Research and Development Tax Credit FAQ

This is a quick recap of the research and development tax credit as it is currently available from the federal government. Calculation of this tax credit is a service that we provide to our clients.

What is the purpose of the R&D credit? To stimulate economic development by giving tax breaks to companies that invest into improving their processes and creating designing technology that is “new to the company.”

Who can get it? Just about everyone! There is a slight bias to manufacturers and software developers as it is often easier to pass the Four Part Test to prove eligibility. However, as long as you can prove that you have a legitimate R&D process in your company that you invested significant capital and manpower into, you stand to benefit.

Isn’t it set to expire? Yes, the R&D tax credit has not yet been set in stone. However, it has already been extended for 2009 by the Bush administration. There are several pieces of legislation in the works that will make the R&D tax credit permanent if passed.

So, how much? There are several methods. Currently, the Alternative Simplified Credit (ASC) is the easiest to calculate and will usually yield the biggest benefit to newer businesses; however the Traditional method is still very strong for businesses with solid base rate foundations. In all cases, in order to receive a credit, your company has to steadily increase R&D investments from year to year.

What if I have a loss? It is a true tax credit; if you have a loss, then you are not paying any taxes and thus cannot use the credit. You can carry the credit forward for up to twenty years. It is very common for start-up companies to have losses for several years and then offset the majority of their first income year with R&D tax credits accumulated during prior periods.

What if I didn’t claim a credit in prior periods? You can refile prior year returns with a completed Form 6765 in order to claim the credit. You can refile the preceding 3 returns if you do it before April 15, at which point you lose the ability to refile the oldest outstanding year. As of the current date, 2006, 2007 and 2008 can be re-filed but not 2005.

I am a start-up, with 0-2 years of activity, can I still get a credit? Yes, you are still eligible for a further simplified version of the Alternative Simplified Credit.

We can evaluate your situation and weigh the pros and cons of the Traditional method versus the newer Alternative Incremental Research Credit (AIRC) and ASC . Please let us know if you have any further questions or would like to discuss an engagement.

How to Prepare Consolidated Financial Statements (featured by Eckemoff LLC)

Income statement amounts (intercompany revenue and costs) can be a bit more complicated. These should be eliminated even if they make sense (for instance, a real estate holdings entity charging the main company contracted amounts for rent) as they have no impact on the consolidated picture. Leaving the intercompany revenue on the P&L will distort all ratio analysis involving sales and gross margin, and can skew both revenue and budget projections.

The best solution to eliminating intercompany P&L items for consolidation is to identify each type of transaction that generates them. In this case, let's say that company A charges company B rent and company B charges company A management fees. To consolidate rents, debit company A's rent income and credit company B's rent expense. To consolidate management fees, debit company B's management fee income and credit company A's management fee expense.

Depending on the size and complexity of the entities you are consolidating, you may be able to do most of this in a spreadsheet. If this is the case and you are only consolidating two companies, we recommend setting up four worksheets in a workbook to receive imported data (tweak your export process to include zero balance rows). Then, set up two worksheets to combine data from the first four. Set these up with a consolidation adjustment column, and then manually eliminate balances.

It will help if you set your financial system up to segregate and group intercompany balances. For instance, company A's clearing account could be "1155" and company B's could be "1156," or they could even be the same number if this does not go against your chart of accounts structure.

For larger businesses that require more complex consolidations, you may consider acquiring some specialized software. Microsoft FRx is a very powerful tool that can serve as a bridge between multiple accounting systems.You can use it to generate on demand any conceivable financial statement, as well as any account detail and transaction report. Most importantly, FRx can pull data from multiple entities and manipulate it prior to output in order to automatically eliminate inter-company balances, giving you consolidated financial statements on demand. Furthermore, all reports can be saved in a file format that permits drill-down, thereby enabling the recipient to enlighten themselves on any questionable balance without having to request additional reports.

We are experts with this software, and can assist your company with implementation. We also offer roaming CFO services as well as MAS90, MAS200 and QuickBooks consulting. We operate on a national level and can come to you or resolve your issues remotely. Please visit our website atwww.eckemoffllc.com for more information.