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- Is technological in nature – Meaning it must rely on at least one of the following: physical sciences, biological sciences, computer science and engineering.
- Is being conducted for a permitted purpose – Meaning that it must be intended to improve functionality, performance, reliability and quality.
- Involves the elimination of uncertainty – Meaning the activity must be intended to identify information required to eliminate technical uncertainty.
- Involves an experimentation process – Meaning that there must be some elements of experimentation, such as trial and error testing, prototyping, development and analysis of hypothesis.
By now you have probably already filed your taxes or have already made plans to visit your tax preparer. And while the annual tax return filing may be the closest some will come to corresponding with the IRS, others may not be as lucky. If that’s the case, follow these tips to help eliminate the element of surprise when dealing with the IRS.
Don’t Guess – Know
If you receive mailed correspondence from the IRS, it’s common to read the return address and think the worst, but that’s not always the case. Simply put: don’t assume to know what the letter says. Oftentimes, the letter was sent as a formality to make you aware of a change that was made to your account or to notify you of what the government entity has received or what information it has on file. Instead, open the envelope immediately and read it completely. It’s likely that no further action is needed on your part, but you will never know if you don’t take out the letter opener and dive in.
Establish A Tracking System
When it comes to deciding which letters from the IRS you should keep, we recommend the first one, the last one and all others in between. Furthermore, until the matter is resolved, be sure to keep all correspondence with the IRS in a singular location. You will want to have the ability to easily refer back to them. Each letter will likely offer specific instructions about what is needed on your end to satisfy the inquiry. It’s important to follow the instructions on these letters – even if you need to know how to file an extension to ask for more time to comply.
A Method To The Madness
How many letters you can expect to receive will depend on your specific circumstances. IRS Publication 594, the IRS Collection Process will provide you with some detailed information, but a brief explanation can be found here:
o Acknowledgement – if you issued a response to the IRS’ initial inquiry, the agency will answer back in similar fashion just to let you know that your letter was received and will be responded to in due course.
o Response – when the IRS sends its response, you may receive a request for payment or notification about how the IRS has applied your payment. You may also be notified of a change to your account or of a request for additional information. In short, the notice you receive could cover everything from a general issue about your account or a specific issue pertaining to a tax return.
o Recap – It’s best to keep a written record of all interactions between the IRS and yourself – even if you spoke with a representative over the phone. If you do speak with someone from the IRS over the phone, be sure to carefully document the conversation for your records, including the agent’s name and badge number. Then, request written confirmation of what was covered during the call – just don’t be surprised if it doesn’t actually get sent. Instead, take a proactive approach and type up your own confirmation and send it in to establish a written record of what was agreed to over the phone. Be sure to also include the name of the representative with whom you spoke and their badge number. Then, as always, keep a copy of the letter for your records.
IMPORTANT: If you provide the IRS with proof of some kind via mailed correspondence, do not send your only copy. Remember, you must keep copies of everything for your records, and this includes any and all attachments.
Don’t Be Afraid To Ask For Help
If, at any point during this process, you have questions or concerns, don’t hesitate to call up your tax advisor. He or she can help you determine the best course of action for your specific circumstance.
BONUS TIP: remember that the IRS will never call you out of the blue; even to bring a legitimate concern to your attention. All official correspondence will be sent through the mail. If you receive a call from a person claiming to be from the IRS, you don’t have to listen to what they have to say. Instead, simply hang up the phone and refer to this article for information about how to report the phone scam to the proper authorities.
By Ben Froese, CPA (Wooster office)
Need more help managing your past, present and future taxes? These articles could help.
If you own a small-to-midsize company, you probably haven’t given much thought to how the Research & Development (R&D) tax credit could help you. You might even think that the R&D credit is reserved for big businesses with tons of money to spare on technological investments. If so, then you may want to change your thought process and your business strategy.
Planning ahead is a great way to save your company’s tax dollars and there are many successful strategies from which to choose.
Click here to find out if you should be making a big purchase for your company that will help cut your tax bill.
The R&D tax credit applies to more than just businesses that have research facilities. In fact, many businesses across a range of industries may qualify for this valuable credit, but instead of asking their financial advisor for guidance, they give in to the misconception that they are not “big enough” or that they have not “big enough investments in technology.”
I recommend you avoid this mindset at all costs.
Plan For The Future
While the 2014 tax season is now over, it’s never too early to start strategizing to secure future tax savings. For example, have you thought about improving your current processes to become more efficient? Believe it or not, taking steps to make your company “lean” may be just what you need to qualify for future tax savings.
Are you familiar with Lean Six Sigma and how it can help you improve efficiency and effectiveness?
Read: Can You Explain The Concept Of Waste In Lean Six Sigma? to learn more.
According to consulting firm Smart Devine, in order to qualify for the R&D credit, your company must engage in an activity or initiative that:
The expenses that will be used to calculate the credit include your wages for research, supplies and contract research expenses.
Still Not Sure?
OK, so maybe you haven’t committed to an extensive lean-oriented strategy yet. That’s alright. There are many ways to qualify for this credit. Start by asking yourself the following four questions:
- Are you constantly developing new products or altering old products for new uses?
- Have you had a lean event to try and increase the productivity of a manufacturing facility, a single manufacturing line, or even a specific machine?
- Have you developed internal software because you couldn’t find one that met your needs on the market?
- Do you constantly develop prototypes to make sure your machines can produce a product that meets customer specifications?
If you answered yes to any one of these scenarios, chances are good that you will qualify for the credit.
If you do indeed qualify to receive the R&D credit, make an extra effort to maintain adequate records to substantiate the credit. This may seem daunting, but you are probably gathering the necessary information already. You probably just need to filter or tweak what you are already doing.
Email Rea & Associates to learn more about the Research & Development Credit and how to identify expenses that could qualify while promoting your company’s overall growth and sustainability. You may also be eligible to claim the R&D credit retroactively, contact us to learn more.
By Ben Froese, CPA (Wooster office)