What is an R&D Tax Credit?

The R&D tax credit was built to incentivize technological advances and the hiring of workers to perform R&D and provides a dollar-for-dollar reduction in tax liability. For manufacturing companies, this can mean significant cash retained by claiming the credits on originally filed tax returns to instantly reduce taxes, or by amending prior-year tax returns for cash refunds within three years of the original tax filing.

The federal R&D tax credit is based on "qualified" activities undertaken by a company each tax year. There are no requirements to be in a certain industry to qualify however you do need to be consistent with the purpose of the incentives: to promote design and development activities within the United States and the subsequent hiring and retention of technical staff to accomplish these tasks.

More Opportunity for Manufacturing Companies
Prior to 2004, the R&D tax credit was only available to companies that discovered information that was new to the world. This discovery test was eliminated after 2003, and now the information discovered only needs to be new to the taxpayer therefore there are more opportunities for manufacturing companies than ever before.

Many manufacturers consistently change their existing processes or develop new ones to increase productivity or enable them to produce new or improved products. Therefore, the activities that many manufacturers perform on a day to day basis now qualify for the credit.

Three Areas of Qualifying Expenses
The R&D tax credit is based upon a percentage of qualifying expenses. Once it has been determined that a company is performing qualifying R&D tax credit activities, certain costs related to those activities must be identified and allocated to the qualifying R&D tax credit activities. The three areas of qualifying expenses include:

• salaries and wages,
• supply costs and
• contract research expenses.

For more information or to discuss R&D tax credit questions with one of our CPAs, contact one of our manufacturing specialists.

Understanding Entertainment Expenses

The general rule-of-thumb for small businesses is that you are able to deduct ordinary and necessary expenses to entertain a client, customer or employee if the expenses meet the directly –related or associated test. We have outlined both tests and further definitions for you.

Definitions	Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate.
Tests to be met	Directly related test Entertainment took place in a clear business setting, or Main purpose of entertainment was the active conduct of business, and You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit.
	Associated test Entertainment is associated with your trade/business, & Entertainment is directly before or after a substantial business discussion.
Other Rules	You cannot deduct expenses that are lavish or extravagant under the circumstances. You generally can deduct only 50% of your entertainment expenses.

Exceptions to the 50% Limit
Generally, business-related meals and entertainment are subject to the 50% limit – employers or their employees can deduct 50% of expenses.  However, one exception that is often overlooked is an employee benefit considered a de minimis fringe benefit as outlined in the next column.

De minimis fringe benefits include:
•    Occasional cocktail parties, group meals or picnics for employees or their guests;
•    Traditional birthday or holiday gifts of property with a low fair market value;
•    Occasional theater or sporting event tickets;
•    Coffee, doughnuts and soft drinks;
•    Flowers, fruit, books or similar property provided to employees under special circumstances.

De minimis fringe benefits do not include:
•    Season tickets to sporting or theatrical events;
•    Membership in a private country club or athletic facility; or
•    The use of employer-owned or leased facilities for a weekend.

For more questions on entertainment expenses, please contact us.

Buy-Sell Agreements Explained

Along with a general agreement about ownership and responsibilities, every business with multiple owners needs a buy-sell agreement. A buy-sell agreement should include these key factors:

• Specific triggers that will set the agreement in motion. For example, if an owner terminates employment, gets divorced, declares bankruptcy or passes away.
• Consideration of granting a put option (the right to sell) to the employee-stockholder and/or a call option (the right to buy) to the employer.
• Consideration of a right of first refusal. This means that if a partner finds an outside buyer for his shares, he must first offer those shares to the existing owners.

As with any business planning, it is important to protect your company and consult your trusted advisors when making important business decisions such as buy-sell agreements.

If you have any questions about buy-sell agreements or business succession planning, please contact Bergan Paulsen.

Protecting Your Tax-Exempt Organization Against Fraud

According to a recent report, it is estimated that five percent of annual revenue is lost by organizations to fraud. The potential for lost revenue could be devastating for any organization, especially those in the nonprofit sector. This lost revenue could lead to payroll cuts, adverse publicity, or more importantly, reduced dollars used to perform the organization’s role in the community. It is not enough for an organization to detect fraud; it must prevent fraud from occurring in the first place.

Internal Controls
The implementation and monitoring of proper internal controls is the first line of defense against fraud. One of the key aspects of internal controls is segregation of duties. The functions of authorization, recording, and custody should be segregated. When completing segregation of duties in smaller organizations, direct participation by the board of directors in the authorization and review process can be a suitable safeguard. It is important to remember that internal controls provide a reasonable, not absolute, assurance that fraud will be prevented.

An Understanding of Fraud
It is important that all organizations, large and small, have a very clear understanding of fraud and its effects. All members of the organization, including board, management, and staff, should have ongoing antifraud training. Members should understand what constitutes fraud, its effects on the organization, and the proper steps to take when they believe fraud is being committed.

Whistle Blower Policies
Organizations should implement an effective fraud reporting mechanism. Do employees within the organization trust that they can report suspicious activity anonymously and confidentially without fear of repercussions? Generally, a simple anonymous suggestion or complaint box may suffice.

Tone at the Top
Another key ingredient is a management team that sets an antifraud climate through both tone and action. A zero tolerance policy of fraudulent conduct will assure employees that fraud of any kind, big or small, will be dealt with swiftly and will not be tolerated.

For further questions or ideas on how you can protect your nonprofit organization, feel free to contact any one of CPAs with nonprofit expertise.

2012: International Year of Cooperatives

The United Nations declares international years to draw attention to major issues, and in this case, the International Year of the Cooperatives is raising awareness of the cooperative business model and the impact of cooperatives in reducing poverty and generating jobs.

Bergan Paulsen's agribusiness experts work with many cooperatives throughout the Midwest and are excited to see these important organizations receiving credit for their contributions. In a recent meeting, our team heard from the National Council of Farmer Cooperatives (NCFC) which is taking this year to celebrate the Year of the Farmer Co-op. The NCFC put together a video highlighting the importance of farmer-owned co-ops in giving family farmers ownership in the success of the business, and we thought it was worth sharing.

If you are interested in tax implications for a cooperative business model, please feel free to contact one of our agribusiness experts.