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The Tax Credit that Most CPAs Never Mention

The Tax Credit that Most CPAs Never Mention

I knew he had been overpaying

When I first met one of my clients, a software developer, he was complaining about how much income tax he had been paying. But since the person who had been preparing his taxes wasn’t “just” a CPA—she was a Director on the California Board of Accountancy, the group that basically ensures CPAs know what they’re doing—he assumed his tax returns were accurate, and that he would not be eligible for a tax credit.

I took one look at his tax returns and immediately knew he had been overpaying. Why? Because, like so many other CPAs, his former tax preparer hadn’t told him about the Research & Development (R&D) Tax Credit.

What is the R&D Tax Credit?

The R&D Tax Credit is a complex tax incentive designed to encourage development in just about every industry. Instead of simply deducting your R&D costs as business expenses, this program gives you a tax credit equal to 10 to 20% of your eligible R&D costs. Both California and the Federal government have programs, and if your business uses technology in some way to develop, design or improve something, you can usually qualify for both.

As far as I’m concerned, the R&D Tax Credit is one of the best tax credits out there. Why? Because it gets my clients back the most money for things they’re already doing. Plus, for new clients I can usually go back three to four years, amend their tax returns, and make them feel like they hit the jackpot in Vegas.

Why doesn’t every CPA mention the R&D Tax Credit?

Determining exactly what expenses qualify for the R&D Tax Credit, and ensuring you have enough proof to stand up to an audit, is actually quite complicated. Other CPAs shy away because they know that if an incorrect tax return is filed based on the opinion that they gave as a CPA, they can be the ones on the hook for the penalties.

In contrast, we’re experts in this area, and feel confident in our abilities to properly classify and document qualifying R&D expenses for our clients. Our firm has represented multiple high profile cases in R&D tax credits and other government incentive programs for over 10 years.

What makes the R&D Tax Credit so complicated?

There are actually four elements that can get tricky:

  1. Ensuring you meet the definition of what constitutes R&D – There are three tests that must be met in this area. You need to understand these.
  2. Quantifying which costs qualify – The R&D costs must have been incurred by someone who was on your payroll, and then only the time spent developing and testing your hypothesis and results count. Breaking this out and quantifying/qualifying everything can be challenging.
  3. Documenting your qualifying costs – Although documentation isn’t required when you submit your tax return, documenting things is obviously the smart thing to do. We create a unique study that takes all of the information behind the tax credits we’re claiming and packages it up in a way that’s highly likely to stand up to an audit.
  4. Determining which calculation method to use – There are three different methods of calculating the tax credit itself, and they’re all complicated. You need to work with a CPA who understands these three methods, and knows which to use in any given situation.

Want to learn more about the R&D tax credit? Let’s talk!

Hiring? Don’t Miss Out on This Incredible Tax Credit

Hiring? Don’t Miss Out on This Incredible Tax Credit

Hiring? Don’t Miss Out on This Incredible Hiring Tax Credit

Between recruiting, interviewing and training, bringing on a new employee certainly isn’t free. Wouldn’t it be great to have the government chip in to offset these costs (and more)? The reality is, there’s a good chance the government would be happy to do so, through this hiring tax credit!

California wants your business to grow and prosper…so much so that the state is willing to give you fairly substantial tax credits for every person you hire. The only real catch is that you have to go through the application process.

Introducing the California Competes Tax Credit (CCTC)

The California Competes Tax Credit is a little-known program that’s been around for a few years. Every business in California is potentially eligible for this program, which provides an average of $10,000 to $30,000 in tax credits for each employee hired. These are actual tax credits—not just tax deductions—that can be carried forward for up to six years.

How much can your business receive? This depends on a few factors, including how many employees you hire. I recently got one of my clients, a hardware store, around $250,000. On average I’ve helped other business owners get anywhere from $10,000 to $150,000.

Got a startup that’s currently in high growth / zero profit mode? This tax credit is for you, too. You can get the credits now while you’re expanding, and then “bank” them to use to slash your taxes later once your business is profitable.

The application process

So what do you have to do to get this money? The application process involves filling out paperwork and creating a proposal and submitting it to GO-Biz (the Governor’s Office of Business and Economic Development). The nice folks at GO-Biz then take a close look at your application, all with an eye towards the anticipated economic impact that your hiring will have.

If your application is accepted, GO-Biz will tell you how much money in tax credits they will give you per new hire.

Of course, you must actually hire the employees

California created this program to incentivize desired behavior. To root out fraud, at the end of the year GO-Biz will do a review to ensure you’re in compliance with your contract. If you don’t follow through with the hiring plans outlined in your proposal, your tax credit is reduced accordingly.

The bottom line

Because we’re seeing real value in this, applying for the California Competes Tax Credit is one of the many services that we offer for our clients. There’s really no excuse not to apply!