By: Max Vignola, CCSP – Director of Tax and R&D Services
I think we can all agree that 2020 has been an extremely unconventional year for businesses and individuals. With uncertainty, we should all remember to be on the lookout for tax planning strategies to help give some financial stability.
In response to all the new challenges, some relief was granted to businesses. One such form of relief is the COVID-19 Paycheck Protection Program (“PPP”). The PPP loan was designed to give assistance and incentives for businesses to keep their workers on the payroll with a potentially forgiven loan. Unfortunately, this windfall could result in a reduced R&D credit benefit for many businesses on their 2020 tax return.
How Could PPP affect the R&D tax credit?
In the CARES Act it was explicitly stated that PPP loan forgiveness does not trigger taxable income, issuing that income which has stemmed from debt forgiveness shall be excluded from gross income. Subsequently, the IRS released notice 2020-32 stating that forgiven PPP loan proceeds used for otherwise allowable business expenses are not deductible.
This disallowance to deduct business expenses derived from PPP loans could have a direct impact on the R&D tax credit as 60% of the PPP funds must be used for payroll cost, one of the 3 Qualifying Research Expenditures (QRE) used in calculating the R&D tax credit. If the IRS position to exclude expenditures paid for with PPP funds is upheld, the net impact to the taxpayer will be a potential increase to taxable income and a reduction in the available tax credits due to the limitations of tax deductions and subsequently QRE’s included in the R&D tax credit calculations.
The PPP loans might not be the only variable that will have an impact on 2020 R&D tax credits. When COVID-19 hit the United States, many companies were forced to send their employees home for an extended period, and for some companies this could have affected the activities being performed by their employees. The R&D tax credit is an incentive for activities related to the development of new or improved products, processes, software and more. If employees that are normally creating and innovating had to transition their role to a support or an administrative position while working from home, their overall involvement and qualifying impact on the credit could be reduced.
How might you be able to offset the reduction to the R&D tax credit? The CARES Act also introduced a refundable federal payroll tax credit called the Employee Retention Credit (ERC) of up to $5,000 per employee for “qualified wages” paid by an eligible employer. The credit is available for any employee that was retained for any calendar quarter between March 2020 and December 2020 and qualifies based on the test for operational shut down or reduction in gross receipts.
While we focused on the impact and planning strategies related to R&D tax credits, it is important to remember that Cost Segregation and 179D Energy Incentives can offer tax relief through increased depreciation deductions. For new, acquired, or recently renovated properties, it is vital to remember that if they were placed in service during or prior to 2020, there are multiple incentives available such as 100% bonus, Qualified Improvement Property, 179 expensing, and 179D deductions that can help reduce tax liability and increase cashflow.
For more information on R&D or any other tax savings strategies discussed, please email firstname.lastname@example.org and we can set up a time to chat!