Technical Tax Incentives

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Please click on one of the following technical tax incentive to get more information on that program.

US Research
and Development Tax Credit (R&D)
Canadian Research
and Development Tax Credit (Can R&D)
Interest Charge – Domestic International Sales Corporation (IC-DISC) Cost Segregation Domestic Production Activities Deduction (DPAD) Start Up R&D Tax Credit
About the Program

The Research and Development Tax Credit, IRC Section 41, was created by Congress as part of the Economic Recovery Tax Act of 1981 to encourage the American industry to invest in research and development activities including but not limited to design, development, engineering, experimentation, trial and error, process improvement, software development and improvement, quality assurance and more. This wage based credit is intended to stimulate R&D activities among businesses through tax incentives.

IC-DISC is the last remaining export incentive available to U.S. exporters. It has been around in its current form since 1984, but did not become popular until the Jobs and Growth Tax Relief Reconciliation Act of 2003 lowered the capital gains tax rate making it much more attractive for exporters.
It is a domestic ‘paper’ entity that does not require employees, offices, or tangible assets. To be a qualified IC-DISC, a corporation must be organized under the laws of a State or the District of Columbia. The company elects to be treated as an IC-DISC and is governed under Internal Revenue Code §§991-997.

Cost Segregation is an engineering-based analysis of the components of a commercial property with the goal of identifying and segregating personal property from real property. The reclassification to personal property assets results in shorter depreciation lives for those assets and the tax benefits of accelerated depreciation and reduced tax liabilities.

The Domestic Production Activities Deduction (DPAD) also called the “domestic manufacturing deduction” or “U.S. production activities deduction.” DPAD was passed into law as part of the American Jobs Creation Act of 2004 (PL 108-357) effective for tax years beginning after 2004.

The Canadian Scientific Research and Experimental Development Tax Credit Program provides more than $3 billion in tax incentives to over 20,000 claimants annually, making it the single largest federal program that supports business research and development (R&D) in Canada. The program is administered by the Canada Revenue Agency (CRA) to encourage industry to invest in research and development activities including but not limited to design, development, engineering, experimentation, trial and error, process improvement, software development and improvement, quality assurance and more.

As part of the Protecting Americans Against Tax Hikes (PATH) Act, Start Up companies are now able to utilize the Research and Development (R&D) Tax Credit. The Research and Development Tax Credit was created by Congress to encourage American industry to invest in research and development activities including but not limited to the design, development, engineering, experimentation, trial and error, process improvement, software development and improvement, quality assurance and more.

Who qualifies

Anytime that you make changes to the design or development process to make it cheaper, greener, cleaner, better, and quicker, you could be earning tax credits. This tax credit can be applied to both new product development as well as the production side of manufacturing and software development. These dollar for dollar credits can make a positive impact on your bottom line. Ideal industries include, but are not limited to, manufacturing, fabrication, machine job shops, engineering, software, biotechnology and more

The different entity types that can use the IC-DISC include flow-through entities (S-Corps, partnerships, LLCs, etc.) and closely-held C-Corps. It’s important to note that you do not have to be the manufacturer of any products to take advantage of IC-DISC – you qualify if you export domestically produced products. Ideal industries include, but are not limited to, manufacturing, distributors, software, engineering/Architectural firms working on buildings/structures in foreign locations and more. IC-DISC is only viable and valuable to the shareholders if the following criteria apply: Minimum annual gross export revenues of $2,000,000 (direct or indirectly), Minimum annual net export revenues of $500,000 (direct or indirectly), and Significant tax liability on current or projected revenues.

Candidates for Cost Segregation include New construction, Look back, New acquisition (Purchase Price Allocations) and Leasehold improvements. Commercial property that is valued at a minimum of $1,500,000 (excluding land value) or a commercial property with leasehold improvements greater than $750,000 have enough potential benefits to warrant a study. Following types of Commercial Properties Qualify: Assisted living, Apartment buildings, Automobile dealerships, Bank/Financial institution, Fitness/Health clubs, Golf/Resorts heavy, Manufacturing/Processing, Hospital/Medical office buildings, Hotels and Motels, Office buildings, Restaurants, Self-Storage facilities, Strip or Regional malls, Tenant improvements warehouses and more

All businesses engaged in domestic manufacturing and production activities qualify for IRC § 199 Domestic Production Activities Deduction benefit. Traditional manufacturers qualify but the rules have broadened the traditional definition of manufacturing to also include companies such as Qualifying production property which was manufactured, produced, grown, or extracted by the taxpayer in whole or in significant part within the United States, Construction firms for construction performed in the United States, Engineering and architectural firms for services performed in the United States for construction projects in the United States, and Electricity, natural gas, and potable water producers for U.S. production. Profitable companies participating in these industries may be entitled to the generous tax and cash benefits provided by this incentive.

Anytime that you make changes to the design or development process to make it cheaper, greener, cleaner, better, and quicker, you could be earning tax credits. This tax credit can be applied to both new product development as well as the production side of manufacturing and software development. These dollar for dollar credits can make a positive impact on your bottom line. Ideal industries include, but are not limited to, manufacturing, fabrication, machine job shops, engineering, software, biotechnology and more.

Start up definition:
- Current year gross receipts of less than $5,000,000
- No gross receipts for prior to 2012
- Anytime a company makes changes to the design or development process to make it cheaper, greener, cleaner, better and quicker, they could be earning tax credits. This tax credit can be applied to both new product development as well as the production side of manufacturing and software development. Industries that qualify include but are not limited to; manufacturing, software development, engineering, biotechnology, pharmaceutical and more.

Benefits

Millions of dollars in tax credits, resulting in cash back from the IRS for previous open tax years. Allowed to go back three open tax years to claim the credits. $1 for $1 reduction on current year’s tax liability. Tax savings in future years as the credits carries forward up to twenty (20) years. 6.5% of qualified expenditures result in the credit or cash back.

Step #1: The exporting company creates a tax-exempt IC-DISC. The IC-DISC is a “paper” entity that does not require office space, employees, or tangible assets. In this example, the IC-DISC is set-up under the ownership of the individual shareholders of the exporting company. Step #2: The exporting company pays the IC-DISC a commission. The IC-DISC commission may be determined as the greater of 50% of export net income or 4% of export gross receipts. The commission may be increased even more in certain instances. Step #3: The exporting company deducts the commission amount paid to the IC-DISC from its ordinary income taxed at 35%. The commission income for the IC-DISC is deferred from current taxation. Step #4: When the IC-DISC pays dividends to its shareholders, the shareholders pay dividend income tax, currently at a rate of 15%. Step #5: The net effect is a 20% tax savings on the IC-DISC commission.

Benefits include, but are not limited to, Time value of money, Dramatic reduction in taxable income, Increased cash flow for investment opportunities and business expansion, Property tax savings, Insurance savings, and more

Each business, big or small, in the manufacturing sector should consider the DPAD. Although complex, it still represents a valuable tax break. Management should always weigh the potential DPAD benefit versus the cost of calculating and supporting it. DPAD is fully phased in at 9% of income from qualified production activities for tax years beginning in 2010. Therefore, more businesses will find that DPAD now outweighs the cost.

The benefits of the Scientific Research and Experimental Development (SR&ED) tax incentive Program are twofold. First, it lets you deduct SR&ED expenditures from your income for tax purposes. Second, it provides you with an SR&ED investment tax credit (ITC) that you can use to reduce your income tax payable calculated under Part I of the Income Tax Act, if any. In some cases, the remaining ITC can be refunded.

The Start Up R&D tax credit allows companies to apply the tax credit to their FICA taxes. Since most Start Up companies are not paying federal tax, this credit can reduce the amount of FICA tax they are paying, giving them an opportunity to offset payroll taxes and reinvest the money in the business. Companies can offset up to $250,000 per year in payroll tax liability.