Business community learns about little-known research and development tax credit

photo of dan puga and ryan gray
Dan Puga, left, co-founder of InTimeTec, and Ryan Gray, co-founder of SGW Designworks, saved money with a little-known tax credit. Photo by Sharon Fisher.

A surprising number of Idaho companies could be eligible for a tax credit on research and development activities.

photo of smith miller
Smith Miller. Photo by Sharon Fisher.

Formally known as the Research & Experimentation Tax Credit, but commonly known as the R&D Tax Credit, it was initially set up in 1981 and extended every few years until 2015 when it was made permanent, said Smith Miller, owner of Strategic Tax Solutions, who led a session about the credit sponsored by Zions Bank on April 3. Because Idaho conforms with the federal tax code, the credit applies to Idaho taxes as well, though there is no Idaho-specific equivalent tax credit.

Miller’s company, with offices in Boise and California, is not a certified public accounting firm and focuses solely on letting people know about the tax credit and helping them apply for it, he said. The company offers a free assessment and, if it is hired for the service, is paid 30% of the money saved, he said. If companies also go back through past tax years, they pay him when they receive their refund from the Internal Revenue Service, he said.

Idaho entrepreneurs Ryan Gray, co-founder of SGW Designworks, and Dan Puga, co-founder of InTimeTec, described their experiences with the tax credit. Gray said his company qualified for $100,000 in tax credits based on its $2 million of business. He added that the company was able to claim the tax credit even though some of its clients are paying them for R&D work.

Companies don’t have to be primarily research-oriented to be able to take advantage of the tax credit, Miller said, noting that he’s worked with dairy farms, wineries, design/build firms and manufacturing companies. Nonprofits, universities, banks, accounting firms and law firms are likely not eligible, but other than those, companies are likely to qualify, he said. All work must be done on U.S. soil.

The criteria for the tax credit are a new or improved product or process intended to improve function, performance, reliability or quality, which relies on scientific or engineering principles. The process or product must also relate to experimentation intended to eliminate uncertainty related to a product’s or process’ capability, method or appropriateness, he said.

The three components of the credit include salaries and wages, supply costs and up to 65% of contractor costs, Miller said. Salaries and wages are based on how much time the employee spends doing the research activity. But, due to the “substantially all” rule, companies can apply 100% of the employee’s salaries and wages to the tax credit as long as at least 80% of the employee’s time is spent in R&D activity. In addition, because the tax credit applies to 100% of employee costs and only 65% of contractor costs, that could make it worthwhile to hire contractors as employees, Miller added.

Companies can go back three years – that is, to 2015 – and can extend the credit as much as 20 years into the future on the federal side and 14 years on the Idaho side if the credit amounts to more than their tax liability, Miller said.

In addition, companies can be eligible for the tax credit even if the company is receiving government funding, such as from the Department of Defense. Companies that aren’t currently making money can apply the credit to their payroll tax. The credit can also be applied to alternative minimum tax, he added.

While some audience members sounded apprehensive, Miller said he had never had the tax credit disallowed, and said that the company offers audit defense to the IRS.

Markus Nigrin, co-founder and CEO of Blocksmith Inc., said his company had been using the R&D tax credit for several years, on the advice of the Boise Angel Alliance, a Boise-based early stage investment organization.

Montana small business lender is giving Idaho a look

Montana Community Development Corp. started giving Idaho a serious look in 2012 with its New Markets Tax Credit program. Since then, it has financed five high-profile projects in Coeur d’Alene, Pocatello, Shelley and Rexburg, totaling $93.35 million in investments.

In all, the recently renamed Montana & Idaho CDC has distributed $341 million in New Markets Tax Credits to 25 projects in the two states since 2008. The federal program was launched in 2000 to partly or entirely finance projects in low-income areas that do not “pencil out” for traditional bank financing, Glaser said.

The tax credits are sold to investors, with the money then distributed to qualifying projects of at least $4 million, typically as grants. The Missoula-based Montana CDC financed the full $11.3 million cost of the Kootenai Medical Center and provided $15.8 million for Golden Valley Natural in Shelley; $21 million for Western States Caterpillar in Pocatello; $12.95 million for Targhee Professional Offices in Rexburg; and most recently, $32.3 million for the $40 million Hemming Cedars student housing mixed-use project in Rexburg. Hemming Cedars is its largest New Markets Tax Credit to date.

Glaser believes Montana & Idaho CDC is the only lending entity operating in Idaho that is focused on New Markets Tax Credits.

Montana & Idaho CDC provides financing and consulting services to incentivize development in low-income areas or provide seed funding for promising small business that can’t get other financing.