TAX CREDITS & INCENTIVES ADVISORY R&D Tax Credit - Cherry Bekaert

TAX CREDITS & INCENTIVES ADVISORYR&D Tax Credit:The Innovation Incentive(IRC Section 41 Credit for Increasing Research Activities)The Research and Development (R&D) Tax Credit is a federalincentive designed to promote innovation in the design, developmentand improvements of processes, products and services. It allowscompanies to receive tax credits when certain expenses are incurredfor the performance of qualified research and development activitiesin the United States. For most companies, the R&D tax credit providesa dollar-for-dollar reduction of income tax liabilities. For some start-upcompanies, a portion of R&D tax credits can be used to offset federalpayroll tax liabilities.

Why Investigate the R&D Tax Credit Now?The R&D tax credit offers innovative businesses the opportunity to save money andgenerate cash to improve and expand operations, products and services. The creditcontinues to be expanded, opening the door for more companies to benefit from thisincentive while expanding the credits available to past or current incentive recipients.Taxpayers may qualify for benefits from multiple tax years (current and prior). Startup companies can use the R&D tax credit to offset up to 250,000 of payroll taxliabilities. C corporations, S corporations, LLCs and Partnerships can investigate thepotential for tax liability reductions. Plus, many states offer additional refundableincentives for R&D activities.Despite all these opportunities, most taxpayers continue to under report potentialqualified research expenses (QREs). Many businesses are not benefitting from this taxincentive because of false assumptions, such as the R&D must be “groundbreaking”to qualify for the credit; claiming the credit will result in an audit; time tracking toolsmust be used to capture R&D efforts; or the R&D tax credit is only beneficial to largeorganizations. We are able to walk you through the R&D process and assist you innavigating common misconceptions.The IRS has established new disclosure requirements for filingamended claims for refund which must be followed. Employers thatclaimed the Employee Retention Credit in 2020 and 2021 can stillapply for R&D tax credits, but need to be aware of the interplaybetween the two incentives.Cherry Bekaert

How The R&D TaxCredit Is CalculatedWhich Activities Do Not QualifyFor The R&D Tax Credit?The R&D tax credit is an incremental credit. Accordingly, todetermine what portion of the annual QREs are credit-eligible,a taxpayer must analyze qualified spending in prior years. Afterthe prior year analysis is performed, the taxpayer calculatesa base amount of spending above which the current yearQREs are multiplied by the statutory credit rate. Every year,the taxpayer has the option to choose between two separatecalculation methods: the Traditional Method (20% statutoryrate) or the Alternative Simplified Credit (ASC) Method (14%statutory rate). Most companies calculate credits underthe ASC Method; however, a taxpayer should explore bothmethods and choose the one that yields the largest credit.The IRS excludes some activities from consideration for theR&D tax credit. Non-qualifying categories include researchafter commercial production; funded research; foreign research;routine testing / quality control / maintenance; adaptation andreverse engineering; non-scientific research; and aesthetics.What Are Qualified Research Expenses?Specific expenditures incurred during the R&D process can be used to qualify for the credit.These QREs typically fall into four categories:W-2 WagesContract Research Box 1 W-2 Wages Costs of staff augmentation Names Job title Vendors performing qualified activities on behalf ofthe taxpayer Location (for potential State Credits) Vendor-level account detail extracted to document Department names Analysis of T&M versus FFP provisionsCloud ComputingSupply Costs Cloud platform costs that support the qualifiedresearch activities Testing supplies E.g., AWS, Azure, Google Cloud Vendor-level account detail extracted to documentCherry Bekaert Prototype costs

Sample Credits by IndustryTechnology / Software DevelopmentManufacturingIntegration of new and legacy systemsDesign, construction and testing of prototypes orpilot modelsDesign and testing of systems such as hardware or softwareDevelopment of new construction or processing techniquesto improve reliability in the manufacturing processModification to existing systems and processes to improveperformance, scalability, security or throughputDevelopment of new techniques to address health, safetyand environmental concernsImprovements to off-the-shelf solutions to meet the needs ofthe taxpayer’s environmentAttempts to minimize product failure in the productionprocessLife Science / PharmaceuticalFinancial ServicesExperimentation with new or alternative materials or reagents into existing processesIntegration of new platforms with in-house developedsoftwareDevelopment of new or improved informatics or analyticaltoolsDevelopment of new trading platformsClinical TrialsIntegration of new financial products (e.g., crypto) into newor existing applications and systemsCRO ActivitiesFinancial modeling and the development of new algorithmsFood and BeverageEnergyTest Kitchen activitiesDesign and development of networks and systems tomonitor energy capacity transmissionDevelopment of new packaging techniquesDevelopment of new and improved batteriesAttempts to improve manufacturing processesDevelopment of new bio-fuel production techniquesTAX CREDITS & INCENTIVES ADVISORY

Cherry Bekaert ProcessScoping the R&D CreditPerforming the R&D Credit Study Gather relevant information. Accumulate financial / cost accounting information. Collect electronically availablefinancial information. Organize documentation associated with the qualified research activities. Conduct interviews with technical subject matter experts.Routine Production, Maintenance,and QCPeople Development/ Training/EducationOperationsNon-US ActivitiesNon-Working Time (PTO, Holidays,Sick/Mat Leave, Jury Duty)General & Administrative Activities(Non-Technical)Cherry Bekaert’s R&D survey process includes use ofa proprietary, easy to use, survey tool that allows CherryBekaert to allocate taxpayer QREs among multipleemployees by business component and by activity.Direct Supervision/ReviewConceptualization/DiscoveryOur Technology-DrivenSurvey ProcessDirect Support Prepare an IRS audit-ready deliverable.Manufacturability/Pilot/ Trial Runs Prepare a work plan for the researchcredit study. Prepare a methodology memorandum and interview memoranda todemonstrate how taxpayer’s R&D activities meet the requirements forqualification under IRC Section 41.Prototype Testing, Benchtop Testing,Other Testing Estimate the federal and stateresearch credits. Analyze current and prior year expenses to substantiate the base amountand the credit-eligible QREs.Prototype Development Conduct interviews with key personnel.Design Development Identify QREs.910111213ActivitiesEmployeeNameEmployee 1DepartmentProductDevelopmentJob TitleMechanicalEngineerStateBusiness ComponentProjectAllocation(%)1234Business Component 125%25% 35% 10% 15%Business Component 225%50% 50%GA Business Component A40%567815%100%100%80% 20%100%Non-Project Time*Employee 2ProductDevelopmentElectricalEngineer0%Non-Working Time10%Business Component 110%0%Business Component 280%0%100%100%WA Business Component A0%Non-Project Time*0%Non-Working TimeCherry BekaertTotalActivitiesAllocation10%100%100%

Cherry Bekaert’s R&DTax Credit ServicesCherry Bekaert provides a systematic approach to claimingyour R&D tax credit. Our goal is to maximize the incentive andprovide qualified and detailed documentation that meets IRSstandards. When assessing the potential for R&D tax creditbenefits, we analyze your: tax returns for the prior four years;prior research credit studies; organization charts, employeeW-2 wage amounts, general ledger information time trackingdata; and any internal documents defining how potentiallyqualifying projects are approved at the company. We alsolook at any contracts defining the payment terms betweenthe company and its customers and the company and itscontractors.Our Tax Credits & Incentives Advisory professionals beginby providing a complimentary analysis of your operations toidentify QREs and estimate federal and state R&D tax credits.Then we map out a plan to implement your research creditstudy. The next step is conducting a thorough, detailed studythat addresses IRS requirements, followed by preparinga comprehensive memorandum documenting how theserequirements are met. Finally, Cherry Bekaert provides eachclient with an IRS audit-ready deliverable.Value Added Benefits Complimentary analysis of federal and state R&Dincentive benefits IRS defense services Consultation and analysis regarding credit utilization by thecompany, partners and shareholders Analysis of whether R&D credits can be used againstfederal and state payroll tax liabilities Deliverables designed to address potential IRS inquiries Proprietary technology tools to survey R&D subjectmatter experts Identification of other credit benefits specific to alternativeenergy investments, hiring and capital investmentsTAX CREDITS & INCENTIVES ADVISORY

States Offering an R&D Tax CreditIn addition to the federal R&D tax credit, many states offer similar R&D tax credits.States offering R&D Tax CreditsWe Can Guide You ForwardMartin Karamon, J.D., LL.M.Partner, Tax Credits & Incentives Advisory Leadermartin.karamon@cbh.com240.316.4517Ron Wainwright, CPA, MSTPartner, Tax Credits & Incentives Advisoryrwainwright@cbh.com919.782.1040Dan Mennel, CPAPartner, Tax Credits & Incentives Advisorydan.mennel@cbh.com703.506.4440Vivian Kohrs, CPADirector, Tax Credits & Incentives ut Cherry Bekaert“Cherry Bekaert” is the brand name under which Cherry Bekaert LLP and Cherry Bekaert Advisory LLC, independentlyowned entities, provide professional services in an alternative practice structure in accordance with applicableprofessional standards. Cherry Bekaert LLP is a licensed CPA firm that provides attest services, and Cherry BekaertAdvisory LLC and its subsidiary entities provide tax and advisory services. For more details, visit cbh.com/disclosure. 2022 Cherry Bekaert. All Rights Reserved. This material has been prepared for general informational purposesonly and is not intended to be relied upon as tax, accounting, or other professional advice. Before taking any action,you should consult a professional advisor familiar with your particular facts and circumstances.v. November 4, 2022 4:18 PM Brochure TCIA R&D-Tax-Credit Overview 832068519

States Offering an R&D Tax Credit In addition to the federal R&D tax credit, many states offer similar R&D tax credits. States offering R&D Tax Credits Warren Kitchens Director, Tax Credits & Incentives Advisory warren.kitchens@cbh.com 919.782.1040 Vivian Kohrs, CPA Director, Tax Credits & Incentives Advisory vivian.kohrs@cbh.com 703.940.5536