BusinessWest

The Research & Development Tax Credit

During these challenging economic times, manufacturers may be overlooking a significant source of revenue for hiring additional workers, expanding operations, and improving their bottom lines: the research and development (R&D) tax credit.
Large companies have banked on these credits for years, feeding a misperception that the credit is limited to high-tech, cutting-edge research companies, multinationals, or Fortune 1000 firms. However, when the credit was enacted by Congress, one of the important goals was to fuel innovation and hiring in the area which produces the most jobs in America: small and mid-sized companies. Recent changes to the credit have helped further this goal dramatically.
Over the past few years, Congress reduced the documentation and qualification requirements to make this credit accessible to companies outside of the Fortune 1000. Court rulings have also boosted eligibility and provided much-needed clarification. In the last two years, five major R&D tax-credit court cases added additional guidance in this area. All of these cases resulted in taxpayer-friendly outcomes that provide a clear, consistent, affirmative message toward estimation and costs that can be claimed. One case involving an automotive supplier had broad implications for companies in the plastics and manufacturing industry as a whole.
Specifically, the court ruled that a company could capture supply expenses incurred for the development of tooling and dies sold to the client. Another case reaffirmed this decision and expanded its applicability toward manufacturers developing products sold to clients. Specifically, the court ruled that the taxpayer could capture all of the expenses related to some of the unique boats the company developed. When viewed through the prism of the manufacturing industry, this applies to the tooling and prototypes sold to clients. An example could be the plastic injection mold developed to make a plastic car part.
Today’s manufacturer may not realize that their activities may entitle them to generous R&D tax incentives, and even if they do, the traditional notions of R&D may cause manufacturers to limit qualified research expenditures to activities associated with new-product and invention developments. However, in many cases, manufacturers spend a considerable amount of time and effort to develop product designs that achieve optimized manufacturing process performance. Furthermore, many manufacturers, including ‘job shops,’ conduct extensive activities to design and develop the manufacturing processes themselves to achieve specific project requirements or to stay ahead of competitors in the marketplace.
All these activities may require time and money both in the engineering department and on the production floor itself, which may be captured as qualified research expenditures leading to significant tax benefits. If you think you have to be a large public corporation developing products and inventions to be conducting qualified activities as defined by the Internal Revenue Code, think again.
Manufacturers with qualifying R&D activities are entitled to a 20% research tax credit (potentially equaling hundreds of thousands of dollars), subject to certain limitations for previous years. The credit is much more powerful than a deduction because it offsets taxes owed or paid, dollar for dollar, as opposed to just reducing a company’s taxable income. Even better, a business can obtain the credit for all open tax years — generally the last three years plus the current year. Any credits not currently utilizable can be carried forward 20 years.
To fully capture the eligible costs for this credit and defend your calculations should you be audited, you need a group of experts with either scientific or engineering experience to help qualify, quantify, and substantiate the credit. A company I’ve dealt with which has such expertise is an organization called Alliantgroup, a national, specialty tax-advisory firm. They provide businesses with a no-obligation assessment of their eligibility for tax credits. With recent changes to these incentives, they have been able to bring extra value to our clients, making this a win-win proposition for everyone.
A noted supporter of the R&D credit, former IRS Commissioner and Alliantgroup Vice Chairman Mark Everson, has urged manufacturers and their CPAs to educate themselves about the credit.
“Manufacturing is a foundational component of the American economy. The R&D credit can be a lifesaver for small and mid-size businesses, and in particular manufacturers. It is critical that businesses capture these funds.”
The U.S. Congress and many state governments realize how critical innovation is to the future of America’s competitiveness in the world, and the R&D credit is an important incentive to nurture that innovation. They also know that the companies engaging in these activities are supporting millions of high-skilled, well-paying jobs.
In addition to manufacturing, Brian Aumueller, director for Alliantgroup, has seen first-hand a variety of industries that are benefiting from the credit, including architecture, engineering, and contracting. He notes, “the broadened applicability of the credit has enhanced the opportunity for companies in various industries across the country — New England is no exception. In 2011, we have seen local companies capture over $16 million in credits, and expect that pace to increase in 2012 and beyond.”
The following examples illustrate how more businesses are taking full advantage of this important tax incentive program, resulting in a new stream of income in these trying economic times and saving jobs.
A contract manufacturer with $20 million in revenues realized a credit in excess of $400,000 due to changes in law that enable the costs related to plastic injection molds and tools sold to customers to be claimed.
Similarly, a tire-mold manufacturer realized about $60,000 in credits from the design of tire molds and the related costs of tire-mold prototypes.
For these and other reasons, the R&D credit will be around for a long time, and any company with relevant products or services would be smart to realize its benefits. By taking a strategic approach to R&D tax credits, businesses can realize significant cost savings benefiting the company, its employees, and the economy as a whole.

Kristina Drzal Houghton, CPA, is partner in charge of Taxation for Meyers Brothers Kalicka, P.C.; 536-8510; www.mbkcpa.com

Good Communication Lowers Costs, Risks

In my book Employees, Kids & Pets, I talk about how the lack of proper and disciplined communication can lead to unhappy employees and business owners. What I don’t talk about is how profoundly that unhappiness can affect your bottom line.
When I say ‘communicate with employees,’ I don’t mean day-to-day stuff or even formal task training. What I mean is properly communicating your organizational needs and wishes.
For instance, how many of your employees know what your mission or vision statement is? Have you ever specifically stated it to them, or do you just assume they know? Here is a good test. Pick a handful of lower-level employees, and ask them to explain, in their own words, what the company actually does. Then ask them who your target customer is. Finally, ask them what is most important to upper management or the owners. If they can’t answer these questions suitably, then there is an opportunity for improvement.

Teach a Man to Fish
If you explain your expectations, then there are a million other little things employees can figure out for themselves because they know the general direction. For tasks, you can say, “this is the order in which to assemble this car.” But with mission and vision, you can say, “we do everything here perfectly, and we absolutely want to treat our customers better than anyone else. So when you are building this car, we want to make sure that no customer ever has a problem and it never has a defect. When you’re building it, know that our mission is for it to be perfect, no matter what.”
Armed with that communication, those employees are now empowered to deal with all kinds of issues that you could never begin to foresee.
For instance, say a car comes down the assembly line in an auto plant and the employee notices a mistake done by the person before them on the line. Now, let’s assume these employees are best friends and the one who discovered the mistake knows the other employee’s husband lost his job. Assume they were trained on how to handle a mistake, but were never given any moral direction on how to handle a mistake made by your best friend when her husband just lost his job. What is the line for our torn employee? Maybe she would call attention to the mistake like she is supposed to if her friend’s husband still had a job, but that one little detail might make all the moral difference in the world to her.
If the employees were never told how important perfection is to the company and only told what to do for a mistake, then they can justify a deviation. However, go back and read the company expectations and tell me you don’t clearly know what the company wants and where they stand on this matter or any other number of odd situations surrounding a mistake. Employees of that company know, “this car is going to go down the line with a defect, and that’s not good! I need to do something about this or it will be my butt.”
The same thing can happen to a white-collar service business as well, although it tends to be a little more subtle. For instance, I have seen employees block sales because they don’t like a salesperson in a company that relies on sales to stay in business, or an employee who purposely treats customers poorly because they don’t like them. The main reason they do this is because no one ever told them that every single sale and customer is important.

How Does It Affect the Bottom Line?
The potential fallout from the assembly-line employee making the wrong choice is virtually endless. The defect could harm another employee down the line and send them out on workers’ compensation or disability. If terminated, the employee might get unemployment depending on the circumstances. The defect could end up on the road and cause an injury lawsuit against the company that could result in your insurance going up, or worse.
The white-collar scenarios can be even worse. Business can be lost, but poor morale due to factions in a company can severely lower productivity and result in workplace violence, harassment lawsuits, and stress-related medical issues.

Why Is It So Hard?
Communicating in a clear, sensible, and consistent manner is not difficult in theory, but two things tend to get in the way.
The first is the assumption that everyone already knows. Common sense is overestimated. For instance, a scientist might think it is common sense not to mix potassium chlorate and sulfur. A contractor might think it is common sense not to walk a job site in sneakers. A mechanic might think it is common sense not to touch a sparkplug wire. But a lay person would need to experience or be told that potassium chlorate and sulfur explode, nails go through sneakers, and sparkplug wires shock. If you want them to know, you must tell them in a clear, sensible, and consistent manner.
The second barrier is conflict avoidance. Most people avoid conflict. When an employee who may already have an edge about them does something wrong, the manager or boss might have a tendency to let it slide or wait to see if they do it again. The next time they do it, you may be distracted or sick and think, ‘I’ll say something the third time.’

Lack of Consistency
The problem with the above scenario of ignoring bad behavior multiple times is something I call, ‘now you’re the bad guy.’ When someone does something (whether they know it is wrong or not) and gets away with it multiple times, it becomes OK or standard. So when you finally work up the courage to confront them the fourth time, they look at you like you’re crazy. They think, “why are you being such a jerk? This is allowed; this is the way we always do it.”
Don’t be the bad guy, and don’t assume that your employees know any more than you tell them. It’s not fair to them, your company, or your bottom line.

Eric Egeland, CPCU, AU is the president of Capacity Consulting Inc., which provides management and business-consulting services. He has personally created 10 successful companies and has consulted on hundreds of projects, funding packages, startups, plans, assessments, turnarounds, closures, and reorganizations; ericegeland@capacityconsultinginc.com

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Insurance Payments for Your Autistic Child

Having a child with autism creates many challenges, not the least of which is the potential financial impact on your family. Until recently, many families were burdened with a mountain of bills when attempting to have their child diagnosed with and treated for disorders within the autism spectrum. But, thanks to a new Massachusetts law, that is changing.
In August 2010, ARICA (an Act Relative to Insurance Coverage for Autism) was signed into law by Gov. Deval Patrick; it became effective on Jan. 1, 2011. This law requires health-insurance companies in Massachusetts to provide coverage with respect to the diagnosis and treatment of autism-spectrum disorders, regardless of the age of the individual afflicted by the disorder.
Despite what many believe, or at least have questioned, ARICA has no impact on the special-education services provided by school districts, as required under the Individuals with Disabilities Act and Massachusetts law.
To clarify, ARICA requires that health insurers provide payment for supplemental services, in addition to services provided by school districts, pursuant to a student’s individualized education plan (IEP). Services covered by ARICA include, but are not limited to, medication, counseling, psychiatric care, psychological care, physical therapy, speech therapy, and occupational therapy.
This law includes several significant factors that are noteworthy:
• Reimbursement cannot be sought for services provided by a school district in furtherance of a child’s IEP;
• School districts are prohibited from requiring that services otherwise provided under the child’s IEP be sought via private health insurance coverage; and
• Potential coverage under ARICA cannot be considered by a child’s IEP team when developing the child’s IEP.
There are, however, several exceptions to coverage under ARICA. For example, self-funded plans that fall under the auspices of ERISA are not required to provide insurance coverage. In addition, individuals who receive health care coverage under MassHealth or CommonHealth are not eligible for the coverage provided by ARICA. In addition, insurers may opt out of required participation if applicable costs to the insurance exceed 1% of its otherwise current costs.
As with any new legislation, the implementation of ARICA has progressed, and will evolve, in fits and starts as interested parties educate themselves and others with respect to the practical application of the law.
For example, health-insurance companies that fall under the requirements of ARICA may require a copy of the child’s IEP prior to making coverage decisions. As such, it is very important that the parents of a child covered by ARICA proactively inform the school district that all requests for their child’s IEP be directed to themselves as the parent of guardian. Remember that Massachusetts law prevents school districts from disseminating information relative to a child’s IEP to a private health-insurance provider without the parent or guardian’s informed, prior written consent.
As with any change, especially one of this magnitude, the key to successful transition is communication. You should contact your child’s school district to ensure that it is aware of the provisions of ARICA, as well as its effect on the services that the district provides. This discussion should include such issues as what policies the district has in place to ensure that your child’s confidential information is not shared with insurers without your written consent, as well as a review of the district’s continuing education of staff and administrators relative to ARICA. Parents may also request literature from the school district in order to ensure that the district has written procedures in place to ensure proper application of ARICA.
With your child’s best interests in mind, it is important to reach out to his doctors and therapists to discuss this new law and the impact that it has on services provided, both pursuant to your child’s IEP and privately. It is important that any services provided to your child by a doctor or therapist be properly coded when billed to avoid confusion, which can ultimately lead to additional costs and/or delays.
Communication with your health-insurance company is crucial — first, to confirm that the provisions of ARICA apply to your health insurer, and, second, to ensure that covered services are provided and billed appropriately. In addition, any questions with respect to co-pays and out-of- pocket expenses are best addressed prior to receipt of services.
Informing your insurer proactively that your child receives services that fall within the scope of ARICA, and requesting written information with respect to its compliance with ARICA, will reduce the likelihood that billing questions and issues arise. As with any issue, proper documentation of any and all services provided will assist in resolving any potential issues in a timely manner.
Luckily, a number of quality resources are available for those who have questions related to ARICA. The Commonwealth of Massachusetts Division of Insurance has published guidance with respect to ARICA, and many autism advocacy and support groups have held and continue to hold informational workshops.
If you need legal assistance when wading through the waters of autism-disorder diagnosis and treatment payments, make sure you consult with a qualified special-education attorney. n

Melissa R. Gillis, Esq. is an attorney with Bacon Wilson, P.C. in the special-education, domestic, and real-estate departments; (413) 781-0560; baconwilson.com/attorneys/gillis. Dennis G. Egan Jr., Esq. is an attorney with Bacon Wilson, P.C., concentrating in special education, business, and corporate law; (413) 781-0560; baconwilson.com/attorneys/egan

Six Tax Tips to Enhance Your Growth Strategy

If you’re a business owner, then you know how challenging it is to maintain your profitability in these tough economic times, let alone grow your business. Therefore, it’s critical to ensure you have the right resources, team, and business partners who not only support you, but also truly understand your business … from all angles.
Every business owner should have an accountant whom they can rely on to support their business’ challenges and provide timely and appropriate advice. Your accountants should be more than just advisers whom you speak with during tax season. They should serve as your business partners, helping you with financial and operational strategies and supporting your objectives for profitability.
Business owners should communicate with their accountants throughout the year to ensure they are taking advantage of all eligible government subsidies, basically tax breaks, that are relevant to the company. These are designed to support investments in capital assets as well as every organization’s most valued resource: its people. The following tips are designed to help decrease risk and improve profitability.

1. Review all expenditures made in 2011 to see if they qualify for the business-property-expensing option. The generous dollar ceilings that applied until Dec. 31, 2011 for both Sec. 179 and 100% bonus depreciation expensing allowed many businesses to deduct most, if not all, of their outlays for machinery and equipment.

2. Next, review your eligibility for the following credits:
• Employee retention tax credit of $1,000 for each eligible new employee whom you have retained for at least 52 consecutive weeks;
• Small-employer health-insurance credit of 35% of your non-elective contributions to your employees’ health insurance; and
• Research and development tax credits, including certain costs incurred in the creation of a Web site.  This can be a very lucrative tax credit, which is often overlooked in businesses, especially in industries not commonly affiliated with research and development.

3. Did you take advantage of alternative fuel and energy credits? There are a variety of options, and it’s important to speak directly with your accountants to confirm if you qualify for any of these credits.

4. It’s important to substantiate and retain documentation for all of your deductible business expenses, particularly meals, entertainment, and automobile mileage. The IRS is auditing small businesses with a particular focus on disproportionate meals and entertainment as well as automobile expenses. Review your expense-tracking system with your accountant for compliance with these requirements.

5. Meet with your accountant to review the status and classification of all independent contractors. Some might need to be classified as employees and receive W-2 forms rather than 1099s.

6. Evaluate your options with an existing retirement plan or consider setting one up beginning in 2012 to maximize your benefits and theirs.

During every growth stage in a company, it’s extremely important to manage your liquidity. Therefore, this is the perfect time to establish a budget for 2012 to accurately forecast the funds needed to run your business. Cash flow is the lifeblood of every organization, so ensure that yours is healthy.

Robert F. Gorton is a shareholder and CPA at Waldron Rand. He has more than 20 years of experience providing assurance, tax compliance, and business-advisory services to privately held companies in varying industries. He works closely with each client’s management team to implement short- and long-term business, financial, and tax plans to ensure success. He is skilled in the area of mergers and acquisitions and has counseled many clients on due diligence, negotiations, and integration activities. He is certified in financial forensics and has significant experience in litigation, accounting and auditing, and investigative analysis; bobg@wrand.com

Use Non-disclosure Agreements to Keep Things Confidential

Practically every business hires independent contractors. But rarely do they obtain non-disclosure agreements prior to disclosing information to the contractors.
If you hired a third party to develop your Web site, did you require an NDA before discussing your business procedures or methods? If you invented a new product or business process, did you obtain a NDA from manufacturers or distributors before discussions began? While this seems like common sense, most businesses fail to recognize this important protection.
A non-disclosure agreement is a legal contract between at least two parties that outlines confidential material, knowledge, or information that is to be shared between the parties, while one or both wish to restrict access to the data by third parties. The non-disclosure agreement is a contract creating a confidential relationship between parties to protect any type of proprietary information.
NDAs are often used when two or more entities are considering doing business and need to understand the processes used by the other for purposes of evaluating the business relationship. Employment contracts will often include a non-disclosure agreement clause restricting the use and dissemination of confidential, company-owned information.
Non-disclosure agreements may also contain clauses that protect the person receiving the information so that, if they lawfully receive the information through other sources, they would not be obligated to keep the information secret. The NDA typically requires the receiving party to maintain the information in confidence when the information was supplied directly by the disclosing party named in the agreement.
Many agreements are unilateral or directional NDAs. This would be used when only one party is disclosing information which is to remain confidential and requires that the other party not use the disclosed information without compensating the discloser. Another common type of non-disclosure agreement is a mutual agreement where both entities intend to disclose information that should remain confidential.
Just because a document or clause is titled ‘non-disclosure agreement’ does not mean it provides you with the appropriate level of protection. A non-disclosure agreement can protect any type of information that is not commonly or publicly known and may be very detailed; however, agreements generally address the following basic issues:
•Parties to the agreement;
•Definition of information to be held confidential;
•Time period of the confidentiality;
•Term the agreement is binding;
•Exclusions, if any, from the agreement; and
•Types of permissible disclosure, such as those required by law or court order.
Unless they can provide a compelling reason for their refusal, warning lights should go off if a party refuses to sign a non-disclosure agreement. Analyze the business relationship and the deal itself and consider whether you should walk away in the event one party refuses to sign.
To minimize and manage your risk, obtaining non-disclosure agreements should become a standard practice for your business.  Do not expose your business secrets to others without this protection.

Dawn D. McDonald is an associate with Cooley, Shrair P.C., focusing her practice on assisting clients in the areas of commercial litigation and labor and employment law; (413) 735-8045; dmcdonald@cooleyshrair.com

When Companies Want to Know What’s Really Going On

You have likely seen the CBS television show Undercover Boss, where the chief executive officer and/or family owner of a large corporation goes undercover in their own company.
They pose as a new employee or trainee and spend one day with each of three or four different employees. Of course, the employees don’t know the $10-per-hour trainee is the CEO of the company, so they dish out personal stories, share complaints about the company, and even share ways they shortcut the company. The boss comes away from the experience suitably charmed by some, but almost always flabbergasted by what is really going on in their company day to day.
Doing an undercover assessment is a great idea, and can really improve your company whether you do it yourself or hire someone. But I can tell you from experience that what you see on television is only part of the story. Our firm has been providing this service for years to companies under 200 employees where everyone knows the boss. We go undercover as an employee, trainee, temp, or whatever the owner is comfortable with, and real life is a little different.
Like all good TV, things get edited. In the case of prime-time TV, all the boring stuff and dead time gets cut, and so does some really good stuff. In the real world, doing an undercover assessment is a little like surveillance. Actually, it’s a lot like surveillance. You watch and listen to a whole lot of nothing for what seems like forever, and then, suddenly, you witness something big.
As an undercover employee, you train with co-workers, hang out at the water cooler, go to meetings, and start to make friends. You typically learn a few things right away that help the company. But for the most part, it can stay pretty benign for weeks or even months. The reason varies, depending on the size of the company. For smaller companies, people are more cautious of what they say and do ‘outside the family’ and can maintain formality for quite some time. Small companies just tend to be too tightly knit for anyone to give dirt to a stranger right away or let them see the family’s dysfunction.
Three to six months is a magic time frame when people start to get tired of faking who they really are day to day. The bigger the company, the more likely there exist employees who feel removed enough that they never fake formality and always act and speak freely, but in a bigger company, you have to find them.
So now you know that real-life undercover assessments can be significantly longer and much duller than on television. But in real-life assessments, we also see some very serious issues that might be too much for television or too embarrassing for the CEO to publicly share. Of course, for our clients, it stays between the boss and the consultant.
Over the years, we have learned about various seedy activities performed by employees. We have seen employees engage in immoral behavior while requiring subordinates to watch guard. We have seen the most respected member of a management team threaten and assault the employees of an entire department as part of their natural management style. We have seen groups of employees in one department band together to undermine another department. We have seen employees purposely provide poor service to customers they didn’t like and brag with a sense of accomplishment after chasing them away. Extreme? Yes, but more common than you think.
On the less dramatic, but just as damaging, side are the bookkeepers who really don’t know how to keep the books, employees who get angry about the boss’s new car and retaliate by lowering their productivity, and the snoops who go through the boss’s desk and computer when alone and then brag about it. The part that should surprise and shock you the most is that the overwhelming majority of these examples involve the longest-term and most-trusted employees.
Why the long-term employees and not the new employees? The new ones can certainly pull some doozies, but they can’t get away with such nonsense for long. They haven’t been there long enough to have the support and/or fear of the other employees. They do something wrong, and the current employees sell them out.
Finding and correcting the issues above can have a huge impact on your organization. It can help avoid lawsuits, improve morale, and make the whole company more productive. But we find many issues that are far less dramatic, yet equally important, like inefficiencies, safety issues, and potential breaches in data security.
We always find improvement opportunities that increase the bottom line, and that is the true value of the undercover assignment, whether it’s real life or television.

Eric Egeland is the president of Capacity Consulting Inc., which provides strategic consulting for multiple industries, including insurance, real estate, education, energy, and Internet. He has personally created 10 successful startups, including seven insurance groups, and has consulted on hundreds of projects, closures, startups, plans, assessments, turnarounds, and reorganizations; ericegeland@capacityconsultinginc.com