2023 Marcum Year-End Tax Guide

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THE MARCUM YEAR-END TAX GUIDE 2023

RESEARCH AND DEVELOPMENT: TAX CREDIT BENEFITS AND CAPITALIZATION CONSIDERATIONS BY NICHOLAS THOMAS

The Federal Research and Development (R&D) tax credit is available for companies that incur qualified research expenditures (QREs) to develop new or improved products, processes, or software in the United States. The Economic Recovery Tax Act of 1981 (ERTA) originally introduced the R&D tax credit, also known as the research and experimentation (R&E) tax credit, on a temporary basis to incentivize R&D spending in the United States. Since its inception, this incentive has been extended numerous times but became permanent as part of the Protecting Americans from Tax Hikes (PATH) Act of 2015.

The credit, though often underutilized, is a powerful tax-savings tool. Many companies underestimate their R&D tax credits or wrongly believe they do not qualify. In actuality, the R&D tax credit represents a dollar for-dollar reduction in income tax liability. Companies should carefully consider eligibility for R&D tax credits because these incentives may: • Significantly reduce federal tax liability and may be carried forward, if unused, for 20 years, • Be utilized up to $500,000 to offset employer-paid FICA and Medicare taxes beginning with 2023 income tax return filing for qualified small businesses or • Provide generous state credit tax incentives GENERAL GUIDELINES Industries where R&D-qualified expenses often occur include, but are not limited to: • Manufacturing & Distribution • Software & Technology • Construction

• Food & Beverage • Consumer Products • Cannabis • Healthcare

To meet the definition of qualifying research expenditures, research activities are required to be performed in the United States and must satisfy the Internal Revenue Service’s (IRS) “Four Part Test”: 1. The work is being performed to develop a new or improved business component (product, process, technique, formula, invention, or computer software component). 2. The activities are performed to discover information that is technological in nature . The activities involve physical, biological, engineering, or computer sciences. 3. The research is performed to eliminate technical uncertainty and determine if a desired result could be achieved, how to achieve it, or the specific product design. 4. The activities will include a process of experimentation involving identifying the technical uncertainties, alternatives to consider in eliminating the uncertainties, and a process for evaluating alternatives.

FEDERAL R&D CREDIT CALCULATION The Federal R&D credit is calculated by determining the amount of QREs for the company’s current year over a base. QREs comprise wages, supplies used or consumed in the R&D development process, and 65% of third-party contract research expenditures. The base is calculated using either the regular or alternative simplified credit (ASC) method. The regular credit computes the base using factors, including historical QREs, historical gross receipts, and when the Company began operations. The ASC calculates the base using QREs in the three immediately preceding tax years. Assessment of each base computation is paramount for a Company to optimize its tax credit.

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