Planning around things that can have an impact on your tax burden needs to happen all year long, not just at tax filing time. In fact, we have found that our clients save the most when we have periodic conversations with them throughout the year. Many things that can have the greatest impact on your tax bill may be things you have never heard of. Two examples of this are the Research and Development (R&D) Tax Credit and Cost Segregation. Both can lead to significant tax savings, and many businesses may be eligible for one or both of these. Let’s take a look at them.
R&D Tax Credit
The name R&D Tax Credit is a bit misleading. A company does not need to be focused strictly on research and development to qualify, and the industries that are included in this program may surprise you. This credit provides a dollar-for-dollar reduction in a company’s tax bill. Here are a few examples of qualified expenses – and some of these may surprise you:
- Developing processes, patents, formulas, techniques, prototypes or software
- Improving or redesigning existing products
- Hiring scientists, designers or engineers that are engaged in qualified activities
- Devoting time and resources to creating (manufacturing or developing) new or innovative products
- Developing intellectual property
- Paying certain amounts for salaries, supplies, contract research and cloud hosting
This credit does not apply to all research and development, but the credit can be taken by companies that conduct research and development in technology, engineering, agriculture, recycling, manufacturing, life sciences, and even social sciences. There are other industries that may qualify as well.
As with anything related to the IRS and taxes, there are professionals with specific expertise in the qualification for this credit who can help you determine if you are eligible and for how much. We’d be happy to have a discussion if you think you may qualify.
Cost Segregation is a way to account for the cost of renovations and improvements to property. This method allows you to accelerate depreciation for improvements to the property and land. This requires a Cost Segregation Study, which is specifically designed to segment real estate costs into the categories of expenses that qualify for accelerated depreciation.
These improvement costs can be substantial, and in some cases you might be able to deduct as much as 30 – 35% of the purchase price of your building in the first year, so the deductions can result in significant tax savings. And the standard depreciation schedule still applies for costs that cannot be deducted on an accelerated basis. Cost Segregation Studies done by an advisor who has a deep understanding of the IRS tax code can save you tens of thousands of dollars in taxes. This is definitely one area for which the results are definitely reflective of the degree of expertise of the person completing the study.
If you recently purchased real estate for your business, or are planning to, reach out to us for a conversation about how much you could potentially save in taxes. It may even be enough to make that purchase feasible.