TAX+BUSINESS ALERT
News for your business and your life. | Hawkins Ash CPAs
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In this Edition
July 20, 2021
Reduce Your Tax Bill With the R&D Tax Credit
PODCAST: Research and Development Tax Credit, Part 1
10 Facts About the Pass-Through Deduction for Qualified Business Income
Are Scholarships Taxable?
A Tax Quirk of Being a Business Partner
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Reduce Your Tax Bill With the R&D Tax Credit |
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The Research and Development (R&D) Tax Credit remains one of the best opportunities for businesses to substantially reduce their tax liability. The R&D Tax Credit is for businesses of all sizes, and many companies are eligible, with an expansive list of activities qualifying for the credit. Many of the daily activities of companies from a wide-range of industries can qualify for federal and state tax savings high to enough to allow companies to hire new employees, invest in new products and service lines, and grow their operations.
What Is the R&D Tax Credit?
The R&D Tax Credit may be claimed by taxpaying businesses that develop, design or improve products, processes, formulas or software and is calculated based on the wages of the employees that are performing the qualifying work.
What Qualifies For the R&D Tax Credit?
If a company does any of the following, the business likely qualifies for the R&D Tax Credit:
- Develops or designs new products or processes
- Enhances existing products or processes
- Develops or improves upon existing prototypes and software
We've prepared an easy way for you to find out if your company could qualify for the R&D Tax Credit. Take our 3-minute, R&D survey.
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How Do I Claim the R&D Tax Credit?
A number of factors go into claiming the credit, but the potential savings make exploring the credit a worthy investment. The credit may be claimed for both current and prior tax years.
To claim the credit, the taxpayer must contemporaneously evaluate and document their research activities to establish the amount of qualified research expenses paid for each qualified research activity. While taxpayers may estimate some research expenses, they must have a factual basis for the assumptions used to create the estimates.
Examples of such documentation includes:
- Payroll records
- General ledger expense detail
- Project lists
- Project notes
- Other documents a company produces throughout the regular course of business
- These records combined with credible employee testimony can form the basis of a R&D Tax Credit claim
As seen above, what constitutes R&D with regard to the credit is much more expansive than many people realize, with activities related to applied sciences and other technical projects qualifying companies from numerous industries.
For additional information on either the credit or our approach in calculating the credit please contact us.
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Contact: Charles Wendlandt, CPA
Phone: 715.384.1986
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PODCAST
Research and Development Tax Credit, Part 1
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When people think of research and development, the first thing that comes to mind might be a person in a white coat in a laboratory. However, the IRS thinks of research in a different way, and through research and development, there is the potential to significantly reduce your company’s tax liability and maximize your bottom line. |
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10 Facts About the Pass-Through Deduction for Qualified Business Income |
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Are you eligible to take the deduction for qualified business income (QBI)? Here are 10 facts about this valuable tax break, referred to as the pass-through deduction, QBI deduction or Section 199A deduction. |
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1). It’s available to owners of sole proprietorships, single-member limited liability companies (LLCs), partnerships and S corporations. It may also be claimed by trusts and estates. |
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2). The deduction is intended to reduce the tax rate on QBI to a rate that’s closer to the corporate tax rate. It’s taken “below the line.” That means it reduces your taxable income but not your adjusted gross income. But it’s available regardless of whether you itemize deductions or take the standard deduction. |
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3). The deduction has two components: 20% of QBI from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate; and 20% of the taxpayer’s combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income. |
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4). QBI is the net amount of a taxpayer’s qualified items of income, gain, deduction and loss relating to any qualified trade or business. Items of income, gain, deduction and loss are qualified to the extent they’re effectively connected with the conduct of a trade or business in the U.S. and included in computing taxable income. |
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5). QBI doesn’t necessarily equal the net profit or loss from a business, even if it’s a qualified trade or business. In addition to the profit or loss from Schedule C, QBI must be adjusted by certain other gain or deduction items related to the business. |
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6). A qualified trade or business is any trade or business other than a specified service trade or business (SSTB). But an SSTB is treated as a qualified trade or business for taxpayers whose taxable income is under a threshold amount. |
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7). SSTBs include health, law, accounting, actuarial science, certain performing arts, consulting, athletics, financial services, brokerage services, investment, trading, dealing securities and any trade or business where the principal asset is the reputation or skill of its employees or owners. |
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8). There are limits based on W-2 wages. Inflation-adjusted threshold amounts also apply for purposes of applying the SSTB rules. For tax years beginning in 2021, the threshold amounts are $164,900 for singles and heads of household; $164,925 for married filing separately; and $329,800 for married filing jointly. |
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9). The limits phase in over a $50,000 range ($100,000 for a joint return). This means that the deduction reduces ratably, so that by the time you reach the top of the range ($214,900 for singles and heads of household; $214,925 for married filing separately; and $429,800 for married filing jointly) the deduction is zero for income from an SSTB. |
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10). For businesses conducted as a partnership or S corporation, the pass-through deduction is calculated at the partner or shareholder level. |
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As you can see, this substantial deduction is complex, especially if your taxable income exceeds the thresholds discussed above. Other rules apply. Contact us if you have questions about your situation. |
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Contact: Nicole Malueg, CPA
Phone: 920.684.2523
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Are Scholarships Taxable? |
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Are Scholarships Taxable?
Many young adults are heading off or back to college in the fall. It’s particularly exciting this year because of high hopes that, thanks to mass vaccinations, students will be able to have something approaching a traditional college experience.
If your child has been awarded a scholarship, that’s cause for celebration, too! But be aware that there may be tax implications.
Generally, but Not Always
Scholarships (and fellowships) are generally tax-free for students at elementary, middle and high schools, as well as those attending college, graduate school or accredited vocational schools. It doesn’t matter if the scholarship makes a direct payment to the individual or reduces tuition.
Subject to limited exceptions, however, a scholarship isn’t tax-free if the payments are linked to services that your child performs as a condition for receiving the award — even if the services are required of all degree candidates. Therefore, a stipend your child receives for required teaching, research or other services is taxable, even if the child uses the money for tuition or related expenses.
What if you, or a family member, is an employee of an education institution that provides reduced or free tuition? A reduction in tuition provided to you, your spouse or your dependents by the school at which you work isn’t included in your income or subject to tax.
Returns and Recordkeeping
If a scholarship is tax-free and your child has no other income, the award doesn’t have to be reported on a tax return. However, any portion of an award that’s taxable as payment for services is treated as wages. Estimated tax payments may have to be made if the payor doesn’t withhold enough tax.
Your child should receive a Form W-2, “Wage and Tax Statement,” showing the amount of these “wages” and the amount of tax withheld. Any portion of the award that’s taxable must be reported, even if no Form W-2 is received.
Basic Rules
These are just a few of the basic rules. Other rules and limitations may apply. For example, if your child’s scholarship is taxable, it may limit other higher education tax benefits to which you or your child are entitled. As we approach the new school year, best wishes for your child’s success. Please contact us if you wish to discuss this or any other tax matter.
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Author: Leslie Smith, CPA, CMA
Direct: 715.384.1977
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A Tax Quirk of Being a Business Partner |
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If you’re a partner in a business, you may have encountered a situation that gave you pause. In any given year, you may have been taxed on more partnership income than was distributed to you. The cause of this quirk of taxation lies in the way partnerships and partners are taxed.
Unlike regular corporations, partnerships aren’t subject to income tax. Instead, each partner is taxed on the partnership’s earnings — whether or not they’re distributed. Similarly, if a partnership has a loss, the loss is passed through to the partners. (However, various rules may prevent partners from currently using their share of a partnership’s loss to offset other income.)
While a partnership isn’t subject to income tax, it’s treated as a separate entity for purposes of determining its income, gains, losses, deductions and credits. This makes it possible to pass through to partners their share of these items.
A partnership must file an information return, which is IRS Form 1065, “U.S. Return of Partnership Income.” On this form, the partnership separately identifies income, deductions, credits and other items. This is so partners can properly treat items that are subject to limits or other rules that could affect their treatment at the partner level. Examples of such items include capital gains and losses, interest expense on investment debts, and charitable contributions. Each partner gets a Schedule K-1 showing his or her share of partnership items.
Basis and distribution rules ensure that partners aren’t taxed twice. A partner’s initial basis in his or her partnership interest (which varies depending on how the interest was acquired) is increased by his or her share of partnership taxable income. When that income is paid out to partners in cash, they aren’t taxed on the cash if they have sufficient basis. Instead, partners reduce their basis by the distribution amount. If a cash distribution exceeds a partner’s basis, then the excess is taxed to the partner as a gain (often, capital gain). Contact us to discuss
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Author: Lance Campbell, CPA
Direct: 507.252.6674
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More Resources from CPA-HQ |
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Traveling for Business Again? What Can You Deduct?
Under tax law, there are a number of rules for deducting the cost of your out-of-town business travel within the United States. These rules apply if the business conducted out of town reasonably requires an overnight stay.
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Employee Retention Credit Calculation Services
Any company with employees that was shut down or partially shut down due to COVID-19 or experienced a significant decrease in gross receipts from the prior year’s quarter qualifies.
Find out how much your company may qualify to receive through the Employee Retention Credit.
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PODCAST: Research and Development Tax Credit, Part 2
The R&D Tax Credit is one of the most substantial incentives under U.S. tax law, and many different types of businesses will qualify to be able to take the credit. In this episode, Charles examples some different aspects of the R&D tax credit including what is considered research by the IRS.
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