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Federal and state R&D tax credits are ripe for the filing

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Changes with taxes, including property, sales and use taxes, are here, and chief financial officers and business owners should be aware of them.

If applicable, they also should contact their tax adviser or another expert. (Frankly, if you are learning about these for the first time, your tax expert is not expert enough.)

In addition, taxes are complicated, and sometimes you need a second opinion.

A look at some of the changes for 2017:

¦ Bonus depreciation has been enacted for new construction, renovation and leasehold improvements.

All qualified building assets with class lives of 20 or fewer years qualify for 50 percent bonus depreciation. The bonus depreciation of 50 percent applies for tax years 2016 and 2017, reducing to 40 percent in 2018 and 30 percent in 2019. This applies to new construction, acquired properties being renovated and remodeled and leasehold improvements.

¦ Research and development tax credit.

First, you need to understand the expanded definition of qualified research and the expenses that qualify for the tax credit.

If you are designing a product or process or providing a service that involves a technology or science and take on commercial risk for rework or failure, then it is likely a tax credit may apply. This applies to many companies involved in design, build and manufacturing in the fields of engineering, architecture, software, technology, food sciences, agriculture and even construction.

If your tax adviser has not already covered this with you, perhaps it was because of an alternative minimum tax restriction or because it was a temporary credit that got extended by the Internal Revenue Service – an issue that complicated tax planning for many businesses. It also may be because your tax adviser is not experienced in this complex credit.

Pennsylvania has a tax credit similar to the federal credit. (Many states do, but different rules apply.)

¦ Key changes in the R&D tax credit include:

? It is now permanent. It used to be temporary and that inhibited multiyear tax planning.

? Businesses with revenues under $50 million no longer have an alternative minimum tax restriction. This is significant for many owners and shareholders, as it removes the single largest barrier for small-business owners to take advantage of research and development.

? Startups with revenue less than $5 million can now use up to $250,000 of the credit to offset payroll taxes for up to five years. This is very significant for firms in pre-revenue or net operating loss status. Firms in Greater Lehigh Valley incubators should be aware of this opportunity.

¦

There are $55 million available in sellable or transferrable Pennsylvania R&D tax credits. This information is publicly available (but almost impossible to find).

Most software, technology, life science, design-build, manufacturing and engineering firms, as well as startup firms, are not applying for the Pennsylvania R&D tax credits for which they are eligible. This is a real concern because the state R&D credit can create real cash at 85 percent of face value on an annual basis.

Gary Bender is executive vice president of Survey, Inspection, Services and Design Inc. and founder of Manufacturers Advantage and The CFO Solution, Quakertown. A founding board member of The CFO Alliance, which has 6,200 financial executives as members, he also shares his expertise at a monthly CFO forum held by the Manufacturers Resource Center of Hanover Township, Lehigh County. He can be reached at gbender@thecfosolution.org or at 215-421-8291. For information on the CFO forum, call 610-628-4640.

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