Fall 2007 issue of Horizons

knowledge. commitment. value. CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

SECOND REASON Your firm is engaging in qualified activities. Your work involves innovation. Your firm is involved in developing and designing functional improvements. Your firm develops or designs new concepts, processes or products. For instance, have you created a prototype design for a new product? Generally, most A/E firms are going to have significant qualified activities. Why? The credit is a wage-based credit. Because the very nature of engineering activities involves innovation and continuous improvement, most firms are eligible. NEXT STEP So, is there possibly money on the table for your firm? The next step is to go through a process of estimating the benefit at a high level. Generally, this is a one to two- hour discussion between key management and an R&D credit expert. Firms with potential qualified activities can contact Linda Paradis, CPA, at linda.paradis@ rubinbrown.com or their RubinBrown contact for more information.

Prior years’ average annual revenues:

$3,333,333

Base period %: Base amount

3%

100,000

Qualified Expenditures

200,000 100,000 $13,000

Amount in excess of base amount

Net Credit at 13%

Many firms may not have considered the R&D credit, but if your firm has the right taxpayer profile and engages in qualified activities, you’ll want to evaluate this opportunity. Think about the following two reasons why. FIRST REASON You have the right taxpayer profile – Does one of the following two descriptions fit your business? 1. You are professional-owned, taxed as an S corporation or partnership, and the majority of owners are active in the business. Why? Professional firms organized as S corporations, LLCs, or partnerships pass through the R&D credits to ownersprorata,basedonownership.Activeshareholders can take the credit against tax. [Shareholders who are not active in the business may incur AMT as a result of the credit.]

Questions? Contact Mark Jansen, CPA Partner-in-Charge, Architects & Engineers Services Group 314-290-3208 mark.jansen@rubinbrown.com

2. You are organized as a C Corporation that pays more than a nominal amount of tax.

Why? Some engineering firms are organized as “C” corporations. In order to reduce corporate-level tax, shareholder-engineers are given large performance bonuses. Due to this very low corporate-level tax, R&D credits will not immediately create substantial tax savings for firms who employ this strategy. However, the credit can be carried back one year and forward 20 years until used.

24 u winter 2007 issue