111 to 3399, inclusive, 541711, or 541712
– These industries generally include those primarily engaged in the business of all forms of
manufacturing, research and development in biotechnology, and research and
development in the physical, engineering, and life sciences.
Manufacturers Sales Tax Exemption
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“Qualified Property” includes the following used in manufacturing processes or
R&D activities:
– Machinery and equipment, including component parts and contrivances such as belts,
shafts, moving parts, and operating structures
– Equipment or devices used or required to operate, control, regulate, or maintain the
machinery (computers, software, repair/replacement parts)
– Tangible personal property used in pollution control that meets established state or local
government agency standards
– Special purpose buildings and foundations used as an integral part of the manufacturing
process, or that constitute a research or storage facility. Buildings used solely for
warehousing do not qualify.
•
Does not include consumables with a useful life of less than one year, furniture, inventory,
equipment used in extraction processes, equipment used to store finished products that have
completed the manufacturing, processing, refining, fabricating, or recycling process, or tangible
personal property used primarily in administration, general management, or marketing.
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This new program applies the exemption to qualifying purchasers throughout
California, without regard to geographic boundaries.
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Requires the issuance of an “exemption certificate” at the point of sale.
Any Questions?
?
GALLINA LLP Contact Information
Mark Bellows, CPA
Partner – Manufacturing Practice Leader
916.677.5787
[email protected]
Jesse Wutkee, CPA
Senior Manager – Tax Credits & Incentives Practice Leader
916.724.6813
[email protected]
Shevar Goonwardena, CPA
Senior Manager – Manufacturing Audit and Assurance
916.724.6824
[email protected]