The research and development tax credit. Cost segregation. Energy solutions. These are just three of eight areas that middle-market service organizations typically overlook. When properly attended to, these areas can result in direct improvements to your bottom line or, at a minimum, ensure you’re in compliance with IRS requirements.
Research and Development Tax Credit
The IRS allows a tax credit on qualifying research and development (R&D) activities. Many companies don’t think R&D credits apply to them and are surprised to learn just how extensive qualifying activities can be. For example:
- Do you have in-house design capabilities?
- Do you have prototype design and testing expense
- Do you own any patents?
- Are there any engineers or scientists on staff?
- Have you undergone a lean process initiative?
- Have you bought significant new equipment that’s caused you to evaluate the way you work?
This list is not inclusive, but it’s good food for thought. And remember, prior year tax returns can also be amended for this credit.
Does your company have foreign sales? If so, you can save significant tax dollars by setting up an interest charge domestic international sales corporation (IC-DISC).
Savings result from the difference in tax rates between dividend income and ordinary income. However, prior-year returns cannot be amended for this strategy, so the IC-DISC must be in place before any sales qualify.
Significant tax savings exist through performing cost segregation studies on any newly constructed or remodeled facility. Rather than depreciating items over the typical 39-year life, cost segregation allows companies to depreciate certain items out of the building over five or seven years. It affords significant actual savings due to present value of money.
The IRS is becoming increasingly diligent in requiring individuals with foreign bank accounts, U.S businesses with foreign entities, and foreign entities doing business in the United States to file a myriad of informational returns. These include:
- Forms for every foreign legal entity, whether it’s currently active or not($10,000 penalty for noncompliance per form)
- Forms for capital contributions to foreign entities (penalty for noncompliance is up to $100,000)
- Forms for transactions with any non-resident aliens (penalty for noncompliance is 30% of the transaction amount)
As you can see, penalties are steep for noncompliance.
Potential Energy Solutions
It’s possible for companies to deduct up to $.60 per square foot if energy efficiency improvements are made to lighting, heating and cooling, or the building envelope. In addition, service organizations planning to update their facilities by utilizing renewable energy such as solar, geothermal or wind turbines are allowed a 30% grant/tax credit for the improvements as well as favorable depreciation on the renewable energy equipment.
Do you truly understand the drivers of cost with respect to your health and welfare benefits? While costs continue to rise, much can be done to mitigate these increases. Collect information such as employee census on cost and utilization data. Consider appointing someone specific within your organization who is responsible for developing and implementing a strategy to address health care reform.
Do you have a vision for where you’d like to be in five years? How about an exit strategy or succession plan for key staff? With the reductions in staff, particularly middle management, over the past few years, we’re finding the leaders at our clients are more involved in the day-to-day operations and have less time to spend thinking strategically. However, it’s extremely important that companies are making decisions based on an end result they’re trying to achieve, and strategic planning is an important part of building a successful company.
If these items are already on your radar, consider your company in the fortunate minority. (Bonus points for devoting the time and attention necessary to reap the rewards in these areas.) However, most service organizations are unaware of many of these items—items that can genuinely make a difference in their businesses.