I Owe Business Taxes….Now What?
posted Mar 20, 2017 by Robert D’Andrea in the Global Tax Blog
Claiming a federal and or state research and development (R&D) tax credit can significantly lower your tax liabilities. But what if you find that you cannot claim the credit? This is where a cost segregation study may be able to help. Who knows, you may be a candidate for both!
R&D tax credit
The R&D tax credit is a government-sponsored program that offers tax incentives by reducing the cash outlay on taxes for businesses conducting R&D in the U.S. The main point of the credit is to encourage businesses of all sizes to conduct their R&D activities here in the U.S.
Many are unaware that their day-to-day business activities may qualify them for the credit. The R&D tax credit program, is after all, intended as an incentive for businesses of all sizes, not just major corporations with dedicated research labs.
Cost segregation study
Commercial property that you build or purchase typically depreciates over 39 years (27.5 years for commercial residential properties).
Here again, many taxpayers are unaware that they are allowed to break the property down into its smaller components and reclassify the components into their proper asset classifications. Different asset classifications have different lives over which they can be depreciated. A cost segregation study accomplishes this reclassification. The reclassified components then have shorter depreciation lives as a result.
This reclassification of your assets out of the 39 year (or 27.5) category to another which provides shorter depreciable lives (i.e., 5, 7 or 15 years), will generate more depreciation expense in the short term. This allows you to defer your cash outlay for taxes into the future.
So, who might qualify?
R&D: If your business is typically involved in the following you may qualify for the R&D tax credit.
- Activities that are geared towards the Elimination of Uncertainty
- Activities which a Process of Experimentation
- Activities that are Technological in Nature
- Activities that meet the Qualified Purpose Test (Otherwise known as The Business Component Test). This test requires that your activities are intended to create a “new” product or improve an existing product or process required to make a product. Here the definition of “new” simply means new to your business.
Cost Seg: If you find that you do not qualify for the R&D tax credit (e.g., you failed one or more of the above four-part test), you may still be able to benefit from a cost segregation study. Who knows, you may be able to benefit from both of these tax reduction strategies. Any type of commercial property placed in service after December 31, 1986 may qualify for a cost segregation study. The easiest time to perform a study is right before or right after the property is first placed in service. HOWEVER, you can still benefit greatly even years after putting the property in service!
If you have significantly improved your property, are building or purchasing a new property, (or have in the past), a cost segregation study may provide a substantial reduction in your current tax liability.
Think about how these two incentives could help you keep more cash in your business. It is imperative that you plan ahead in order to take advantage. The deadline for filing your tax returns and paying any tax due is fast approaching.
Questions? Contact us.