{"id":12288,"date":"2023-10-12T02:11:27","date_gmt":"2023-10-12T02:11:27","guid":{"rendered":"https:\/\/taxops.com\/?p=12288"},"modified":"2023-10-13T17:54:06","modified_gmt":"2023-10-13T17:54:06","slug":"a-guide-for-pe-firms-hidden-rd-credit-value-in-6engineers","status":"publish","type":"post","link":"https:\/\/taxops.com\/a-guide-for-pe-firms-hidden-rd-credit-value-in-6engineers\/","title":{"rendered":"A Guide for PE Firms: Hidden R&#038;D Tax Credit Value in #6engineers"},"content":{"rendered":"\n<div style=\"height:53px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<figure class=\"wp-block-gallery has-nested-images columns-default is-cropped wp-block-gallery-1 is-layout-flex wp-block-gallery-is-layout-flex\">\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1024\" height=\"536\" data-id=\"12225\" src=\"data:image\/gif;base64,R0lGODlhAQABAIAAAAAAAP\/\/\/yH5BAEAAAAALAAAAAABAAEAAAIBRAA7\" data-src=\"https:\/\/taxops.com\/wp-content\/uploads\/2023\/07\/6ENGINEERS-1024x536.png\" alt=\"\" class=\"wp-image-12225 lazyload\" data-srcset=\"https:\/\/taxops.com\/wp-content\/uploads\/2023\/07\/6ENGINEERS-1024x536.png 1024w, https:\/\/taxops.com\/wp-content\/uploads\/2023\/07\/6ENGINEERS-980x513.png 980w, https:\/\/taxops.com\/wp-content\/uploads\/2023\/07\/6ENGINEERS-480x251.png 480w\" sizes=\"(min-width: 0px) and (max-width: 480px) 480px, (min-width: 481px) and (max-width: 980px) 980px, (min-width: 981px) 1024px, 100vw\" \/><noscript><img decoding=\"async\" width=\"1024\" height=\"536\" data-id=\"12225\" src=\"https:\/\/taxops.com\/wp-content\/uploads\/2023\/07\/6ENGINEERS-1024x536.png\" alt=\"\" class=\"wp-image-12225 lazyload\" srcset=\"https:\/\/taxops.com\/wp-content\/uploads\/2023\/07\/6ENGINEERS-1024x536.png 1024w, https:\/\/taxops.com\/wp-content\/uploads\/2023\/07\/6ENGINEERS-980x513.png 980w, https:\/\/taxops.com\/wp-content\/uploads\/2023\/07\/6ENGINEERS-480x251.png 480w\" sizes=\"(min-width: 0px) and (max-width: 480px) 480px, (min-width: 481px) and (max-width: 980px) 980px, (min-width: 981px) 1024px, 100vw\" \/><\/noscript><\/figure>\n<\/figure>\n\n\n\n<div style=\"height:53px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\"><em><em><em><em><em><em>Add value to your private equity deals with research tax credits for innovative portfolio companies.<\/em><\/em><\/em><\/em><\/em><\/em> <\/p>\n<\/blockquote>\n\n\n\n<div style=\"height:8px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\">By <a href=\"https:\/\/taxops.com\/mark-dunning\/\" target=\"_blank\" rel=\"noopener\" title=\"Mark Dunning\">Mark Dunning<\/a> and <a href=\"https:\/\/taxops.com\/jamie-overberg\/\" target=\"_blank\" rel=\"noopener\" title=\"Jamie Overberg\">Jamie Overberg<\/a><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Business transactions involving private equity portfolio companies often trigger complex tax considerations across various disciplines. Advanced tax planning not only creates opportunities but also eliminates unpleasant surprises, increasing the purchase price when taking a company to market for a buyer, especially with the small business payroll cash benefit.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This is especially true when it comes to R&amp;D credits. Motivated sellers can uncover hidden value in the everyday activities of innovative companies, even those with as few as six engineers. Six engineers are all it takes to leverage lucrative R&amp;D credits across\u00a0industries such as software and technology, manufacturing, automotive and aeronautical, biomedical and medical devices, engineering and more.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The term &#8220;#6engineers&#8221; highlights the minimum number of engineers or software developers required at a company to generate sufficient expenses \u2013 wages, salaries, outside contract and leased computer costs \u2013 associated with R&amp;D and achieve a reasonable ROI on R&amp;D credits. These engineers must be actively engaged in improving a product or process. Meeting this criterion is essential for eligibility.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Role of Private Equity Firms<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">As a PE investor, your role often grants you control over management and operational changes to increase profitability with an eye on a later profitable sale. In this capacity, consider whether your portfolio companies could benefit from federal and state R&amp;D credits to improve cash flow and investment proceeds. Over 20 billion of dollars are distributed to both small and large companies through R&amp;D credits, making it worthwhile to explore this option and file a credit claim, provided the company meets the #6engineers requirement in an innovative field.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">To successfully claim R&amp;D credits, several operational tasks must be completed. First, design documents that demonstrate the product&#8217;s research must be maintained. Second, a nexus between each associate development activity and the project must be established for claiming the credits.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">At the federal level, spending $1 million on research could result in a business receiving a $100,000 credit. However, each of the approximately 38 states offering R&amp;D credits has slightly different criteria and requirements, necessitating a nuanced approach for computation methods and research filings based on the specific state.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Contrary to a common misconception, R&amp;D credits are not solely beneficial to larger corporations. Small companies are eligible as well and can often benefit more by combining federal and state credits.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Recent changes under Section 174 should also be on your radar as a PE firm manager. These changes require companies to amortize Section 174 expenses, typically over five years (or 15 for foreign assets), starting in 2022. This could accelerate amortization and depress income, potentially impacting the short-term sale of portfolio companies. Proactively managing these issues with tax practitioners who understand the intersection of Section 174 and R&amp;D expenses is crucial for preserving valuations.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Justifiable Claims<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">R&amp;D credit claims require sophistication and expertise and should not be entrusted to subpar market players. Making aggressive or frivolous claims could invite IRS audits and enforcement into your PE deals. R&amp;D credits are not quick or easy and cannot be automated. Beware of vendors who promise a quick estimate of R&amp;D value without delving into project specifics; only experts who examine the details of each ongoing project and R&amp;D subcontract can truly boost business value through R&amp;D credits.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In addition to R&amp;D credits, consider other tax specialty areas during your due diligence, including net operating loss carryforwards, accounting for income tax provisions (ASC 740) when an initial public offering is slated, and state and local tax implications on escrow and purchase price.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Leveraging R&amp;D Credits<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">The U.S. leads the world in funding for research and development, with annual average spending of 4.3% per year from 2000 to 2017. The right amount of credits to claim is the amount a business can qualify and quantify\u2014nothing more, nothing less.&nbsp;A justifiable R&amp;D study involves creating a new product or process with technical uncertainty and using a process of experimentation based on hard sciences.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The companies nurturing these projects typically combine different manufacturing, medical, and coding disciplines in developing and improving tools, workflows, processes, and testing protocols that bring R&amp;D alive. A great deal of U.S. research comes from software companies, where deploying effective technologies that change how we live and what we see in the digital space happens at hyper-speed especially with the proliferation of machine learning.&nbsp;Many innovative companies, engineering firms, and government entities use unique designs and workflows to create new and improved products, services, and processes. All may be eligible for R&amp;D credits with #6engineers.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Got #6engineers or more? Contact TaxOpsMin to learn more and have a conversation about claiming research credits.&nbsp;<\/p>\n\n\n\n<div style=\"height:50px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/taxops.com\/contact\/\" target=\"_blank\" rel=\"noreferrer noopener\">Let&#8217;s Talk Tax<\/a><\/div>\n<\/div>\n\n\n\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\">More Tax News<\/h3>\n\n\n<ul class=\"wp-block-latest-posts__list wp-block-latest-posts\"><li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/taxops.com\/auditor-independence-in-the-age-of-private-equity\/\">Auditor Independence in the Age of Private Equity: What CFOs Need to Know<\/a><\/li>\n<li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/taxops.com\/r-d-credits-for-software-companies\/\">R&amp;D Credits for Software Companies: Scrum Teams, Qualifiers, and Section 174 After OBBBA<\/a><\/li>\n<li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/taxops.com\/section-174-decoupling-what-tax-pros-need-to-know-state-by-state\/\">Section 174 Decoupling: What Tax Pros Need To Know State By State<\/a><\/li>\n<li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/taxops.com\/sean-espy-new-partner\/\">TaxOps Welcomes Sean Espy as Partner, Tax Minimization<\/a><\/li>\n<li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/taxops.com\/state-nexus-demystified-navigating-tax-compliance-after-wayfair-episode-1-2\/\">Your Tax Footprint Is Probably Bigger Than You Think: What Finance Leaders Need to Know About State Nexus<\/a><\/li>\n<\/ul>\n\n\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/taxops.com\/contact\/#subscribe\" target=\"_blank\" rel=\"noreferrer noopener\">Subscribe to Tax News<\/a><\/div>\n<\/div>\n\n\n\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Add value to your private equity deals with research tax credits for innovative portfolio companies. By Mark Dunning and Jamie Overberg Business transactions involving private equity portfolio companies often trigger complex tax considerations across various disciplines. Advanced tax planning not only creates opportunities but also eliminates unpleasant surprises, increasing the purchase price when taking a [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":12225,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"off","_et_pb_old_content":"<!-- wp:spacer {\"height\":\"53px\"} -->\n<div style=\"height:53px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->\n\n<!-- wp:gallery {\"linkTo\":\"none\"} -->\n<figure class=\"wp-block-gallery has-nested-images columns-default is-cropped\"><!-- wp:image {\"id\":10182,\"sizeSlug\":\"large\",\"linkDestination\":\"none\"} -->\n<figure class=\"wp-block-image size-large\"><img src=\"https:\/\/taxops.com\/wp-content\/uploads\/2022\/04\/Texas-High-Court-Clarifies-Service-Receipt-Apportionment-1-1024x536.png\" alt=\"\" class=\"wp-image-10182\"\/><\/figure>\n<!-- \/wp:image --><\/figure>\n<!-- \/wp:gallery -->\n\n<!-- wp:spacer {\"height\":\"53px\"} -->\n<div style=\"height:53px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->\n\n<!-- wp:quote -->\n<blockquote class=\"wp-block-quote\"><p><em><em>The Texas Supreme Court has ruled in favor of apportioning service receipts to the location of personnel or equipment, a position providing clarity to taxpayers on whether to source receipts from services performed versus where customers are at.<\/em>&nbsp;<\/em><\/p><\/blockquote>\n<!-- \/wp:quote -->\n\n<!-- wp:quote -->\n<blockquote class=\"wp-block-quote\"><p><\/p><\/blockquote>\n<!-- \/wp:quote -->\n\n<!-- wp:paragraph -->\n<p>By <a href=\"https:\/\/taxops.com\/tram-le\/\" target=\"_blank\" rel=\"noreferrer noopener\" title=\"Tram Le\">Tram Le<\/a> <\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>On March 25, 2022, the Texas Supreme Court held in favor of the taxpayer that services revenue is apportioned to the location where services are performed, consistent with Texas law.<sup>1<\/sup> The Court found that the performance of service is located where the taxpayer\u2019s personnel or equipment is physically doing useful work for the customer.&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>The case involves Sirius XM (Sirius XM Radio, Inc. v. Hegar, Tx. Sup. Ct. No. 20-0462 (3\/25\/22)), whose headquarters, transmission equipment and production studios used in providing a subscription-based satellite radio service are largely located outside of Texas. In the 2010 and 2011 tax years, Sirius XM apportioned tax based on costs of activities in Texas and outside of Texas. Under Texas rules, service revenue is apportioned to Texas based on the \u201cfair value of the services\u201d rendered in Texas where services are performed in more than one state.<sup>2<\/sup>&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>For those tax years, the Texas Comptroller adjusted on audit to base the tax on the percentage of Sirius XM\u2019s Texas subscribers. The Comptroller argued that service revenue is sourced to Texas if the \u201creceipt-producing, end-product act\u201d takes place in Texas. In this case, such an act was considered the decryption of the satellite network and enabling of each subscriber\u2019s radio to receive Sirius XM\u2019s signal. However, Sirius XM argued that its services \u2013 the production and broadcasting of radio content \u2013 was mainly performed outside of Texas.&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>The Texas Supreme Court ultimately agreed that Sirius XM was providing satellite radio content and those services are performed in Texas if the labor employed in that service is doing the work in Texas. This constitues a natural reading of the law, which requires taxes due \u201cwhere service [is] performed in this state.\u201d This rejects the Comptroller premise of service taking place at the customer location. The Court also rejected the use of the \u201creceipt-producing, end-product\u201d test to determine where a service is being performed.&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>Although the Court ruled in favor of the taxpayer, the case was remanded to the Appellate court for further review of Sirius XM\u2019s cost of performing services and evidence to support its \u201cfair value of services\u201d performed in Texas.&nbsp;&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>The Texas Supreme Court opinion provides clarification in apportioning service revenue in Texas and determining whether services are performed in the state. Taxpayers doing business in Texas should carefully review business operations, nature of services, i.e., properly characterizing the services provided to customers and location of equipment, facilities, and personnel to properly apportion revenue.&nbsp;&nbsp;&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>In addition, if services are being performed in Texas and outside of Texas, taxpayers must properly evaluate methods of determining the fair value of services and maintain sufficient evidence to support what revenue is apportioned to Texas. Contact a TaxOps advisor is you need assistance assessing nexus and taxability in the state of Texas and everywhere you do business.&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>Tram Le is a member of the SALTovation team at TaxOps and an adjunct professor at the University of Texas at Arlington. She writes about hot topics in state and local tax affecting business operations and growth strategies and the Spreading SALTovation column for Tax Notes.&nbsp;Reach out to Tram at <a href=\"mailto:tle@taxops.com\" target=\"_blank\" rel=\"noreferrer noopener\" title=\"Tram Le\">tle@taxops.com<\/a>.&nbsp;&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:spacer {\"height\":\"53px\"} -->\n<div style=\"height:53px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->\n\n<!-- wp:buttons -->\n<div class=\"wp-block-buttons\"><!-- wp:button -->\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link\" href=\"https:\/\/taxops.com\/contact\/\" target=\"_blank\" rel=\"noreferrer noopener\">Let's Talk Tax<\/a><\/div>\n<!-- \/wp:button --><\/div>\n<!-- \/wp:buttons -->\n\n<!-- wp:spacer {\"height\":\"47px\"} -->\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->\n\n<!-- wp:heading {\"level\":3} -->\n<h3>More Tax News<\/h3>\n<!-- \/wp:heading -->\n\n<!-- wp:latest-posts \/-->\n\n<!-- wp:spacer {\"height\":\"47px\"} -->\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->\n\n<!-- wp:buttons -->\n<div class=\"wp-block-buttons\"><!-- wp:button -->\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link\" href=\"https:\/\/taxops.com\/contact\/#subscribe\" target=\"_blank\" rel=\"noreferrer noopener\">Subscribe to Tax News<\/a><\/div>\n<!-- \/wp:button --><\/div>\n<!-- \/wp:buttons -->\n\n<!-- wp:spacer {\"height\":\"47px\"} -->\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->","_et_gb_content_width":"","spt_transcript":"","footnotes":""},"categories":[382,78,226],"tags":[1074,252,1075,1076,1070,1072,284,126,1078,998,265,92,106,1077,1071,1080,263,48,49,50,563,1079,783,159,1073,30,52,80],"class_list":["post-12288","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-main-tax-min","category-tax-savings","category-tax-news","tag-6engineers","tag-accountant","tag-aeronautical","tag-biomedical","tag-business-transactions","tag-buyers","tag-cfo","tag-cpa","tag-engineering","tag-faqs","tag-finance-professional","tag-irs","tag-ma","tag-medical-devices","tag-pe","tag-pe-firm","tag-private-equity","tag-rd","tag-research-and-development","tag-research-credit","tag-research-expenses","tag-roi","tag-section-174","tag-sellers","tag-six-engineers","tag-state-and-local-tax","tag-tax-credit","tag-tax-provider"],"aioseo_notices":[],"jetpack_featured_media_url":"https:\/\/taxops.com\/wp-content\/uploads\/2023\/07\/6ENGINEERS.png","_links":{"self":[{"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/posts\/12288","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/comments?post=12288"}],"version-history":[{"count":11,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/posts\/12288\/revisions"}],"predecessor-version":[{"id":12617,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/posts\/12288\/revisions\/12617"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/media\/12225"}],"wp:attachment":[{"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/media?parent=12288"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/categories?post=12288"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/tags?post=12288"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}