Tax Alert: Brief Summary for the Proposed Sec. 199A Regs

Today, Engineered Tax Services provides a quick summary of the 184 pages of regulations released by the IRS this week, more to follow…

  1. The term “trade or business” is the Sec. 162 definition. This excludes real estate, absent real estate professional status. But can group rental or intangible property with a trade or business if there is common control over both. This may be a problem for pure real estate investors. The Real Estate Round Table should have focused more on this–as we suggested.
  2. QBI is calculated for each trade or business and then netted. So if you have a profitable business and a loss business, you net those for computing QBI. If the net amount is a loss, then you have a QBI carry-forward to the next year.
  3. QBI is calculated for each trade or business and then netted. So if you have a profitable business and a loss business, you net those for computing QBI. If the net amount is a loss, then you have a QBI carry-forward to the next year.
  4. The 50% wage limitation is applied on a separate trade or business basis.
  5. The 199A deduction doesn’t reduce self-employment tax.
  6. Taxpayers paying temp agencies, etc. can use the wages paid by the temp agency in computing the 199A deduction.
  7. The “unadjusted basis” is the date the property is placed in service, so you can buy it on date 1 and hold it and not place in service until later at date 2, and the date 2 counts. Addresses the 1031 question for the replacement property, by using the excess value for the replacement property, not just the relinquished property. Also says that if you have improvements that are segregated out, those are treated as a separate property–so can do cost seg and not have to worry about missing the segregated property.
  8. The term “qualified property” means property used in the business during the year and held at the end of the year, so if you acquire it w/in 60 days of the end of the year and dispose of it w/in 120 days, it isn’t qualified property for 199A.
  9. A Sec. 481 adjustment, whether positive or negative, will be QBI if they arise post 1/1/18. So a Sec. 481 adjustment arising post this date can be QBI. This could be big for cost segs in the coming years. Need to read this one closer.
  10. Passive activity losses (and other suspended losses) are not treated as QBI until the year they are used up.
  11. You can aggregate or combine trades or businesses if the same ownership (majority ownership the same) and two of three factors (same products/services, share business elements, or dependent businesses).
  12. There is a de minimus rule for specified service trade or business where it is not an SSTB if less than $25m gross receipts in the year and less than 10% of gross receipts are attributable to SSTB services. E.g., optometrist that also owns an eyeglass business.
    Has definitions for specified service trade or business. Maybe planning opportunities with the definitions.
  13. There are anti-abuse rules for switching from an employee to a contractor.
  14. Multiple trusts, etc. anti-abuse rules.

Julio Gonzalez, Shares His Expertise for FORE Magazine

With tax reform, cost segregation is now more critical than ever.

National Tax Expert and CEO of Engineered Tax Services, Inc., Julio Gonzalez, shares his expertise on cost segregation and tax reform for the Family Office Real Estate Magazine.

For further insight into the article, click here

National Tax Reform Expert, Julio Gonzalez Advises Millennials

Julio Gonzalez, national tax reform expert, and CEO of Engineered Tax Services, Inc., has advice for businesses and individuals in high tax states like California, New York, and New Jersey. He appeared on BoldTV to discuss why people are leaving these states in record numbers and what lawmakers can do to stay competitive in the pro-business environment created by the Tax Cuts and Jobs Act.

According to Gonzalez, “numbers show that we’ve had 8,000 companies leave California over the last five years. These things are due to high taxes and high regulations. The tech and entertainment industries remain strong, but every other sector is leaving, and they’re going to states that have better regulations and lower taxes.”

His recommendation to young adults considering a career move is to evaluate both wages and the cost of living in an area when making a decision. “Savings is the key at any age. Live within your means. Be able to save, and put the savings into good investments. Living a life with less debt is the way to build a nest egg and take advantage of investment opportunities.”

Gonzalez suggested that state lawmakers want to find ways to be more competitive and think about how they tax individuals and companies in their states. He pointed to New York’s plan to make state and local taxes a charitable deduction so residents can still take advantage of the deduction that is now capped under the TCJA.

About Engineered Tax Services, Inc.

Engineered Tax Services, Inc. (ETS) is a licensed engineering firm that focuses on federal, state, and local tax benefits. Founder and CEO, Julio Gonzalez, is an expert in tax reform whose strong presence is helping define our current tax laws. Under Gonzalez’s guidance and true insight into how the industry is shaping, Engineered Tax Services is one of the largest, fastest growing, and most innovative engineering, energy, and specialty tax credit services firms in the country. Visit us at www.engineeredtaxs.wpengine.com.

The ADISA Due Diligence Forum Invites National Tax Reform Expert, Julio Gonzalez to Discuss the Benefits of Tax Reform for Family Offices

Representatives from more than 100 investment and financial services firms convened in New York for the ADISA Due Diligence Forum. One of the sessions at this year’s event featured National Tax Reform Expert, Founder, and CEO of Engineered Tax Services, Inc. and the Gonzalez Family Office, Julio Gonzalez to speak about the benefits of tax reform for family offices.

Representatives from more than 100 investment and financial services firms convened in New York for the ADISA Due Diligence Forum. One of the sessions at this year’s event featured National Tax Reform Expert, Founder, and CEO of Engineered Tax Services, Inc. and the Gonzalez Family Office, Julio Gonzalez to speak about the benefits of tax reform for family offices.

Gonzalez focused on the benefits of tax reform for family offices that want to diversify their investments through real estate. Changes to the tax code offer new opportunities to identify deductions that increase ROI and yield higher returns from real estate investments. By taking advantage of comprehensive tax studies—such as cost segregation—to minimize recapture and accelerate depreciation, these family offices can maximize wealth preservation.

Engineered Tax Services, Inc. (ETS) is a licensed engineering firm that focuses on federal, state, and local tax benefits. Founder and CEO, Julio Gonzalez, is an expert in tax reform whose strong presence is helping define our current tax laws. Under Gonzalez’s guidance and true insight into how the industry is shaping, Engineered Tax Services is one of the largest, fastest growing, and most innovative engineering, energy, and specialty tax credit services firm in the country. Visit us at www.engineeredtaxs.wpengine.com.

“Gonzalez focused on the benefits of tax reform for family offices that want to diversify their investments through real estate.”

Drilling For Tax Credits

R & D Tax Credits | Oil & Gas Industry

by David Mayer | National Director at Engineered Tax Services

Many activities within the oil and gas industry qualify for the R&D tax credit, and this significant tax incentive is often overlooked within the industry. The R&D tax credit was originally enacted as part of the Economic Recovery Tax Act of 1981. For a company to qualify for the credit, a company needed to discover something new to its industry or its particular field of science or engineering.

However, in December 2003, the IRS replaced the “Discovery Test” with a “Four-Part Test” to qualify for the credit. This change opened up the types of activities that are eligible for the credit and greatly enhanced this opportunity for the oil and gas industry.

The Four-Part Test

For a company to qualify for the R&D tax credit, it now needs to perform activities within the United States that meet the following “Four-Part Test” criteria.

First, the company needs to be trying to (these do not need to be successful endeavors) develop a new or improved “business component.” As defined in IRS regulations, the business components include a product, process, technique, invention, formula or software.

Second, the activity needs to be technological; in other words, it needs to involve the hard sciences, like engineering, physics, biology, computer science or chemistry.

Third, there needs to be some uncertainty at the onset when the company is trying to develop a new or improved business component. However, there only needs to be uncertainty regarding one of three things: can they do it, how would they do it, or the ultimate or appropriate design of what they are trying to develop.

And, finally, the company needs to be evaluating different alternatives when it is trying to develop the new or improved business component. Examples of this include systematic trial and error, modeling and simulation.

Qualifying Activities In Oil and Gas

Several activities within the oil and gas industry involve the development of new or improved products, processes or techniques that would qualify for the R&D tax credit. These include:

  • Improvements made to a drilling process and its design
  • Developing fracking techniques
  • Improving methods to refine or transport oil and gas more efficiently
  • Developing plug and abandonment solutions
  • Offshore structure design
  • Design of a plant, including considerations made to pollution control and safety
  • Wastewater solution design
  • Improvements made to wells and other field equipment

Costs That Qualify For The Credit

R&D expenditures used to calculate the R&D tax credit include the wages paid to employees for engaging in qualifying R&D activity within the US, including direct supervision and direct support of such activities. Also, up to 65% of outside contractor costs associated with qualifying R&D activities can count towards the credit calculation as well, as long as the contractors are based in the US.

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Outside Contractors

Very Meaningful Federal And State Tax Credit

The federal R&D tax credit typically comes out to about 5% to 7% of the above R&D spend. Most states have an R&D tax credit as well. Texas, for example, has a state R&D tax credit that comes out to about 2/3 of the federal credit and can be used to offset up to 50% of the Texas franchise taxes paid by a company each year.

The Benefit To Oil and Gas Companies

These dollar-for-dollar federal and state tax credits can significantly reduce the tax burden for oil and gas companies. In this very competitive industry, these tax savings can be used for further investments in technological advancements and also to finance additional projects and to hire more employees.

More On R & D Tax Credits

R & D Related Videos

Need More Information On R & D Tax Credits?

We offer free consultations on R & D Tax Credit qualification.

The United States R&D Tax Credit is Not Competitive Globally

The federal research and development better known as, the R & D tax credit offered within the United States is not competitive when compared to many of the other industrialized countries’ R & D tax incentives.

To illustrate, the net (i.e., dollar-for-dollar) US R & D tax credit is typically about 5% to 7% of a company’s R & D spend in the US per year. Contrast that with the R & D tax credit available in Canada, Mexico, Ireland, France, Italy, and Japan which range from 30% to 50% of the R & D spend in those respective countries.

Also, China, India, the UK, and Brazil offer a bonus “super deduction” that ranges from 100% to 225% of the R&D spend in those countries each year. Further, some countries, like Canada, offer a refundable R&D tax credit in certain situations, whereas the US does not.

Technology Changing The Game For R&D Tax Credit Globally

As technology advances and the globe continues to get smaller, US-based companies have more options with regards to where they conduct their R & D activities. All of the industrialized countries compete for businesses to relocate their manufacturing and R & D there, in large part, by providing generous tax rates, exemptions and incentives. Several US-based companies have moved some, or all, of their R & D operations overseas over the past few decades as a result. For example, Google, Pfizer, Boston Scientific, Facebook, Twitter and Johnson, and Johnson are just some of the US-based companies that have significant operations in Ireland due to its generous tax rates and incentives, including its R&D tax credit.

R&D Tax Credits Incentivizes Long-Term Economic Growth

Technological innovation and manufacturing are what grew our country to what it is today. R & D is the main catalyst for innovation and innovation is what drives long-term economic growth. Our R & D tax credit is meant to incentivize these activities and investments at home and, thereby, promote job creation and prosperity in the US. Congress should be looking to increase our R & D tax credit to make it more competitive globally.

For example, it should increase the Alternative Simplified Credit (ASC) from 14% to 20%, the same as the regular R & D tax credit. This increase was proposed in the Research and Experimentation Advances Competitiveness at Home (REACH) Act of 2016 by Congressman Tiberi (R-OH) and Congressman Larson (D-CT).

Instead, as part of the recently enacted Tax Cuts and Jobs Act (TCJA), beginning in 2022, Section 174 R&D costs that are used to calculate the R & D tax credit will need to be amortized over five years instead of being afforded immediate deduction. If kept in place, this rule change will significantly dampen our already weak R&D tax incentive on the global stage, beginning in 2022.

Considering The Effect

Congress should seriously consider the effect of this rule change on future R & D investment in the US and revert to existing law which allows for the current deduction of all Section 174 costs.

In addition, Congress should embrace proposals such as the bi-partisan REACH Act, which will strengthen our R & D tax credit in this ever increasingly competitive global environment.

Software Enabling Companies to Interact with Third-Parties… An R&D Tax Credit Hidden Gem

People don’t typically think of research and development when they think of banks, retailers, brokers, insurance companies, hedge funds, and financial service companies. However, many of these companies have large IT departments that are developing software for their own operations. That development can qualify for a very significant tax incentive – the Research and Development (R&D) Tax Credit.

SOFTWARE ENABLING COMPANIES TO INTERACT WITH THIRD-PARTIES… AN R&D TAX CREDIT HIDDEN GEM

The development of software by or for a company that is deemed to be for “internal use” will qualify for the R&D tax credit only if the software is considered innovative. Examples of internal use software include software that is developed for a company’s financial management, human resources, or support services. It can be difficult for most software developed for these purposes to meet the high threshold of innovation test in order to qualify for the credit. It would need to be software that is not otherwise commercially available, for example.

However, there are two typical situations when the software developed for a company would not need to be considered innovative in order to qualify for the R&D tax credit. First, when the software is developed to facilitate the viability of business interactions with third parties, such as executing banking transactions or tracking deliveries. And, second, when the software is developed to function as a software portal that enables third parties to execute actions on its software system (think of a functional website or an app on your phone). Since these types of software do not need to meet the innovation test (although, some likely would in any event), their development would very likely qualify for the R&D tax credit.

Examples of Such Software

  • Mobile Banks

Mobile technology has opened banking institutions to this new trend. Branchless banks and mobile banking services are gaining space. They all charge minimal fees and offer simplified solutions for payments. The mobile bank is designed for on-the-go-users, and is designed to provide many of the features of traditional banking via smartphones at a low cost.

  • Mobile Payments (P2P)

Apps like PayPal and Venmo, for example, allow users to exchange payments with people in their social circles via a smartphone. With just the link of a bankcard transactions can happen overnight.

  • Business Apps for Finance and Accounting

These apps help to streamline financial tasks, including payroll and taxes, for businesses. They can also give business owners a better picture of their company’s financial health.

  • Mobile Imaging Technology

Depositing checks is an appealing function of mobile banking. Instead of going all the way to a bank branch or an ATM, customers can easily deposit their checks by simply snapping a photo of it. This feature has also expanded to mobile photo bill pay, which can be used with banks, financial institutions, and insurance agencies. Through just the snap of a picture, customers can add billing information to their accounts.

  • Fully Functional and Engaging Websites

Music Websites

Many music sites offer a great service that challenges the user’s understanding through a creative blend of videos and animation. These websites have tools that are very engaging for the user.

Retail Websites

Many retail websites have adopted the trend of using compelling visuals of their products. Users interact with simple, color-based backgrounds that are accompanied by strong typography help to keep the focus on exactly what the user came there to see.

Design Websites

Designers take advantage of a fully engaging website experience for their viewers by showcasing their portfolios with strong photography and animations.

For a consultation or to learn more about how the R&D tax credit may be applicable to your business, please reach out to David Mayer, CPA and National Director of Engineered Tax Services, directly at dmayer@engineeredtaxservices.com. You can also learn more about how internal use software qualifies for the R&D tax credit in David’s latest video: https://bit.ly/Tax-Credit-Opportunity or on EngineeredTaxServices.com.

Helping CPAs Build Additional Revenue Stream Through Our Specialty Tax Services

Helping CPAs Build Additional Revenue Stream Through Our Specialty Tax Services