1. Formulating a Better Bottom Line With The R&D Tax Credit
13th Annual Worthington Bio Conference
Scott Schmidt
April 7th, 2017
The R&D Tax Credit | April 7, 2017

2. Agenda What is the Credit What’s New with the Rules
Potential for Bio and Life Science Companies
Qualifying Activities & Expenditures
The Four Part Test
Documentation
Using a Pro
The R&D Tax Credit | April 7, 2017

3. What is the Credit? Federal and State Credits Available
The R&D Tax Credit | April 7, 2017

4. What is the Federal R&D Tax Credit?
A tax incentive provided by the U.S. government to encourage businesses to invest in activities within the U.S. that will provide for product and process improvements and/or the introduction of new products or processes
Applicable to C-Corps, S-Corps, LLCs, Partnerships, Sole Proprietorships and Joint Ventures
The R&D Tax Credit | April 7, 2017

5. Minnesota State R&D Tax Credit
First state in the country to have an R&D Tax Credit
The amount of the credit is equal to 10 percent of qualifying expenses up to $2 million, and 2.5 percent for expenses above that level.
R&D expenses that qualify for the federal R&D credit and are for research done in Minnesota over a base amount
Follows the federal R&D credit, but based on Minnesota gross receipts
The R&D Tax Credit | April 7, 2017

6. Minnesota State R&D Tax Credit
The current proposal:
Makes the credit refundable up to $100K on the first tier
Increases the credit rate from 2.5 percent to 4 percent on the second tier.
Creates a simplified calculation
The R&D Tax Credit | April 7, 2017

7. Rule Changes New Legislation Impacts Eligibility
The R&D Tax Credit | April 7, 2017

8. New Legislation Protecting Americans from Tax Hikes Act of 2015 (PATH)
R&D Tax Credit is now permanent
Eligible Small Businesses may claim the credit against the Alternative Minimum Tax (AMT)
Average sales of less than $50 million over the prior three tax years
For tax years beginning after December 31, 2015
Can amend for 2016 if did not claim timely!
Certain Start-Up Companies may apply credits against the employer’s FICA Payroll Tax liabilities
Current year sales of less than $5 million  
The credit may not exceed $250,000 per year
Can’t claim for more than 5 years
Cannot have gross receipts for more than 5 years (Tax Year 2016: No gross receipts in 2011 or earlier years)
The R&D Tax Credit | April 7, 2017

9. Tax Credit Potential What can Biotech & Life Science Companies Expect?
The R&D Tax Credit | April 7, 2017

10. Tax Deduction & Tax Credit
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Deduction
Income on which you do not pay tax.
Credit
Dollar for dollar reduction in the amount of taxes paid.
You May Qualify for Both
The R&D Tax Credit | April 7, 2017

11. An opportunity for the asking
Roughly $9+ billion in R&D Tax Credits are claimed by businesses each year
The R&D Tax Credit | April 7, 2017

12. What Qualifies? Qualifying Activities and Expenditures
The R&D Tax Credit | April 7, 2017

13. Qualifying Expenditures
R&D spending includes:
Internal labor- (Box 1/W2 - salaries, wages, bonus)
Directly performing research
Directly supervising of research
Directly supporting of research
Supply costs (lab supplies, prototype costs, etc.)
External labor (contractor payments) if:
Payment is based upon T&M
Rights are retained
The R&D Tax Credit | April 7, 2017

14. Examples of Qualifying Activities
Discovery and development of new methods for drug delivery
Development of biosimilars relating to advanced biologics, assays and testing protocols
Development of new therapeutic drugs, compounds, or molecules used in synthesis experiments
Designing and developing medical device equipment used for treating various diseases
Manufacturing experimental qualification lots and clinical trial lots
Multi-application approach to synthetic microbe
Developing biofuels from plant waste
Development of bioremediation techniques
Developing fuel and feed from plant biomass
The R&D Tax Credit | April 7, 2017

15. Four Part Test How to Determine Eligibility
The R&D Tax Credit | April 7, 2017

16. 4 Part Test: Does Your Work Qualify?
Any new OR improved product, formula, process or software development initiative may qualify for R&D tax credit qualification
Activities must pass a simple four part test
Non-intuitive examples??
In general, activities are eligible for the R&D tax credit if they are:
Being conducted for a permitted purpose (i.e. improved quality, reliability, functionality or cost reduction),
Intended to resolve technological uncertainties through a process of experimentation,
Using a permitted science (i.e. any of the engineering sciences, chemistry, biology, or computer science)
The R&D Tax Credit | April 7, 2017

17. 4 Part Test: Does Your Work Qualify?
To qualify as an R&D activity, the activity must:
Be intended for the development or improvement of business components
Eliminate uncertainty
Use a process of experimentation
Be technological in nature
Non-intuitive examples??
In general, activities are eligible for the R&D tax credit if they are:
Being conducted for a permitted purpose (i.e. improved quality, reliability, functionality or cost reduction),
Intended to resolve technological uncertainties through a process of experimentation,
Using a permitted science (i.e. any of the engineering sciences, chemistry, biology, or computer science)
The R&D Tax Credit | April 7, 2017

18. Test #1: Does Your Work Qualify?
The development or improvement of business components
A business component is any:
Product
Process
Technique
Formula
Invention
Software Application
The R&D Tax Credit | April 7, 2017

19. Test #2: Does Your Work Qualify?
Must have uncertainty:
Information sought must be intended to eliminate uncertainty
Uncertainty exists if, at the outset, the available information does not establish the taxpayer’s:
Capability of developing or improving the business component,
Method of developing or improving the business component, OR
Appropriate design of the business component
The R&D Tax Credit | April 7, 2017

20. Test #3: Does Your Work Qualify?
Process of experimentation:
Experimentation is the evaluation of multiple alternatives, including developing and testing hypotheses, modeling, simulation, and systematic trial and error
Research must substantially relate to new or improved function, performance, reliability, or quality
Experimentation goes beyond the “lab” – It includes both conference room and shop floor experimentation time
Failures Count!!!
The R&D Tax Credit | April 7, 2017

21. Test #4: Does Your Work Qualify?
Technological Criteria:
Process of Experimentation must fundamentally rely on principles of science including:
Physical
Biological
Engineering
Chemical
Computer sciences
The R&D Tax Credit | April 7, 2017

22. Case Study
Client: A leader in biologics manufacturing and process development R&D: R&D activities included: testing & assay validation, validation studies, forensics research, drug development, stability study testing & management Sales: $7.5 Million Credit: $85,000+ Federal & MN State Credits
The R&D Tax Credit | April 7, 2017

23. Documentation What and How to Document
The R&D Tax Credit | April 7, 2017

24. Documentation What to Document:
Track supply costs by project for expenses which are used during the development process
Document the development process, not just the end result (i.e. failures)
Establish nexus between QREs and QRAs
Gather contemporaneous documentation that supports research efforts
The R&D Tax Credit | April 7, 2017

25. Examples of Documentation
Time tracking & Project Tracking
Product or Project Specifications, Descriptions, or Proposals
Test Reports and Laboratory Results
Documentation of alternative supplies/materials/technology evaluated
Patent Applications or Abstracts
Contracts with Consultants and Customers
And more!
The R&D Tax Credit | April 7, 2017

26. We Can Help Benefits of Working with a Professional
The R&D Tax Credit | April 7, 2017

27. Getting the Credit You Truly Deserve
Accurate and Defendable R&D Tax Credit
Study Approach
A process that is led by someone experienced in this area of tax and up to date on current rules
Implements a methodology that is consistent and addresses all requirements of the code
Calculates the credit amount (Form 6765)
Creates documentation to support the credits claimed
Partners with your CPA firm to ensure an accurate claim and usability of the credits
The R&D Tax Credit | April 7, 2017

28. Next Steps
If not yet filed, evaluate the R&D Tax Credit opportunity for the current tax year
Evaluate whether it makes sense to go back to prior years
Can meaningful tax credits be used or carried forward?
Can the claim be adequately documented?
Raise awareness and put in place a process to make utilizing the R&D Tax Credit turn-key
The R&D Tax Credit | April 7, 2017

29. Thank You
Don’t hesitate to contact us after the presentation with any additional questions
Scott Schmidt
The R&D Tax Credit | April 7, 2017