Hal Zemel, CPA, J.D., LL.M. and Jeffrey Frisch, CPA
04.24.2018 | Berdon Industry Insights
During the past year Berdon identified over $1 million in Research & Development (R&D) credit opportunities for our agency and technology clients, and we continue to identify ways of maximizing these credits, which are often overlooked, especially by digital agencies.
A “PATH” Less Traveled Results in Missed Opportunities
The industry challenge regarding R&D credits is that too few digital advertising agencies and technology companies take advantage of it. About 20,000 U.S. organizations annually claim the credit, but 80% of the credits are claimed by Fortune 1000 companies and 68% are claimed by manufacturing businesses. Most agencies performing digital work, and their accountants, do not realize they qualify for R&D credits.
Traditionally, digital advertising agencies participate in a number of activities that would qualify for the credit. These activities include, but are not limited to:
- Development of software that tracks, monitors, and optimizes clients’ marketing and advertising campaigns;
- Design of databases to improve efficiency, speed, and user functionality;
- Design of reliable algorithms to enhance the data collection process associated with advertising campaigns;
- Website development;
- Development of Client Relationship Management (CRM) software that integrates CRMs with other marketing software or databases; and
- Other software code writing.
Qualified expenses for R&D credits include amounts paid for salaries, supplies, independent contractors, and computer leasing relating to activities noted above.
The Protecting Americans from Tax Hikes Act of 2015 (PATH), made three important changes to the R&D credits as follows:
- R&D credits were permanently extended.
- No Alternative Minimum Tax (AMT) Limitation – Eligible businesses (i.e. those with $50 million or less of gross receipts) are not subject to the AMT limitation.
- Eligible Against Payroll Tax – Start-up agencies (i.e. those with less than $5 million of gross receipts in the current year and no gross receipts for more than five years before the current year) can use the credits against employer’s portion of the Social Security payroll tax (i.e. FICA) liability up to a maximum amount of $250,000.
R&D credits are a dollar-for-dollar reduction in the tax liability. While not refundable (i.e. they cannot be used to reduce tax liability to below zero), any unused federal credits can be carried back one year and carried forward for 20 years.
In addition to claiming the credit on current year tax returns, the IRS allows you to amend all prior year tax returns to claim the credits generated as long as the statute of limitations is open for filing amended tax returns. Generally, you can go back up to three years, but in some circumstances you can go back even further.
Generally, a R&D study has an average turnaround time of 12 to 18 weeks (depending to a large degree on the size of the client and the complexity of the study). Some states such as California have their own R&D credits which can enhance the benefits of a R&D credit study for agencies filing in those states.
Note that the Tax Cuts and Jobs Act did not alter R&D tax credits.
To learn more about R&D credits and if your agency is eligible to take advantage of this significant saving opportunity, contact Hal Zemel at HZemel@berdonllp.com or Jeff Frisch at JFrisch@berdonllp.com.
Berdon LLP Accountants and Advisors