1. Tax Year 2016 Section 41 Research & Experimentation Tax Credits Presented By: Mike D’Alessandro, MBA Green Outsourcing, PA

2. Who qualifies for these Tax Credits? The tax definition of R&E and the scientific definition of R&E can be polar opposites. Any company that makes things Any company that designs things Any company that improves things Any company that invests in the previous EXAMPLES include…

3. History of the Federal R&E Tax Credit Economic Recovery Act of 1981 Expired 9 times and Extended 15 times Made permanent as of 2016 American Jobs Creation Act of 2003 (2004) Summary of H.R.2896 - 108th Congress – Old Rules – New Rules: 4 Part test

4. History of the Pennsylvania R&D What is the PA Research and Development (R&D)Tax Credit? An R&D tax credit is available for qualified research performed in PA with $55M available annually Also the program has been extended to taxable years ending before January 1, 2016. The credit may be applied against the corporate net income tax, capital stock and franchise tax, personal income tax or any combination thereof, but may not exceed 50% of such qualified tax liability for tax years 2004 and earlier. The limitation for years 2005 and forward was eliminated. Unused credits may be carried forward fifteen taxable years. The application is due by September 15, of the year of the application. To be received timely, it must be post marked by that date or in our hands by that date. No extensions are allowed. Taxpayers can apply to the Department of Community and Economic Development to sell or assign an unused credit. The purchaser or assignee must use the credit in the taxable year in which the purchase or assignment is made and the credit cannot exceed 75 percent of the tax liability for the taxable year. The purchaser may not carry credits forward or back or obtain a refund of any unused credit. This change applies to credits awarded in December 2003. The Department of Revenue will be required to report to the General Assembly the names of all taxpayers using the credit for credits awarded in December 2004 and after.

5. 2016 R&E Tax Credit Overview Key expansions to the Federal R&E Tax Credit will begin January 1, 2016: Removal of the Alternative Minimum Tax Limitation New Regulations for Start Up Companies The Credit was increased 30%

6. Removal of the AMT Limitation Businesses with less than $50 million in gross receipts will now be able to claim the credit against their Alternative Minimum Tax (AMT), thereby removing the single greatest barrier preventing companies from claiming the credit in the past.

7. New Regulations For Start Ups The bill includes a provision that opens the credit up for start-ups, allowing businesses with gross receipts of less than $5 million a year to take the credit against their payroll taxes (capped at up to $250,000 per year) for up to five years.

8. R&E Credit Increased 30% The Alternative Simplified Credit (ASC) method multiplier was increased 30%. Effective tax year 2016, the ASC Calculation Method for the Section 41 R&E tax credit will increase from 14% to 20% on qualified research expenditures ASC vs. Regular Credit Calculations

9. What is the opportunity? Obama Signs $1.8 Trillion Tax And Spending Bill Into Law President Obama signs the budget bill in the Oval Office on Friday December 18 th President Obama has signed a $1.1 trillion funding bill that will keep the federal government running until Sept. 30, 2016. Earlier on Friday, the Senate gave final congressional approval to the bill, which includes nearly $700 billion in tax breaks. The Senate adopted the Omnibus Appropriations Act by a vote of 65-33; the House did so by a 316-113 tally.

10. What is the cost? COST OF SELECTED EXTENDERS OVER 10 YEARS Research Tax Credit$113.24 B State And Local Sales Tax Deduction $ 42.44 B Section 179 Expensing $ 77.01 B Refundable Child Credit $ 87.80 B Bonus Depreciation $ 28.20 B Subpart F Exception $ 78.00 B Mortgage Debt Forgiveness $ 5.14 B Tuition And Fees Deduction $ 608 M

11. What does this mean to you? The US tax code is over 74,000 pages Opportunity to introduce a tax planning strategies to Clients Creates value added ideas and service offerings Increases Client relational capital Viewed as a resource Helps the Client and creates a “Triple Win”

12. What does this mean to the Client? For “S-corporations” and LLCs – The R&D Tax Credit is a “flow-through” credit used to offset the personal tax liabilities of the shareholders Form 6765 1065-B (Sched. K1) Shareholder’s 1040

13. How does this work? Calculate the most current years of R&E/R&D Rolling 3 year average for Federal R&E Rolling 4 year average for Pennsylvania R&D You are permitted to make calculated estimates Reasonable Allocation of Wages Some documentation is required

14. Section 41 Framework 4 Part Test – Technological in Nature – Uncertainty – Process of Experimentation – Permitted Purpose

15. Employee Timesheets Weekly, Monthly or Quarterly Tracking Projects and making time estimates Three types of qualified R&E/R&D – Product related activities – Process related activities – Technical Support, Administration & Supervision related activities

16. Project Eligibility Worksheets A Sample of Annual Qualified Projects – These projects will demonstrate how the company qualified by proving the 4 Part Test requirement Technological in Nature Uncertainty Process of Experimentation Permitted Purpose

17. What Expenses Qualify? Qualified Research Expenses: – Box 1 W2 Taxable Wages including Owners – Supplies and Materials Consumed in R&E/R&D Must be consumed in R&E/R&D and accurately tracked – 3 rd Party Contractor Expenses Subject to a 65% limit of total 3 rd Party Expenses

18. Product Development Cycle Ideation Phase: Customer, RFP, RFQ Interaction Phase: Sales, Mgmt, Proposal Development Phase: Engineering & Design Option Phase: Tooling, Mfg, QA/QC, Prototype Proposal Phase: Win or Lose the opportunity Commercial Production

19. Types of qualifying activities Classic R&E: results from a deliberate decision to develop a new or improved product Contingent R&E: results from a deliberate bid on an order whose specifications are beyond capabilities Unplanned R&E: discovery that you cannot accomplish something with the present capabilities

20. When does this make sense? When a Client has made an investment in… – Product – Process – Technology – New Line of Business When you believe that qualified dollars the client has invested could be over $50,000 Facility upgrades and improvements are a good indicator of qualified investments

21. How does this work? By working with trusted advisors or being referred into an opportunity. Phase 1 Analysis: – Education – Identification – Qualification – Quantification

22. What does this mean to the client? Federal Research & Experimentation tax credits in 2015 will net 6.5% – In 2016 it will net 10% $50,000 in qualified expenses = $3,750 of credits in 2015 $50,000 in qualified expenses = $5,000 of credits in 2016 Pennsylvania Research & Experimentation tax credits in 2015 will net 10% for small businesses – In 2015 it will net 10% $50,000 in qualified expenses = $5,000 state credit

23. Where do you start? Reaching out to a subject matter expert Conversation with the Client Conduct an introductory meeting Decide to move forward or not with Phase 1 Complete Phase 1 Deliver Phase 1 to the CPA Review the ROI Make the decision to complete the engagement

24. Questions ???

25. For More Information: Contact: Mike D’Alessandro, MBA Director of Specialty Tax Green Outsourcing, PA 1275 Glenlivet Drive Suite 100 Allentown, PA 18106 Office: 484-232-1076 Mobile: 610-730-6302 miked@greenoutsourcing.com