Understanding The Alternative Simplified Credit Calculation For R&D

Understanding The Alternative Simplified Credit Calculation For R&D

The Research and Development (R&D) Tax Credit is a valuable incentive offered by the US government to encourage innovation. However, calculating this credit can involve complex formulas and historical data analysis. This is where the Alternative Simplified Credit (ASC) method comes in, offering a streamlined approach for qualifying businesses.

Traditional vs. Alternative Simplified Credit Calculation

The Regular Historical method for calculating the R&D Tax Credit involves a complex formula that requires the calculation of a fixed base percent using information most companies do not have (1984-1988 financial information). The ASC method offers a simpler alternative, particularly for companies that don’t have extensive R&D history or lack the resources for a detailed analysis. Here’s what you need to know:

  • Eligibility: The ASC method is available to all companies with QREs in the current tax year and the previous three tax years. Exceptions do apply for any previous year of the three prior years with no QREs.
  • Calculation Steps:
    1. Identify Average QREs: Calculate the average of your qualified research expenses from the preceding three tax years. Or, zero if you do not have a prior three years of qualified expenses.
    2. Apply Base Percentage: Multiply the average QREs by 50%.
    3. Determine Creditable Excess: Subtract the result from Step 2 (base amount) from your current year’s qualified research expenses.
    4. Apply Credit Rate: Multiply the creditable excess by 14%.
Benefits Of The ASC Method
  • Simplicity: The ASC method requires less data and offers a straightforward calculation approach.
  • Reduced Time and Costs: Businesses can save time and resources compared to the traditional method.
  • Accessibility: The ASC method makes the R&D Tax Credit more accessible to smaller companies or startups.
Considerations Before Using The ASC Method
  • Potential Benefits: With a detailed estimate analysis, both methods can be evaluated. If the proper documentation is available, the most advantageous method will be suggested. When engaged, we will document accordingly.
  • Businesses with significant and consistent R&D expenses might benefit more from a detailed analysis.
  • Professional Guidance: Regardless of the chosen method, seeking the advice of a qualified tax professional is recommended to ensure you maximize your R&D Tax Credit potential and comply with regulations.
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Learn How To Staff Your Tax Practice And Get Work Done In Today’s Market

Learn How To Staff Your Tax Practice And Get Work Done In Today’s Market

Many of you have shared with us this tax season was a challenging one for many tax firms due to lack of tax staff with three to five years of experience to support Tax Managers, Tax Directors, and Tax Partners. This has been a challenge for firms for a few years now, so what is the solution? There are a few solutions that are currently being adopted by firms nationally and internationally. This post discusses the solutions for firms’ short term and long term. The primary solutions are offshoring the work, onboarding new staff and outsourcing the work to other firms, and under private contract utilizing TaxConnections Executive Search services.

Services provided in offshoring tax work to India started in the 1980s and rapidly accelerated in the ’90s. In today’s world where information technology has become critical to business, the meaning of outsourcing has undergone a drastic change over the years. CPA and accounting firms significantly reduce costs by outsourcing tax compliance services to India. Labor costs in India are much lower than in the United States, with firms saving up to 60% of costs. It means that firms can save a significant amount of money by outsourcing tax services to India. We have encountered many Tax Managers who have been on rotation to offices between the U.S. and India to train the staff on tax preparation. The Big Four firms in India have grown to massive size to outsource client engagements for U.S. multinational clients at competitive costs. The one drawback to this is there has been less emphasis on training tax staff in the U.S.

We have noticed accounting firms and corporations increasing their hiring at the tax intern and staff level. This is good news as they are also making a commitment to train and educate a new generation of needed tax staff by corporate tax departments and public accounting firms. If these organizations offer tax staff a supportive environment to learn and grow, this is good news for a tax staff entering the tax profession. If you do not have enough tax staff, the growing trend is training and growing your own. You build technically stronger Tax Managers when you provide them with the opportunity to grow by transferring their technical knowledge and tax skills to others. We expect to see this trend continue to grow throughout the tax profession. It is a win-win solution for tax organizations.

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IRS Seeks Membership Nominations For The 2025 Internal Revenue Service Advisory Council

IRS Seeks Membership Nominations For The 2025 Internal Revenue Service Advisory Council

On Thursday, April 18th the Internal Revenue Service announced that it is now accepting applications for the 2025 Internal Revenue Service Advisory Council (hereinafter “IRSAC”) through May 31, 2024, including nominees for a newly created subcommittee focused on fairness issues.

The IRSAC serves as an advisory body to the IRS commissioner and the Service’s leadership. The IRSAC is organized under the Federal Advisory Committee Act and includes volunteer members with deep subject matter expertise amongst highly diverse tax matters. IRSAC provides an organized forum for discussion of relevant tax administration issues between IRS officials and representatives primarily from accounting firms, law firms and the tax departments of select Fortune 500 / Russell Index 2000 size companies. The IRSAC’s goals and objectives include but are not limited to:

  • Proposes enhancements to IRS operations;
  • Recommends administrative and policy changes to improve taxpayer services, fairness in tax administration and compliance;
  • Discusses issues and recommends solutions relevant to information reporting;
  • Addresses matters concerning tax exempt and government entities; and
  • Conveys the public’s perception of professional standards and best practices for tax professionals.

In addition, the IRSAC will launch its first-ever Subcommittee on Fairness in Tax Administration that will join the existing five subcommittees. This new subcommittee will review, and issue specific recommendations related to the overall fairness in tax administration. The subcommittee will focus on how the Service can identify and address any tax administration disparities that may limit some communities from fully benefiting from and contributing to the nation’s economic growth and prosperity. Potential focus areas will include disparities in audit selection, tax credit and deduction awareness, fraud prevention, data analytics as well as community outreach and education opportunities. The IRSAC’s other subcommittees focus on information reporting, large business & international, small business/self-employed, tax-exempt/government entities, and taxpayer services.

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California’s AB 2829 Digital Advertising Tax Proposal

California's AB 2829 Digital Advertising Tax Proposal

California has proposed a new digital advertising tax (AB 2829) that has been met with mixed reactions from businesses and consumers alike. If passed, the tax would be levied on large-scale California businesses that generate over $100,000,000.00 in annual global revenue from digital advertising services and would take effect on January 1, 2025.

Some have hailed the proposal as a way to generate much-needed revenue for the state’s budget, which was hit hard by the COVID-19 pandemic and has not yet fully recovered. Supporters of the tax also argue that it would help level the playing field between brick-and-mortar businesses and digital retailers, which have avoided many of the taxes and regulations that traditional companies face.

Opponents of the tax disagree and argue that the new tax would be harmful to both businesses and consumers alike. Opponents argue that it would make it more difficult for businesses to compete in an already challenging economic environment and that the tax would be difficult to enforce as it raises constitutional concerns surrounding the Due Process and Commerce Clauses. Opponents also argue that although there is an anti-passthrough provision disallowing the tax from being charged to the consumer as a separate fee, surcharge, or line item, businesses would instead pass the cost along to consumers under the guise of higher prices.

This recent California proposal has generated significant debate and controversy, with solid arguments on both sides. What are your thoughts?

You can reach Dan Thompson at Dan@thompsontax.com or call 916.333.2404

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The Tax Relief for American Families And Workers Act of 2024

THE TAX RELIEF FOR AMERICAN FAMILIES ACT

Part 1: Tax Relief for Working Families

Calculation of Refundable Credit on a Per-Child Basis. —Under current law, the maximum refundable child tax credit for a taxpayer is computed by multiplying that taxpayer’s earned income (in excess of $2,500) by 15 percent. This provision modifies the calculation of the maximum refundable credit amount by providing that taxpayers first multiply their earned income (in excess of $2,500) by 15 percent, and then multiply that amount by the number of qualifying children. This policy would be effective for tax years 2023, 2024, and 2025. Modification in Overall Limit on Refundable Child Tax Credit. —Under current law, the maximum refundable child tax credit is limited to $1,600 per child for 2023, even if the earned income limitation described above is in excess of this amount. This provision increases the maximum refundable amount per child to $1,800 in tax year 2023, $1,900 in tax year 2024, and $2,000 in tax year 2025, along with the inflation adjustment described below.
Adjustment of Child Tax Credit for Inflation. —This provision would adjust the $2,000 value of the child tax credit for inflation in tax years 2024 and 2025, rounded down to the nearest $100. Rule for Determination of Earned Income. —For tax years 2024 and 2025, taxpayers may, at their election, use their earned income from the prior taxable year in calculating their maximum child tax credit if the taxpayer’s earned income in the current taxable year was less than the taxpayer’s earned income in the prior taxable year.

READ THE NINE PAGE PROPOSAL

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IRS Issues Frequently Asked Questions Related To The Tax Treatment Of Work-Life Referral Services Provided To Employees

IRS Issues Frequently Asked Questions Related To The Tax Treatment Of Work-Life Referral Services Provided To Employees

The Internal Revenue Service issued frequently asked questions (FAQs) in Fact Sheet 2024-13 related to the tax treatment of work-life referral services provided to employees under an employer’s work-life referral program.

A work-life referral program is an employer-funded fringe benefit that provides work-life referral services to eligible employees.

Work-life referral services are restricted to informational and referral consultations that assist employees with identifying, contacting and negotiating with life-management resources for solutions to a personal, work or family challenge. For example, choosing a suitable child or dependent care program, connecting with a local retirement or financial planner or navigating eligibility for government benefits.

The FAQs released today clarify that, under certain circumstances, the value of work-life referral services provided to employees through a work-life referral program can be excluded from income and employment taxes as de minimis fringe benefits.

IRS-FAQ

IR-2024-110

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Spotlight Interview: Chuck Levun On Educating CPAs And Attorneys On Partnership, LLC, And S Corporation Flow-Through Planning On Four Costly Business Mistakes They Make (Part 1)

Spotlight Interview: Chuck Levun On Educating CPAs And Attorneys On Partnership, LLC, and S Corporation Flow-Through Planning On Four Costly Business Mistakes They Make (Part 1)

Each year there is a must attend complimentary webinar hosted by Tax Forum educators Chuck Levun, Michael Cohen, and Scott Miller.  This is a special presentation for educating attorneys and CPAs on the four biggest and costly business mistakes they make and how to avoid them. Once you attend one of Tax Forums training sessions, you will appreciate why they are the leading trainers in the tax profession on partnership, LLC, and S corporation flow-through programs for tax professionals.

Please read through this special interview, Part 1 with Co-Founder of Tax Forum, Chuck Levun: Part 2 will be another spotlight interview with Michael Cohen. If you desire cutting edge training in partnership, LLC, and S corporation flow-through, you will want to Register For Their Complimentary Webinar. You will appreciate what you will learn spending time with these leading training experts.

Kat Jennings Question:
Please tell me about Tax Forum and its origin.

Chuck Levun Answer:
Back in 1985, I was engaged to be the consultant for the CCH Partnership Tax and Practice Guide. When the project was close to being finalized in the summer of 1987, I asked myself – “How can I help market this product?” I remember pitching the Tax Forum® concept to CCH and meeting with Dick Merrill, CCH’s CEO, who said to the 6 VPs present in the conference room, and I quote, “You guys make this work.”

The Tax Forum started in the fall of 1987 as a 1-1/2 day in-person program presented in four cities. After four years, CCH indicated that they no longer were interested in being in the seminar business (although for many years CCH remained a Tax Forum sponsor), and my partner, Michael Cohen, and I took over the entire concept and grew it to what it is today. At one point, we were presenting in-person in seven cities, as well as presenting private seminars to national CPA firms in another seven or so cities.
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Navigating A Sales Tax Audit: A Comprehensive Guide To Protecting Your Business

Navigating A Sales Tax Audit: A Comprehensive Guide To Protecting Your Business

If you’re reading this, you’ve probably received a letter of audit from a government entity. You’ve also likely now gotten over your initial anxiety and are looking for help with the next steps. You’re in the right place – we’re here to tell you that there’s no need to panic.

So, what exactly is a sales tax audit? And what can you expect?

Definition Of A Sales Tax Audit

A sales tax audit is a rigorous examination conducted by state taxing authorities to review a business’s sales tax returns, financial records, and transactions. The primary objective is to ensure compliance with applicable tax laws and regulations regarding the collection, reporting, and remittance of sales tax.

We know, sounds scary. But we can help you navigate the process successfully. In this guide, we’ll unpack various aspects of sales tax audits, including triggers for audits, documentation requirements, strategies for responding to audit findings, the role of tax professionals, and the possible consequences of an unsuccessful audit.

Here’s what you can discover:

  1. Understanding Sales Tax Audits
  • Triggers for a Sales Tax Audit
  • Types of Sales Tax Audits
  • Common Misconceptions about Sales Tax Audits
  1. Responding to Audit Findings
  • The Audit Process: From Notification to Resolution: Gain insights into the audit process, from receiving a notification to resolving discrepancies and finalizing outcomes.
  • How to Handle Audit Findings: Explore strategies for addressing audit findings effectively, including reviewing and collaborating with tax professionals.
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Citizens Against Government Waste: The Prime Cut Series (#5)

Citizens Against Government Waste: The Prime Cut Series (#5)

Eliminate Earmarks For The F-35 JSF Program
1-Year Savings: $1.5 billion
5-Year Savings: $7.5 billion

The many problems of the JSF make it impossible to justify Congress adding funding beyond that requested by the DOD. Total acquisition costs of the program now exceed $428 billion, 84 percent greater than the initial estimate of $233 billion, with projected lifetime operations and maintenance costs of $1.727 trillion.

In February 2014, then-Under Secretary of Defense for Acquisition, Technology, and Logistics and now Air Force Secretary Frank Kendall referred to the purchase of the F-35 as “acquisition malpractice.” On April 26, 2016, the late John McCain (R-Ariz.), who was then chairman of the Senate Armed Services Committee, called the JSF program “both a scandal and a tragedy with respect to cost, schedule, and performance.”

The JSF has been dragged down by an array of persistent issues, many of which were highlighted in the FY 2019 DOD Operational Test and Evaluation Annual Report, which revealed 873 unresolved deficiencies including 13 Category 1 items, involving the most serious flaws that could endanger crew and aircraft. While this was an overall reduction from the 917 unresolved deficiencies and 15 Category 1 items found in September 2018, the report stated that “although the program is working to fix deficiencies, new discoveries are still being made, resulting in only a minor decrease in the overall number of deficiencies.”

Many of the problems with the F-35 program can be traced to the decision to develop and procure the aircraft simultaneously. Whenever problems have been identified, contractors needed to go back and make changes to planes that were already assembled, adding to overall costs. Speaking at the Aspen Security Forum on July 24, 2015, then-Air Force Secretary Deborah Lee James stated, “The biggest lesson I have learned from the F-35 is never again should we be flying an aircraft while we’re building it.”

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How To Receive Your R&D Payroll Tax Credit

How To Receive Your R&D Payroll Tax Credit

The Research and Development payroll tax credit, also known as the R&D payroll tax credit is a tax incentive designed for qualified businesses to offset their payroll tax. It is designed for new companies that perform research and technology development activities to be able to apply up to $500,000 of research credit against payroll tax liability. These R&D credits can be carried forward for up to 20 years.

Which Businesses Qualify for the R&D Payroll Tax Credit?

In order to qualify for the tax credit, a business must meet each of the following criteria:

  • Have 5 years or less in revenue
  • Have less than $5 million in revenue in the current year
  • Have conducted qualifying research activities and expenditures
Documentation Needed to Claim the R&D Payroll Tax Credit

Documentation is extremely important to defending any R&D tax credit claims. This includes having a permitted purpose, technological uncertainty, the process of experimentation, and being technological in nature.

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IRS Form 8938 (Statement of Specified Foreign Financial Assets): Reporting Requirements Overview

IRS Form 8938: Reporting Requirements Overview

Living abroad brings its own set of adventures and challenges, especially when it comes to navigating U.S. tax obligations. If you’re an expat with a financial footprint across borders, you’ll need to familiarize yourself with IRS Form 8938, a key component of the Foreign Account Tax Compliance Act (FATCA).

WHAT IS FORM 8938?

Form 8938, titled “Statement of Specified Foreign Financial Assets” is a tax form required by the U.S. Internal Revenue Service (IRS) for taxpayers to report their specified foreign financial assets if the total value of those such foreign bank assets exceeds certain thresholds. It was introduced as part of the Foreign Account Tax Compliance Act (FATCA) to combat tax evasion and ensure U.S. persons are reporting their foreign income.

The form is filed along with the taxpayer’s annual income tax return, and the reporting thresholds vary depending on the taxpayer’s filing status and whether they live in the U.S. or abroad.

WHO NEEDS TO FILE IRS FORM 8938?

IRS Form 8938 must be filed by U.S. taxpayers (citizens, residents, and certain nonresidents) who have specified foreign financial assets exceeding certain thresholds. These thresholds depend on the taxpayer’s filing status and residency:

  • U.S. Residents:
    • Single or married filing separately: Assets over $50,000 on the last day of the tax year or over $75,000 at any time during the year.
    • Married filing jointly: Assets over $100,000 on the last day of the tax year or over $150,000 at any time during the year.
  • Non-U.S. Residents:
    • Single or married filing separately: Assets over $200,000 on the last day of the tax year or over $300,000 at any time during the year.
    • Married filing jointly: Assets over $400,000 on the last day of the tax year or over $600,000 at any time during the year.

    Even if the reporting thresholds are met, Form 8938 is only required if the taxpayer is required to file a U.S. tax return.

WHAT ARE FOREIGN FINANCIAL ASSETS?

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TITGA Reports On Status Of IRS Digital Asset Monitoring And Compliance

TITGA Reports On Status Of IRS Digital Asset Monitoring And Compliance

The Treasury Inspector General for Tax Administration (“TITGA”) recently has released a report on the status of efforts by the Internal Revenue Service (“IRS”) to develop the digital asset monitoring and compliance strategy mandated by Congress with the Inflation Reduction Act of 2022.

For purposes of federal taxation, a “digital asset” is defined as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.”[1] This includes non-fungible tokens and virtual currencies.

As part of the Infrastructure Investment and Jobs Act of 2021, Congress had amended sections 6045 and 6050I to require reports from digital asset brokers and from any person engaged in non-financial trades or business who receives more than $10,000 at least in part in digital assets.[2]

TITGA noted that the IRS has created the Digital Asset Advisory Committee (“DAAC”) in February 2022 to provide service-wide collaboration, planning, and information sharing with respect to digital assets. The DAAC has the following goals:

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