Specialty Tax Services
Hi Welcome to ValuationPodcast.com - A podcast and video series about all things related to business and valuation. My name is Melissa Gragg, and I provide online divorce mediation and valuation services in St. Louis Missouri.
Today we are going to discuss specialty tax services and tax credits for business owners with Randy Crabtree. He’s a CPA in Schaumburg, Illinois. He’s also co-founder and partner of Tri-Merit Specialty Tax Professionals and a fellow podcaster. He has 30 years of public accounting and tax consulting experience. He’s an author, lecturer, and podcast host of “The Unique CPA” podcast. Also, something that Randy may not toot his own horn about is that he was also listed in the “Ones To Watch” section of Accounting Today’s 2021 “Top 100 Most Influential People in Accounting.”
1. What are tax credits and are they different than tax deductions?
2. What is the difference between temporary tax credits and permanent credits in the IRS tax code?
3. What is the Employee Retention Tax Credit in the 2020 Cares Act?
4. Employee Retention Tax Credit 2021
5. What is a research and development tax credit?
6. Are there any other important tax credits?
7. Tell us more about you and your firm!
See transcript below:
Melissa (00:00):
Hi, welcome to valuationpodcast.com, a podcast and video series about all things related to business and valuation. My name is Melissa Gragg and I provide online valuation and mediation services in St. Louis, Missouri, specifically for divorce partner disputes and estate planning. Today we're going to discuss specialty tax services and tax credits for business owners with Randy Crabtree. He's a CPA in Schaumburg, Illinois. He's also co-founder and partner of tri-merit specialty tax professionals, and a fellow podcaster. He has 30 years of public accounting and tax consulting experience. He's an author lecture and podcast host of the unique CPA podcast. Also something that Randy may not, uh, toot his own horn about is he was also listed in the ones to watch section of accounting. Today's 2021, top 100 most influential people in accounting. Well, we are so lucky to have you here, Randy. Thank you.
Randy (01:04):
Well, thanks for, thanks for having me. And, and I have to say that was a very professional introduction. You're you, you seem like you're a very experienced podcaster. Nice.
Melissa (01:13):
You know what, keep it simple and only say a few things and it's really easy. <laugh>
Randy (01:17):
Nice. Well, you did a great job <laugh>
Melissa (01:19):
Well, and today we're gonna talk about tax credits, which I feel like business owners really want to know about, or they just kind of like, eh, if somebody tells me about it, maybe I'll figure it out. They don't always know kind of how it's important to their business. And so today kind of talking about, you know, and when we start talking about this, we start talking about tax credits and accountants, financial people understand this. I mean kind of, um, but what are, but I think regular people get confused because what are the difference between tax credits and tax deductions? And can I just do one of them, so help us out kind of with the basics.
Randy (02:02):
Yep. And there's actually probably three things, uh, tax credits, tax incentives, tax deductions. And, and I can kind of go into incentives a little bit too, but yeah, in general, a tax credit is a dollar for dollar tax savings. So, so if I have a hundred thousand dollars tax credit and my tax bill was 400,000, I'm gonna reduce that to 300,000. I'm gonna use my credit to pay part of my income taxes. So it's very valuable. A deduction is a straight reduction of my taxable income. And so if I have that same a hundred thousand, but now it's a deduction rather than a credit. You know, the credit saved me a hundred thousand dollars. That's what's going back into my bank account is a hundred thousand dollars for a credit, for a deduction. I'm gonna take the a hundred thousand dollars, reduce my taxable income. Let's say I'm in a 30% tax bracket. I save $30,000, 30% of the a hundred thousand. And so that's still a nice savings, but obviously a credit's a lot more valuable than a deduction.
Melissa (03:04):
Well, and the tax deductions are kind of like your normal expenses, right? Yep. Like you're always gonna have them, whereas tax credits have kind of a different purpose and you know, some of them, like, I don't even think I know as much about tax credits as I should. Um, but like, what is the purpose of them specifically for business owners, but also, I guess I always remember like people buying them and so maybe you can help us understand like how we acquire the credits. Yeah.
Randy (03:35):
It's so, so the credits usually tied to some kind of incentive. It it's the, you get a credit because you're doing something that Congress has to, we're talking of federal credits that Congress has decided should get an extra incentive for you to do this, whatever it is. And so a few common ones are, are, um, you know, research and development tax credits or a big one recently that everybody's heard about was the employee retention credit. And those were out there R and DS out there to put an incentive on companies to do R and D projects within the us rather than outsourcing it overseas or to another country employee retention credit was there because you as a business were either affected directly by COVID by reduction revenue or by being shut down by some government mandate. So it's usually the credits out there as an incentive somewhere or another compared to just normal operating expenses. You know, you, you pay your rent, normal operating expenses. I get to deduct that, uh, you go out to bring a client out to lunch, normal operating expenses. Although those are often treated a little bit different, although in 21 to 22, we get a full deduction for that. So, so that's, that's why credits exist to really put an incentive on businesses to do something extra than they normally would've done.
Melissa (04:57):
Okay. And, and some of them, I think last for quite a long time, some of them are, uh, temporary. And so, and we're kind of go, what we're trying to do really in this podcast is go through some of the basics and then talk about some of the specific ones that would really be appropriate. So this is kind of the primer, if you will, but what is the difference between like a temporary tax credit and a permanent credit in the IRS tax code?
Randy (05:26):
So, and each of these can end up being both at some point in their lifetime. Um, and it's just a matter of really what it comes down to well, employ retention credit that was temporary because it was, you know, due to, you know, it was COVID relief, um, R and D tax credit, which was defined in 1981 was a temporary credit until 2006. So it went through 35 years, never being a permanent part of the tax code and why that happens, boy, we're going deep into tax. I'm gonna lose your whole audience here. We're talking,
Melissa (05:58):
We're gonna nerd out a little too much. Right.
Randy (06:01):
<laugh> um, but, um, what, what really happens is, is Congress, when they, when they put this incentive out there, they have to figure out a way to pay for it. There's always this checks and balances and okay, I'm gonna give money out. Where am I gonna steal, you know, lack of a better term where I gonna steal that money from to be able to pay for this credit than now I'm giving people. And so that's why this one R and D was never permanent. 2000. I said six, 2016 actually is when it became permanent. So it was, you know, 45 or 35 years. I had my math, right. I just had my year wrong. <laugh> um, and so, so they finally made that a permit part of the tax code in 2016. So it's really just a matter of, can we Congress thinking now, can we make this permanent?
Randy (06:46):
Do we have enough money to support this? Does it put enough money back into the economy? R and D in my mind puts money back in the economy, so that helps to pay for it. And so that's part of it is just figuring out, you know, if it should be permanent, if it should be, um, temporary. And a lot of the ones I deal with are temporary, just because every two, three years they have to decide, is this worth it? Are we getting enough return on it? And can we afford to continue to do it? That's really in my mind how it comes about.
Melissa (07:16):
And a lot of this, it seems like it takes some prior planning or some prior kind of knowledge about these either, you know, with a consultant or something like that. You're not just gonna, you know, these tax credits, aren't just gonna come out of nowhere and hit you. But you've mentioned a couple that I think, you know, would be helpful to understand. So the temporary one that is kind of in play right now, that everybody is talking about is the employee retention tax credit that was in the 2020 cares act. So is this applied to all businesses? Are there, you know, can you give us some more details of if we should be concerned about this?
Randy (07:56):
So every business should be concerned about it. Not every business is gonna qualify and, and what I'm saying, every business should be concerned because everybody's circumstances are unique when it came to, how did COVID affect them and how did the pandemic affect them there? I can go on my soapbox a little bit, and I probably won't spend a lot of time on this, but there are people out there saying everybody qualifies, which is not true. So be wary. If, if you feel like you had something, you know, if somebody's promising you millions of dollars in credits, and you're wondering where the heck is this coming from. But if you meet one of two requirements that were defined in the cares act, and like you said, we're gonna nerd out on taxes again for a second tax codes. It was defined in the cares act. It was redefined in the consolidated appropriation act and then re redefined in the American rescue plan three major tax acts that happened from 2020 over a year time.
Randy (08:52):
Really, it was a 12, 13 month period. These three things happen. And what happened is COVID was continuing longer, I think, than they originally expected. They decided we better put some additional incentives out there. So, so the employee retention credit is a key one. A business can qualify for this. If they meet one of two requirements, the first one is simple. It's math. We calculate our revenue and see if we had a significant drop in revenue in any quarter in 2020 or in 21. And this goes through the third quarter of 21 for Morris businesses. So it's really the last three quarters of 2020, the first three quarters of 21. Some businesses can go to the fourth quarter of 21, but let's assume that it's those six quarters in the year 2020, if your business had a 50 big drop 50% drop in revenue in any quarter, when we compare it to the same quarter in 2019 automatic qualification, you get to now start to quantify your credit.
Randy (09:54):
If you had a 20% drop in the year 21, again, compared to that same quarter in 19 automatic qualification, you qualify, let's quantify the credit. And this drop in revenue does not have to be you. Don't not have to prove that COVID defected. You, you just have to prove that you had a drop in revenue. And so it's a really straightforward calculation. Boom, I meet the math I qualify, but you know, 50% drop is pretty big in 2020. And, and we have clients that have done at restaurants, bars, theaters, gyms, you know, common users of this, but that's not the only way to qualify. You could qualify. You're getting you, we're going deep dive taxes to talk now. I mean, uh, we gotta make, we gotta laugh a little more because this is a, you know, now
Speaker 3 (10:47):
Understand
Melissa (10:47):
It. This is
Randy (10:50):
So the other way to qualify, if you don't meet the math, is, were you restricted your business restricted by a government mandate, a mandate that was put in place due to COVID due to some kind of restrictions due to, you know, it, and it has to affect your business. It can't just be you're in an area where there's a mandate. And so you qualify, no, we have to show that your business was affected. And so the, the easy one to explain is let's say restaurants, restaurants around the country, almost everywhere were closed for a certain amount of time, no indoor dining. They have a mandate that affected them. They qualify even when they went to, let's say, 50% capacity. So you can eat indoor. Now that's still a mandate that's restrict in their business. They qualify. And so restaurants are the easy one, actually medical as well, because medical let's say you're a, your dentist, your dentist was able to do a root canal, but they were closed from being to do just, uh, a checkup that they couldn't do that for.
Randy (11:57):
You know, maybe it was two weeks, maybe it was four weeks. Maybe it was six weeks, but there was a moment in time that they were affected. So if you didn't meet the math, the 20% drop in 21 or 50% drop in 20, and you can prove that you were affected by a government mandate that restricted your ability to conduct business. Now you qualify as well. So one or the other, not both, that's, there's some confusion on that. People think, well, I didn't have the drop in revenue. I don't qualify. Um, but that's not true. And if you, if you let me ramble for a couple more minutes, I can give you another good example on that. So besides having a lot of fun talking tax, I actually own a, uh, a partner in a craft beer bar in Chicago as well. And we're a craft beer bar and a liquor store.
Randy (12:44):
So we have two entities in the same building in the same place in Chicago. We were under capacity restrictions in the bar from March 17th, 2020, till July or June 11th of 21. So a, a long period. I mean, well, over a year there was restrictions in place. The liquor store was essential. There was no restrictions in place. And obviously, you know, liquors essential. So, so it was an essential business, no restrictions. If you looked at the overall financial statements for our business revenue overall in 2020, and in 21 was significantly up because a lot of people got drunk at home, something, they would buy stuff. But so my revenue didn't drop at all. In fact it increased significantly, but the fact that my bar revenue was under restrictions and there's some math you can do there to determine, but the fact that a portion of my business was restricted, allowed me to qualify for the credit. So that's why I was pointing out. Everybody's got a unique situation just because there's an increase in revenue. Well, let's find out if there was a portion of your business affected. If so, you can still qualify for this.
Melissa (13:56):
Well, and, and I deep think deep breath. Yeah. Deep breath. Cause I got a question about it too, but I think that this is an important piece. Is that even when, I mean, if you go back to looking at how you got the PPP loan, right? Yep. It was looking at a quarter comparison, a quarter to a quarter mm-hmm <affirmative>. So you don't always have to look at the whole, right. Right. It's not the total of each revenue for each year. It's like, you know, did you have a bad first, second or third quarter of 2020 compared to 19, which was a lot of people's banner financial year. Right, right. Yep. So it's not the total, but I think that that's a key, but the other thing that you said is that is to qualify and now once you have qualified, then you have to quantify or calculate what the actual credit was. So I think that's where we're going next,
Randy (14:48):
Right? Yes. I think that's a good point because if this thing's worth a dollar, it's not worth my time. Right. Right. So, so, so what's it. Although if you wanna hand me a dollar right now, I'll take it, but it's not, of course I'm not gonna spend a lot of time on it. <laugh> um, I'm not driving to St. Louis to pick up that dollar. I that right now. So, um, so yes. So 21, I kind of mentioned things got enhanced in the, you know, couple different tax codes. Let's go 20, 21st and then you'll see it's a significant credit. And then I'll blow your mind when we talk 21 credits. All right. So 2020, the credit was an annual credit for 2020. And annual means as soon as you were affected, or as soon as your revenue drop started as early as March 13th, that's when this kicked in.
Randy (15:34):
So March 13th, 2020 is the earliest. You can qualify all the way to the end of the year. Let's assume a company qualified for the entire year. The credit is the 50% of the first $10,000 of wages per employee eligible wages. And I say eligible because, and you mentioned Alyssa that, uh, PPP, you can, you can do both. You can have a PPP and ERC, but you can't use the same wages for both. So you need to segregate out those wages, which for 2020 is usually fairly easy. E especially if you qualified the whole time, because you know, you know, $10,000, if you have full time, employees, let's assume you have $10,000 of wages per employee for nine and a half month period. They're probably gonna be well more than that. Even taking out whatever you used of their wages for forgiveness. So very simply one employee's worth $5,000 credit in the year, 2020.
Randy (16:28):
Most likely if you have 10 employees, small business, 10 employees, there's a $50,000 credit sitting there in the, if you haven't done this yet. And if you qualify sitting there right now, that's just sitting there. That's some, that's an asset that you wouldn't even know exist. That's sitting there for the asking. And I say that because this is not, we didn't even talk on this at all. But tax credits in general, if anybody knows tax credit, you think, okay, a credit I have to use to offset my income taxes. Kind of like the example I used before the 400,000 drop into 300,000 in this scenario, a tax credit is cash. It doesn't matter what taxes you paid. It doesn't matter if you're ever gonna pay taxes in the future. If you say you have a $50,000 credit, you file the forms. The IRS send you a $50,000 check. So this is money. That's, that's exactly what this is. So that's the year 20, 20 small business. 10 employees could have a potential $50,000 refund check sitting in there. And when you're talking about valuation, that might be a nice asset going back into the business. So <laugh>, um, at least, you know, small business.
Melissa (17:32):
That's true. That's true.
Randy (17:34):
All right. So that's, uh, um,
Melissa (17:37):
Well for any small business though, you have 2, 3, 4 employees. I mean, and again, let's go back to the conversation that we just had. This is not a tax deduction, right? This is a tax credit. So this is if you paid $5,000 in taxes, you get $5,000 back, right?
Randy (17:55):
Well, you don't even have to pay taxes in this one. Okay. This is, this is, I have a credit. I get a refund check. Awesome. You refundable credits don't happen. IRS, doesn't give out refundable credits. This is one that they did. This is, this is a very unique, ah, you mentioned my podcast was the unique CPA. So I try to build that into my conversation. This is a very unique credit, uh, uh, that CPAs get to deal with. Um, and as a refund. So it, it, it honestly doesn't matter what your taxes are at all, you know, mm-hmm, <affirmative> you get this check, you get this money back. So I'm sorry I interrupted you.
Melissa (18:32):
No, so, but tell us more. So like, okay, is it going to in like, what should we do?
Randy (18:38):
Well, let's go 21 first. Then we'll go to that. Yeah. 21. Perfect. So 21 is, so this is where it gets really exciting. <laugh> um, again, I'm a tax geek. That's probably coming off on this, but I, I love this stuff. It's, it's so fun. I'm putting money back into businesses. At this point with the employee retention credit, I've put 160 million of, of, of money back into businesses. To me, that's just amazing. Mm-hmm <affirmative> so let's talk 2121. The credit now became quarterly in 2020, it was an annual credit 21. It's a quarterly credit. And in 20, it was a 50% credit of the first $10,000 wages. And 21, it is a 70% of the first $10,000 of wages per quarter. So in this scenario, that same 10 person company could have $70,000 of credit per quarter. They have, you know, a hundred thousand dollars of wages, 10 employees, $10,000 of wages, each 70% of that $70,000. If they qualify all the way through September, um, of 21, that's three quarters, that's $210,000 of refunds available in the year 21, add the 50,000 from last year, $260,000 of refunds for this small 10 person business. That's why this is so exciting. And that's why this is, uh, this, that's why I smile a lot. When I talk about this, it's fun to help these businesses put this money back in.
Melissa (20:04):
Now, do you think that the businesses are really going to understand this, or are we gonna have a bunch of like amended tax returns and people kind of having to go back and say, okay, did I qualify in 2020? Do I need to amend my return? Or am I just like getting too ahead of myself?
Randy (20:23):
No, you, that's a great question, cuz this is a huge topic right now in, in, in the industry. There's two things that to go to there. This is actually a payroll tax credit. I didn't even mention that before. It's not an income tax credit. Uh, so it, it gets filed on the 9 41, the payroll tax return, but it does affect the income re income statement or the, the, the, the tax return, the income return income tax return. I can't talk. I'm getting too excited here. The income tax return, Melissa, keep me on track here. <laugh> so it does affect the income tax return. And so, you know, we're recording on March 15th, most pass through entities, tax returns, S CORs LLCs are due today. Um, they, if they haven't taken this credit, they're not putting on this, on this tax return. So they're going to have to go back and amend the issue is, and this is no reason not to look at the credit.
Randy (21:18):
The issue is if we file, let's assume a company hasn't applied for RC and they qualify. That's a big, if you have to qualify, I'm not gonna be in that, that category where people promises everybody that qualifies that is not by far not the case. Um, but if you qualify, you haven't taken it yet, you filed your S Corp return. Let's say today, as you and I are sitting, not as this is being broadcast, I'm not, I'm ruining timing on this. Now you hearing secrets on how, how quickly you record this and get it out <laugh> um, but you have to adjust that income tax return. So you're gonna have to go back and amend it. This is the concern I file today for the arc, and it's not gonna happen if I haven't looked at, but you know, if file next month for the arc for 21, all three quarters, let's assume that scenario.
Randy (22:09):
I had $210,000 of refunds coming for the year 21. That's supposed to be income on my tax return. My income tax return, even though it's a credit against my payroll taxes, it's income on my income tax return, unlike PPP, which didn't end up being income. This one does, um, I'm not gonna receive that refund from the IRS for nine months, 10 months a year. It's taken them a long time. So if I pick up 200, $10,000 of income today, and again, let's say I'm in a 30% bracket, that's $63,000 of tax. I'm gonna pay a money I haven't received yet. That's a big issue. That's something I really think IRS needs to address. I think you should be able to pick up this income in the year you receive it rather than the year the wages were used. That's not what the tax code says.
Randy (23:00):
That's a little bit of a dilemma. I think what's gonna happen is a lot of people are gonna wait till they get their refunds. They're gonna amend their tax return. They're gonna hope the IRS doesn't get mad and say, Hey, you got a penalty for late payment. They've pretty much already came out and said, you're, they're not gonna penalize for paying this late because they know that there's a timing issue. Mm-hmm <affirmative> but they were specifically CA talking about 20, 21. They said that, I assume that'll carry forward to 21. Now I'm lose. Now you're getting glassy eye here as I'm talking this stuff. So, um, <laugh>, we'll, uh, we'll move on to the next topic. But, but that, that is an issue. You kind of mentioned it. We have an interplay with the income tax return and there's decisions that need to be made on when we have to adjust that return. Well,
Melissa (23:45):
But I think it is, I think it is helpful for business owners to understand that they, there are little chinks in the armor and we don't know if we can, what we can do, but, you know, cuz everybody would be like, oh my gosh, this is easy money. Well, there might be a payment, you know? So, so there are some intricacies that you need to be aware of. Um, and, and there's,
Randy (24:09):
There's a lot, sorry, Melissa cut. But there's a lot of interplay between the ERC and other things. You know, you have to PPPs just one where I say you have to double, you know, you can't double dip, you can't double dip with R and D tax credit wages. You can't double dip with wa work opportunity, tax credit wages, um, restaurant reation grants interplay with this. Even the idle loan, the IDL loans that a lot of companies took as well from the SBA. There's an interplay. Now some of these are big effects. Some of our are not much of an effect, but you have to know how all these play together. And that's, I've spent my last year basically educating everybody in the country on, on employee retention credits. And I don't know what I'm gonna do for an Encore. I, this might be the end of my career, cuz I don't think I can find something that I enjoy this much. Again,
Melissa (24:58):
I'm pretty sure people are gonna be dealing with this for years because the IRS is so backed up. Yes. You know, I mean nothing's happening, but the other tax credit that I think, you know, so this is kind of something that has hap you obviously need to address it, you know, with your own accountant. And if you don't, if you're not working, I think this is, this is encouraging a lot of business owners to start working with accountants because some of the stuff is complex. And if you mess it up, it could come back to haunt you. But one another credit that I think people are more aware of. At least they may not know the details of it, which you're gonna help us with. But it's really talking about like these research and development tax credits. Like in my mind when I'm talking about research and development, if I'm like a business owner, I'm like, well, I don't do any research. Like I don't develop any products or I don't keep track of it. You know? So what do we do here?
Randy (25:58):
Yeah. That's that is not an uncommon, uh, statement there. Uh, I'll go into places that I know they're doing R D and I just lie there cuz I don't go into our clients anymore. When we started 15 years ago, I would go in right now. I'm just the talking head. I just go out and talk about it, but we will go into clients that they say, I don't do R and D and sometimes they're right. They don't. Right. Um, but it's not as complex as it sounds like just by the name, you know, it probably should be called new or improved process credit, um, rather than R and D credit. So, you know, do I have processes? Every company has a process now that has to have technology involved in it. So it's not just a, you know, how we move paper around in the office.
Randy (26:44):
Maybe there's a process to that, but that's probably not an R and D process. Um, and so to qualify for R and D and before I tell you that most common users, manufacturers, software developers, architects, engineering, companies, even the construction industry potentially can qualify. It's IFF you, but I've seen credits in that those are common industries for the credit. So if you're in one of those, you should be looking at it to see if you qualify. But anybody that meets a four part test that is defined in Iris code, and we can go really deep and say code section 41. <laugh> um, the IRS code, it says, I qualify for the R and D tax credit. If I meet this four part test first being, do I have a, a business component which says, do I have a newer improved product or process? But it goes further.
Randy (27:39):
Do I have a newer improved and improved key, newer improved product process, technique, formula invention, or software. One of those are the, the, the business components they specifically call out. Then number two, you have to have technology involved with what you're doing. So, you know, engineering, computer science, you know, uh, material sciences, uh, biology, chemistry, you know, not, not like a marketing science or a management technique, anything like that, some kind of hard science involved, which again, that's pretty straightforward looking at, you know, um, you know, Melissa, you may do some software development internally for your business to help manage something. That's, that's a technology, computer science, you you're doing those two are straightforward. The next two are the meat of the four part test. I have to have uncertainty and the uncertainty doesn't have to be. And that's a little nebulous. What's uncertainty mean it doesn't have to be, can I even do this?
Randy (28:38):
It doesn't have to be, is it possible? It doesn't have to be, you know, can I develop a time machine? You know, that level of uncertainty, it can be, can I do something better, faster, cheaper, more efficient, less operations, less waste, less weight, reduce shipping costs, whatever it is, I'm doing something different. Uh, even if I have an existing product, I just wanna be more efficient with that product. That's enough uncertainty. And then if there's uncertainty, the fourth part ties in experimentation, which is, you know, evaluating different alternatives to see if we can come up with a solution to whatever the problem is that we have, uh, come up with. Uh, and, and experimentation is, you know, conceptual idea, Hey, I have an idea. I wanna do this. Or I got an order we need to now figure out how we're gonna manufacture this, you know, to design, to testing, to protyping, to CAD work, to, you know, uh, evaluating going through that multiple times, experimentation is the timeline we quantify for the credit. But bottom line is new improved product to process technology involved, uncertainty, not ultimate, just some level of uncertainty and experimentation. A lot of businesses have projects that incorporate all four of those. If so they need to look at quantifying that for a credit.
Melissa (29:53):
But Randy, I mean like we're post pandemic, like you and I are only meeting virtually like isn't everybody essentially having to double down on technology and figure out how to do this business stuff. Yep. In this way, like, don't you think there's a lot more opportunity now that people are just by way of transitioning their business to a post COVID like business economy, which I really think is where we are. Yep. Is isn't that a lot of, I mean, cuz that's a lot of technology, like would I, would I qualify? Do you think it's easier to qualify for some of these credits now?
Randy (30:36):
I think it is. I think you'll see a lot more of it. I think you've been watching my webinars because <laugh> and I've been saying that, um, so thank you for paying attention <laugh> um, but, but yes, um, not just purchasing technology though, you have to be okay, doing something. You can, you right now you can have an accounting system. You can have a CR IM system. You can have a, you know, I don't think you're shipping, you know, a lot, but a shipping system, you can have all these systems already that you bought these technology packages. Now you want them to all work. You want it to work with your zoom now, too. You wanna work with your teams. You wanna, whatever. Now you're developing some modules internally to get all these technology packages that you purchased to work together seamlessly that integration can qualify for the credit.
Randy (31:24):
So I see that for sure. One thing I wanna point out and I, I like using my bar as an example. Now, when I just said the four part test there, you're not thinking, oh yeah, bar is gonna qualify for an R and D tax credit. Well, what you just said when we were shut down, the liquor store already had an online store. It started blowing up. We started shipping around the country. We already were. We had to make this online store more robust, a lot of, uh, uh, software development internally that we did just on the, the, the software to, to do the sales. But then we had to integrate with the POS system. We had to integrate with the shipping system, the online system, even FedEx, FedEx did this same day delivery. They came to us and said, Hey, we wanna start doing this. And we want you to be the Guinea pig. And uh, and so we're gonna do two windows of same day delivery of your product within a 60 mile radius. Now we had to tie into their software as well. And so all that software development created an R and D tax credit for a liquor store that you never would've thought would've had an R and D tax credit. So you are, you, you are exactly right.
Melissa (32:34):
No. And I think that it, it is going to change everything because we, we are having to, you know, I tell business owners every day, I was like every everything, every way that you do business right now is continuing to change. Like I know you pivoted for the pandemic, but like continue, keep that pivot hat on because we're gonna continue to change. You know? Like we've been, um, talking a lot, uh, I've been talking with other businesses about building communities, well, building communities, you can do them on other people's platforms or you can do them on your own platforms. Mm-hmm <affirmative> well, people are trying to reinvent these ways that we communicated pre pandemic. And I think that a lot of people are putting, I mean, I've bought an app. I had to buy this, you know, other website, I had to buy this other stuff and put it together. But I think what you're saying is I would still need to put that together. So then if I offered like a valuation training program or something,
Randy (33:43):
So, um, or
Melissa (33:44):
Would it have to be like a product like a, so like a valuation calculator
Randy (33:48):
Or so when we're talking software, it's gonna be more the platform behind the scenes. That's running something. So let's say that you, you bought an app, but you I'm gonna give you two examples here. Yeah. You bought an app. All right, great. They had to do programming for your app. Right? You may have an R and D text script for that. If you took on the risk of that programming, you know, if you bought an app and they said, Hey, Melissa, we're gonna, we're gonna charge you $10,000. And we're gonna put this app together for you. You really didn't take a risk on cuz you know, you have a flat fee of $10,000 and now they don't get paid unless they, you know, deliver you this app that works.
Melissa (34:26):
Sure.
Randy (34:27):
If, if the app company came to you and saying, Melissa, we're going to develop this app for you. And there's some complexities here because we have this valuation software. We wanna build it and everything. And we're not sure how this is gonna work. Exactly. So you're gonna pay us $200 an hour until we get this working. Or if we can't get it working, you still paying us $200 an hour mm-hmm <affirmative>. And that scenario you took on the risk, because if this fails, you are the one that's hurt by it. You're paying to try to do this. There's uncertainty there. And so even if we're outsourcing somebody to put some software to developer some software together for us, you could take a credit in that scenario. Okay. Okay. Uh, and I don't remember the other thing I was gonna say
Melissa (35:09):
<laugh>
Randy (35:12):
So
Melissa (35:12):
Well, but that's helpful because I think that everybody's getting, so we talked about how to qualify again. Yep. For this credit, how do we quantify? Is it just all the expenses that we've pay? Like every dollar that we can find or is there, uh, a better way to go about
Randy (35:29):
It? Yeah. That's uh, um, man, you are really good at this hosting stuff. You, you could just taking this right in the right path. Um, I'm gonna have to have you on the unique CPA as well. And, but I won't be as good a host as you obviously, um, let's go, let's go down that path and I
Melissa (35:46):
Would be uniquely not a CPA. So there would be, that would even be the more fun
Randy (35:50):
<laugh> there you go. Be unique, non CPA. So that's, that's what we'll do about valuation. I mean, that's huge in, in, in public accounting. So I would love to talk about that. All right. We digress. Let's go into quantifying the R and D tax credit. This one is not as straightforward as ERC because you know, ERC is, Hey, I have an employer, I paid them. Boom. And there was some complexity and ERC I didn't get into if you're a large employer, small employer, but we, we don't have time for that unless we wanna go four hours. I mean, if you wanna go four hours today, I'll do it. Right. All right. So R and D tax credits, then we look at that experimentation timeline, you know, idea to manufacturing or to, you know, running a software and all those, the expenses in the middle, there it's four things we can take into account salaries and wages.
Randy (36:40):
So like the ERC it's based on salaries, but no limitation. If we pay somebody, we get to take whatever percentage of their time, times their W2 is their expense for this. So it's salaries and wages it's outsourcing, you know, in our app scenario, you outsource development. Okay. If that qualify, we get to take that into account as well. If we're in a manufacturing setting or even a even, you know, this is a fun one craft brewery setting where they're, you know, they're using supplies. If they're consuming supplies in the development process or the prototype process, we can take those material costs into the credit. And the fourth one, which we see, but not a lot is rental of computer time, which we see now because of, you know, uh, cloud computing services that are used for R and D. So we look at those four expenses on all the projects for that year, not the project start and stop, but what happened during the year, if, if that's, let's say a million dollars of expenses and for a, you know, 10 million manufacturer, a million dollars of iron D expenses is probably normal, probably even low.
Randy (37:46):
Um, and so in that scenario, the credit is about 10% of those costs. And so in that scenario, a million dollars of cost, a hundred thousand dollars credit. And again, this one's not like E C it's not a refund. It is I have to offset taxes. And so we take that a hundred thousand dollars and we reduce our income tax bill by a hundred thousand, or if we're a startup business, which startup businesses are defined as businesses that are five years are less, pretty much is the rule. And our current revenue is less than 5 million. If we have that scenario, it is almost refundable cuz we can use it to offset payroll taxes. So if we are paying anybody, we can use it, offset payroll taxes and get the money back that way. So that's the, that's the how you quantify, that's how you use it. And uh, and that's the, that's the quick course in R and D tax credits.
Melissa (38:39):
Well I'm thinking under your scenario, either a micro brewery or a winery winery, like we, we would maybe have to research what type of wine we wanna make. So we would have to consume all of that product.
Randy (38:53):
Oh, I thought you were saying you and I have to go research if their wine was any good. So we have to go out there, you know, they could pay us to taste their wine. And that's part of the, uh, testing process. Yeah. In CRE brewery or winery, which there's the, what wine trail? Not far from you in Southern Illinois, right? Yeah. So there's some wineries down there. Yeah. Um, and CRE breweries, well St. Louis is big Cref brewery town as well. Yes. And so in fact, you know, I won't say who, but we've done a handful of R and D tax credits in your town. <laugh> um, so breweries, every time they have a new formulation, there's probably R and D anytime they're doing a seasonal beer, a one off beer, a test batch, that's all involves R and D. And the interesting thing about breweries only cuz you brought it up and I already brought up beer like five times already.
Randy (39:41):
So I guess I brought it up, but because we talk breweries, um, their credits can grow significantly with all the, you know, the water, the hops, the grains, the yeast that go into all those test batches, all those four ingredients can now become part of the credit. And that can be a significant cost when they're doing test batches. So the breweries in general, um, have had bigger credits the last five or six years because this rule kind of changed five or six years ago. And so it's been a fun industry for us to work with as well.
Melissa (40:12):
Now the only other thing that I think that people are, are actively doing now, a post pandemic is creating like training packages and becoming like more, um, you know, leadership training or whatever, teaching a skill, things like that. And a lot of that is online. A lot of that is like, are you seeing people like that? Being able to get it because they're kind of pulling together, but it's still, I don't know if they have the, the, um, what did you say the risk? Right.
Randy (40:44):
Well, the risk would be an issue, but, and they may, we'd have to look at that. We just analyze projects, see if they took on the risk, if they did, they did, if they didn't, they didn't. But what more so it is, is, you know, creating the training program itself, you know, the, the, you know, content and whatever tests and all that, that alone. No, cuz there's not technical uncertainty in that, but if we're creating the platform to run it on, you know, the software platform that's and we've seen plenty of training companies where we have taken credits for that platform development. Yeah. That's really the key aspect of
Melissa (41:19):
It. Okay. Okay. So in general, if somebody's like, you know, I think I may have some of these credits, they would go to some, you know, somebody like you and you would look at all of the different business credit options and kind of look and see what now should they expect this from their regular CPA? Like should their C you know, cause I don't think I always see that anybody's doing in depth consulting. Like, like if you just hire somebody to do your personal tax return or your company tax return and they're not getting really deep into anything else, are they gonna find these credits or do you have to go out and kind of seek them?
Randy (42:02):
So it, that, it's a great question. And it's why we exist because these are really complex part of the tax code. And I am a CPA. I was a generalist. I was in public accounting. I was doing every, you know, tax returns from whatever, you know, a brewery to a manufacturer, to a software, all these industries. Um, but as a generalist as your, your, your normal CPA, they just can't become an expert in R and D or E or C or cost or all these things that I work with. And so because of that, we work with CPAs. That's where our business comes from. We support CPAs. We are not a, a, uh, a competitor with a CPA firm by any means. Um, and so that's, that's our whole thing. So CPAs in general, and I, I say CPAs somewhat generically, cuz you got S you got tax preparers. Sure. I mean, I'm a CPA. So I, I, I take pride in that. So I say CPA, um, you're a unique CPA <laugh> that's right. Um, uh, I used to be called the wacky accountant, so I'm glad that was you moved up. Yeah, exactly. Went from the wacky accountant to the unique CPA. It's a little more sophisticated. So yeah. Um, that was just, my family would call me that and friends. Um, I've never told anybody that <laugh>, um, it's all
Melissa (43:21):
Public now.
Randy (43:22):
<laugh> you can edit that out. Right. <laugh>
Melissa (43:25):
Of course
Randy (43:26):
Surely will wink, wink. Right. Um, yeah. So, so, so we support the CPAs. Part of my fun is I just educate on this stuff and hopefully that comes across that I enjoy it as we're talking today cuz I do. And so I've probably, you know, I do, I don't even know 30 education, whether it's a webinar or conference, uh, well, no, you count the, the, the podcast, that's more, but that's all CPAs who are my audience and that's who I talk to and that's I want them, my goal is that a CPA learns enough when they listen to me that they can identify an opportunity. They're not gonna be able to be an expert. They're not gonna qualify a quantify a document. They're not gonna do any that, but identify cuz as a CPA, that's what you need to know. You can't. I mean, if you stack the tax code, you know, page by page, you know, you'd be, you know, reaching the moon or something that's crazy. And so you can't know everything, but you can know it exists and that's my whole goal. So, so if somebody's CPA is not bringing this to 'em, that's not outta the ordinary. Right. Uh, the CPAs that we work with obviously were constantly educating and hopefully they're able to identify and then bring this to 'em
Melissa (44:38):
And that's the point is like, it's not your, your, your normal CPA bookkeeper, this isn't their responsibility to come up with these types of things. But, and I think we, it became more clear at the beginning of the pandemic when we had all the PPP loans, there were so many people coming out and saying so many conflicting wrong information that it really did take a handful of people to go deep, dive, figure it out and then help you know, others. So that's where this comes into. Now, before we talk a little bit about your firm, we've gone so much information. Are there any other important tax credits that you just wanna at least mention for business owners to kind of keep on their radar? Maybe give us a little information about it. Um, because these things they could ask their accountant or they could reach out to you. Um, and we'll give all that information, but tell us any other ones that we just need to like ping to our brain.
Randy (45:35):
Yeah. I'll, I'll, I'll touch on a few just very quickly, which I don't always do very quickly. So we'll uh, <laugh>, we'll do the best we can. I'll give it a try. Yeah, exactly. Um, and the reason we talk about this right now is because you mentioned it too, with the pandemic we're used to this stuff. I mean, we're used to PPP, we're used to employee retention credit. We're used to the idle loans, the restaurant revitalation grants, the, you know, share venue, grants, all these things came out in the last two years, but there's other things that have existed and we'll continue to exist. That that make sense to, to be educated on, to learn about. And so a couple of key ones that, that I specifically, uh, uh, am, am passionate about really basic one is cost segregation. That's an incentive, it's not a credit, but it's anybody that owns a depreciable property, whether it's residential rental or commercial property, normally those are depreciated over like 39 years or 27 and a half years. And what cost sec does it goes in and it breaks down those buildings into smaller components and see what portions you can accelerate and depreciate quicker. Okay. So rather than buying a million dollar building and taking one 39th of it every year, if I can find 400,000 of that, that is, has shorter lifespan. I can take that in 5, 7, 15 years instead of 39. So that's cost se it's, it's pretty much anybody owns a depreciable property.
Melissa (46:57):
Okay.
Randy (46:57):
There's another two other real estate incentives that are interesting. One's a credit and one's a deduction. The credit is 45 L that is for developers of residential property. So if you're developing residential, you know, a real estate developer, you're developing residential property and we can show that it's energy efficient. I won't go into the definition, but a lot of them will qualify. If it's energy efficient, a developer can get it up to $2,000 tax credit per unit, they develop. So they built a hundred homes last year and they all qualify. There's a hundred thousand dollars tax credit, again, reduction of income taxes, that's cash in their hand. One 70 nined is a deduction for commercial property. So if I have a commercial building and I can show that's energy efficient, I can take a portion of that and write it off over one year rather than 39 years.
Randy (47:52):
So 1 79 D is another real estate incentive. And then the last one we'll touch on, which is not, I was gonna say similar to RC, not really similar, but it's an employee credit. Again, it's based on wages. It's a new hire credit, which is interesting because there's a lot of new hiring going on right now. <laugh> and, and you can get this credit if you hire an individual that either meets a certain demographic definition or geographic location. And if they meet that, there's anywhere from 2,400 to $9,600 credit per new hire. And so this is a pretty interesting area, especially with people being used to employment credits with ERC. Now there's this ZY work opportunity tax credit that is out there. And that's something to look at as well. And those are really the key things that, that people should be aware of and thinking about going forward, cause these exist, these aren't, these aren't these life, the lifespan of these haven't run out for the most part. Some of 'em would need to be renewed right now. Um, but, uh, they, they should all stick around for a while.
Melissa (48:54):
Well, and we have the great resignation or the great reshuffle mm-hmm, <affirmative>, that's gonna eventually result in the great rehire yes. As everybody kind of, um, you know, redefines what they want in life and things like that. And so I think there's gonna be some opportunities in that capacity. Um, now Randy, you've given us so much information and I really appreciate the fact that you've, that you've said that you are not in competition with accounting firms. You're kind of like a secret weapon for them to help their consumers if they don't have those professionals on staff, which right now it is hard to keep everybody knowing this deep of information about these credits. And like you said, the IRS tax code is not easy to understand. So tell us how people can get a hold of you, how your process, how you work, you know, um, we do have typically a lot of valuation accounting people that watch the podcast. So they are, you know, kind of probably interested in this information, but tell us more about your firm.
Randy (50:03):
Yeah, well, our firm's trim merit, um, May 7th of 20, 22 is our 15 year anniversary. So getting pretty excited about that celebration, we're planning. I really, you know, I already said what we do and, and who we work for. It's mainly CPAs that we, we get our business from. You can get information on us on our website, which is try T R I dash merit, M E R I t.com, which I know you have, uh, uh, logos coming up or banners coming and look at you. This is such a professional, uh, podcast. I, I feel unworthy of being on here. Um, so you
Melissa (50:39):
Have some magic <laugh>
Randy (50:42):
So, so trimer is the, uh, the website. You can get all the information there. There's links to my podcast on it as well. The unique CPA. In fact, I think that has a, there we go, unique cpa.com. Um, and so anything there, you can find out more about us. I I'm, I, I honestly tell people I'm available anytime for an email for a phone call. Um, I'm answer any questions, anything we do personally, our business is there's no strings attached. If, if we don't find anything or if people don't wanna move forward, there's no fees due to us. So it, it is, uh, Hey, let's do an investigation scene. If something there, if there is great, let's go to engagement. Whether if there's not, at least we investigate it and, and you, you at least got a comfort level that yes there is, or no, there's not. So it it's pretty easy to work with us. And we, we purposely have done that
Melissa (51:32):
Well, and the one thing that we didn't have up there was your email address, cuz everybody loves an email. So, um, reach out. Um, I encourage people to reach out on LinkedIn too, because you know, quite frankly, this is a digital world and we need to connect digitally as well. Um, and you need to be out there on LinkedIn growing your base anyway. But, um, this has been very helpful. I'm sure we're gonna figure out another topic to talk about. So I'm sure we'll see you again. Um, or I will be on the UN unique
Randy (52:06):
You'll be on there.
Melissa (52:07):
Not CPA. No, just kidding.
Randy (52:09):
<laugh> but you have worked in public accounting. I know that. So
Melissa (52:12):
I know God love 'em I I'm a little financial little bullet that kind of goes to the accounting world, but
Randy (52:20):
Well, you're, you're, you're you're in, in much need in this, especially these days too, with a lot of, uh, M and a work going on, I'm assuming that's been big for you. Oh,
Melissa (52:30):
So much craziness going on in the world. Well, we appreciate all of your time, Randy. And, um, we will probably call you back for another fun topic so we can nerd out on accounting things, which a lot of people love to do. So like we're not alone. Some people are gonna be sitting there going, we love this we're nerds too. Like, hello, you know, the revenge of the nerds. We're just successful nerds.
Randy (52:53):
I geek I'm a nerd too. So I got both of things going
Melissa (52:59):
All. Thanks, Randy. We'll talk to.
