Research and Development Tax Credit with Skyler Kressin

Come on one lead this is George G and the time is right welcome today’s guest strong a powerful Skyler Chris and Skylar, are you ready to do this? Oh yeah. All right, let’s let’s let’s go. Skylar is a CPA and a partner with Dominion Enterprise Services. He’s got a specialty in strategic tax planning and research and development tax credits. Get excited to have you on scholar tell us a little about your personal life’s more about your work, why you do what you do?

Skyler Kressin 0:40
Absolutely. So, just in terms of my personal life, married six kids really enjoying kind of being in the thick of family life right now with kids ranging from two years old all the way to my oldest who just turned 15. So been really enjoying my time with my five boys and one girl and married my high school sweetheart. So it was a very, it’s been a very great 16 years of marriage and just really enjoying that. Professionally speaking. I’m a CPA. As you mentioned, I’m a strategic tax planner, recently joined with Katherine Tyndall, who I know, have you spoken with before, with Dominion Dominion Enterprise Services, and we work exclusively with business owners and high net worth individuals who want to be strategic about their tax planning. My specialty area. Alongside the strategic tax planning more generally speaking, is r&d credits, as you mentioned, I think it’s an untapped tapped area of tax law that a lot of small midsize businesses should be taken advantage of. And, yeah, we can kind of go from there.

george grombacher 1:53
I love it. So 16 years with your high school sweetheart, amazing six kids to the 15. And as a strategic planner was was was was 60 the plan number are we are we hoping for more?

Skyler Kressin 2:09
Uh, yeah, who knows? I mean, we may, we may be blessed with more, but we shall see. But I’ll tell you what, you know, there are things built into the tax code that do encourage having children. So the child tax credit and various other incentives for you know, getting married and staying married are definitely there.

george grombacher 2:28
Yeah, yeah, that, that right there. The hook getting married, stay married might be the best piece of financial. I don’t want to say advice necessarily, but the financial rule of thumb, potentially right there. So that’s right. I love it. So tell me more about this r&d Tax Credit? Because I know that I’ve heard a little bit about it, but I don’t know much about it. And I feel like I’m not that that’s not an uncommon thing.

Skyler Kressin 2:53
Yeah, absolutely. Um, r&d tax credits, you know, they’ve been around for a while. And in 2016, they were really enshrined into staying into tax law. And I don’t think they’re going away anytime soon. And essentially, what they are is they’re in an attempt by federal government and state governments, in many cases to really incentivize domestic research and development. And so what they reward is paying people domestically to do research and development work. And, you know, so you know, there’s a lot of discussion about how there’s a lot of manufacturing overseas and offshoring and all this stuff. And so, right now, the the kind of mood and what’s been encouraged since the mid 90s, by the tax code is to really invest in innovative processes and products stateside. And so that got in trying to the tax code in the form of the r&d credit. The r&d credit, essentially, is a rewarding of firms who pay out wages, and do pay out subcontractor costs to domestic subcontractors for doing research and development work. So that’s kind of the overview in terms of, you know, what’s, what it’s all about in terms of the motivation for the tax code. In terms of the nitty gritty, we can get into that. But you know, I’ll just stop there and see if you have any questions first.

george grombacher 4:21
Yeah, I think that that, that seems like a pretty wise thing. And our government doesn’t always this is a controversial take right here. Our government always isn’t the wisest, what, what, what was kind of the motivation? I understand that, but to actually make it happen, what was the push, just the desire to?

Unknown Speaker 4:40
Yeah, so really, the push was and this is kind of alongside a suite of various other tax incentives. Like there was one that’s that since expired, that rewarded domestic production. And so that’s again related to the domestic manufacturing, and the arguments surrounding all These pieces of incentives and legislation was to encourage high paying innovative manufacturing type jobs and research in the United States. The research just shows over and over that, you know, really the way you build wealth in a country is to provide people with, you know, good paying jobs that are tied to whether it’s manufacturing or, you know, research and development, you know, high end products and processes that are being developed domestically. If you basically just farm that out to offshore firms, if you even domestic firms, just hire people offshore to do that work, you’re really not building a base of high wage earners in the United States. And so that’s the logic behind this. And I think it’s pretty sound logic thinking the economic analyses kind of bear that out. If you look at the period from, you know, World War Two, all the way through to say the mid 70s, that was a period of unprecedented prosperity in the United States. And a lot of the reason why that was because we were just such a powerhouse in terms of economic innovation, manufacturing, etc, you can think of, you know, all the men and women who had these jobs in companies for 50 years. And the reason why they could do that is because these companies continued to innovate and continue to manufacture things stateside. And so I think that the the motivation behind it is really tied to that and tied to that recognition that that’s something that’s good to encourage. So, you know, one of those, as you mentioned, one of those rare instances, where, you know, the federal government, I think, kind of got it right, in terms of their incentives, along with a few other things. But this one, you know, I think, makes a lot of sense.

george grombacher 6:51
Yeah, yeah. And it certainly seems to be picking up steam, at least the things I’m paying attention to when we’re recognizing that we have supply chain issues, and so much of our medications are built or created overseas and whatnot. So hopefully, hopefully, there are still more funds coming into this. So how does that work? Let’s let’s dive into that nitty gritty.

Unknown Speaker 7:13
Yeah, so So really, what you have to do in order to be eligible is, as I mentioned, you have to be paying people domestically. So a lot of people will think, Hey, I do my company is innovative, we do innovative work. Well, the first threshold question is do you pay wages to people to make domestically? Or do you pay subcontractors domestically? A lot of people have off offshore contractor teams or what have you, that’s just not going to work for the r&d credit, because that’s contrary to the entire purpose of it. So step number one is, do you pay people domestically wages or subcontractor fees? Step number two is do you really qualify in terms of eligibility for the credit, and I would just say that that’s much broader than people might imagine. But in some ways, it’s narrower. So the IRS has a specific definition. And basically, you can be eligible for the r&d tax credit, if you are devoting time and effort and resources to developing or creating new or innovative products, or processes, you’re improving existing products or processes, and, or, you know, patents, prototype software, etc. And you’re hiring people who are using technical scientific expertise in order to do that. So designers, engineers, scientists, etc. So that’s the basic picture is you have to be developing a new product or process and you have to be doing paying people domestically who are experts in developing such products or processes. So once you do that, then it’s a whole process of, you know, how much is this really gonna benefit you? What is this going to get you in terms of a credit? But those two threshold questions, I think, are key. Are you paying people domestically? And are you paying them as kind of experts to do a development of a product? Now I want to disabuse the notion that it has to be someone who’s like, you know, a PhD in chemistry or something like that doesn’t have to be that person. In fact, you could have somebody who’s, for instance, a brewery owns a brewery, who has an expert Brewer, who’s developing a new beer, that could actually be a new product and because that Brewer even though he may or may not have a advanced degree in biochemistry, or what have you, is developing a new product along the lines of a scientific process of testing and, you know, the whole process of developing that new beer at that company could qualify.

george grombacher 9:52
Got it? You know, Skyler I don’t know what that says about you and me, but that’s exactly where my brain went. Also, as I bet that you You could probably qualify if I were brewing beer. So, on the flip side, well, I don’t know if the flip side of the coin, let’s also assume that I’m a company that’s trying to develop a different version of the vaccine for future viruses or whatever that would, I would assume, obviously qualify?

Unknown Speaker 10:17
Absolutely. So and in fact, I’ve helped, I’ve helped, you know, firms who do biomedical research, especially in this time, developed products and, and testing methods, etc. And so that’s been actually a huge boon for those companies to encourage them to be innovative in the response to the pandemic. Absolutely.

george grombacher 10:37
So how does it actually work? If let’s just use this year as an example, it’s, it’s it’s 2021. I’ve invested $100,000 into into research for my new vaccine.

Unknown Speaker 10:51
Yeah, so if that $100,000 was, for instance, paying a scientist to do the research, yeah, testing, you know, eliminates uncertainties experiment along the lines of the technological, you know, experimentation process that we’ve just outlined, then that would be that entire $100,000, if you’re paying that to this, you know, specialists to do that research would be what’s called a qualified research expenditure, that then gets plugged into somewhat complex formula, and there’s different elections you can make. But generally speaking, you can expect something around, say, 15% of those wages back as a credit. And the reason why this is important to make a distinction here is that it’s not a deduction, it’s a credit. So that’s $1 for dollar decrease to your tax bill. So say you have a, you know, a taxable income of $100,000. tax on that 20,000. Well, if you have a $15,000 credit, then that eliminates 15 of the $20,000 of tax. So it’s a much more powerful thing than just merely a deduction not given that it’s a credit.

george grombacher 12:04
Yeah, certainly. So is this something that I need to apply for on the front end? Or is it on on the back end? How does it how does it actually work?

Unknown Speaker 12:13
Yeah, it’s claimed, the main one that I’m talking about, there is another one, that’s a that’s a payroll r&d credit, I’m talking about the one that’s offsetting income taxes, and the way that it’s claimed is on your income tax return. So say you’re a firm that is an LLC or S corp, you know, or C Corp, it’s going to be claimed at the level of the business entity itself. And then it’s it’s a pass through entity, it flows down to the individual. If it’s a C corporation that pays its own tax federally, then it’s calculated and reduces tax at that level. So essentially, it’s claimed at the level of the income tax return, that for the business that’s doing the actual activity. Got it? Nice, it can be claimed retroactive lease. So you know, you can amend tax returns. You know, with certain statute limitations, you can you can claim refunds for the r&d credit.

george grombacher 13:15
Okay. So it’s really possible that there are a lot of businesses out there that have been doing this and just not even realize.

Unknown Speaker 13:24
Absolutely. And oftentimes, that will exactly be the situation is I’ll, you know, be talking to a new client, and just kind of looking at their situation and just say, hey, you know, did your last CPA speak to you about the r&d credit? Oh, no, I don’t even know what that is. And so, you know, we’re talking about very, very high tax savings, potentially, depending on what the business is doing.

george grombacher 13:48
Nice. And, okay. So really, I mean, this is a, for lack of a better term, an advertisement for working with somebody who is more proactive than than just reactive. And obviously, all professions, not all professionals are the same. So just taking a big step back and looking for different opportunities, walk me through sort of typical client engagement.

Unknown Speaker 14:14
Yeah, so you know, our firm’s profile and our philosophy is that we want to work with people who, who really see the value of strategic planning. And so that means it’s really a mutual thing. You know, we want to only take a limited number of clients because there’s only so much time in the day, so much attention we can give to people. And we want to do that because we want to be very proactive and holistic in our planning process. Oftentimes, professionals of various stripes, including CPAs, will just get bogged down with the compliance work that goes along with just filing a huge number of tax returns. And that’s the last thing we want to be doing is, you know, focused on filing a bunch of tax returns, getting the work out the door and missing these guys. opportunities for our clients. And so our engagements are predicated on a limited number of relationships and relationships where we can really bring value to the table. And so our engagement typically looks like this, we’ll do an assessment of someone’s tax situation, usually, you know, they’ll send over a couple of years of tax returns, we’ll kind of review them comprehensively. And then we’ll do a discovery call with them, where we determine, hey, does this make sense from a standpoint of relationship, we, you know, we don’t take everybody that walks into the door. And we think that that’s, you know, best for both the prospective client and for us. And if it does make sense, and if, for instance, r&d is one of those areas where they can really acquire some tax savings, then we’ll communicate that to them. And we’ll say, Look, we see this opportunity for you. I know you haven’t signed on with us yet. But this is what we could potentially do for you. And then with that in mind, then we, if they, if they want to sign on with us, and you know, it’s mutually agreeable, then we delve into the really nitty gritty detail work of getting that credit claim done.

george grombacher 16:07
Nice. I appreciate that. So a question that popped into my mind was, should people be thinking about this proactively? If it’s, you know, we’re in 2021, and they’re looking at 2022? And they say, Okay, this is a cool thing. Should I be potentially allocating more funds towards this? Or is that a dangerous thing, because it could go away?

Unknown Speaker 16:33
You know, right now, I don’t really see it going away. I think that in general, you know, even if you allocated more funds to it, it’s got to make, it’s got to make first of all, it’s got to make business sense. So you really have to have a potentially viable product. So one of the things I like to say is, you know, we try to encourage our clients to not let the tax tail wag the business dog. So you don’t want to just be making this poor business decisions for potential tax benefits. That really doesn’t make sense. So first of all, it’s got to make business sense. Second of all, you have to be paying somebody you know, fairly for something that is actually going to get you what you want, which is, you know, that new developed product or process. If it’s if it’s just you as a business owner, and maybe your form of compensation can be, you know, wages rather than, you know, maybe other forms of compensation. And you’re going to pay yourself that amount. Anyway, that’s a no brainer to me, and you’re doing this work anyway. So again, it has to be in the form of wages. So I guess my answer to you is that it really depends on the product and process and the business decision. But if it’s viable, that you think you you may have a chance of developing a new product or process, then this is definitely still a strong incentive for you for you to use going forward.

george grombacher 17:54
That makes a lot of sense. Well, Skyler, people are ready for difference making tip do you have for them?

Unknown Speaker 18:01
I think that the difference making tip that I would give everyone is for you to look comprehensively at your relationship with your tax advisor, your taxes are your oftentimes your biggest expense, single line item on your p&l. If you look at yourself, your personal p&l, and so getting that number whittled down every single year proactively, I think can make a huge difference in terms of your cash flow. And that can you know, ultimately pay dividends in terms of your potential earning potential with respect to your investments with respect to your freedom, cash flow with which you can do any number of other things. So take a look every year at your full tax that you pay state and local, federal, etc. And make it a goal every year of whittling that number down as much as possible.

george grombacher 18:55
Well, I think that is great stuff that definitely gets cut. Schuyler, thank you so much for coming on. Where can people learn more about you? How can they engage with you?

Unknown Speaker 19:03
Yeah, absolutely. So I’m on LinkedIn. You’ll find me Skylar, question on LinkedIn. And our website is dominion, EAS. That’s Dominion s.com And you’ll find various resources on there and contact information as well.

george grombacher 19:19
Love it. Well, if you enjoyed this as much as I did, so schedule your appreciation and share today show the friend who also appreciates good ideas go to Dominion s calm that’s domin i o n e s calm find scholar on LinkedIn, list all those in the notes of the show. Thanks. Get together. Thank you. And until next time, keep fighting the good fight. We’re all in this together.

Transcribed by https://otter.ai