Dave: Hey everyone, Dave here with another episode of the Philly Tech Connect podcast. Today I’m speaking with Morgan Doyle from Corporate Tax Incentives (CTI). CTI focuses on supporting US businesses with federal and state tax credits, especially startups. In short, how you can potentially save money by doing what you’re going to be doing anyway, which is investing in your startup. Morgan, how are you doing?

Morgan: Good, I’m doing good. How are you?

Dave: I’m doing well. Great to have you on the show. These types of, I hate to say niche, but for lack of a better word, these kind of niche opportunities are not always on the radar of your typical startup founder, but they potentially have some huge benefits. As the con resident expert in the PT Community, I want to bring you on the show and have you educate us a little bit about research and development in the tax credit programs that we should be aware of as startup founders. 

Morgan: Tax credit programs in general, they’re put in place to incentivize certain behaviors and reward companies for doing certain things. For example, the research and development tax credit was originally established to incentivize innovation within the United States, and it rewards businesses for hiring technical labor in the US. And this is directly applicable to the software space. 

Dave: A lot of times when we think about research and development, just first of all, just as a name, it sounds very official. I think we tend to associate these types of benefits with large companies. Of course, Amazon is taking advantage of every opportunity they can. They probably have, they don’t probably have, they definitely have a massive legal department that is exploring all these opportunities. Why should people in the startup community be focused on this?

Morgan: That’s a great question. You could be in startup phases even pre-revenue, and the research and development tax credit can still be available. Even if your plan is to sell the business, these credits can ultimately bring value. Typically, any companies in the hard sciences are great qualifiers: architecture firms, engineering firms, any companies that are doing heavy chemistry or biotech activities. Certain types of manufacturing companies, they’re all great qualifiers. But software does tend to be a very good candidate for this credit. And I know that there’s a lot of software-focused startups in PTE. And it’s written right in the code section of the research and development tax credit that determines what type of work activities qualify. Those are the types of activities that these startup groups are performing. 

Dave: So many startups now are software-based, and like you said, there’s a couple of different other hard sciences that make for great candidates. Software in general… I’m definitely not an expert when it comes to this, but I believe, if I’m not mistaken, that in the recent one or two years, it turned out that software expenses were depreciated over time so that you’re not allowed to claim them all in the first year, but they get depreciated over 15 years or something like that. Being able to maybe take advantage of benefits like R&D credits can help reduce some of the costs that we now are not able to write off. So can we speak a little more specifically to some of the qualifying behaviors from startups that, again, it’s usually like a professional needs to evaluate these things, but to at least have it on everybody’s radar so they can say, “Oh, I’m doing these things, I should really look into this.” What are some of the qualifying behaviors?

Morgan: A lot of times, what we’ve seen a lot of companies do is they will self-censor themselves. They will just assume that the work that they’re doing, hey, like it’s not what we would think research and development is, so there’s no way that this credit could be available to us. We’re not even going to go down that road. It’s not really worth the exploration. For the members of PT, there could be some startup founders performing the right activities that really do generate an R&D credit. It could be really anything from programming software, source code, to compiling and testing source code, designing structural software architecture, even establishing electronic interfaces between various modules. So really, anything that you’re doing to develop and improve an app, a process, some type of function, those are going to be qualified research activities that the IRS will review and see what you’re doing, and all of those fall into that category.

Dave: Yeah, that’s super cool. I feel like often, as it sounds like a lot of kind of the cost of doing business, or at least that’s what a founder might be thinking, that we tend to have a high bar for what we would consider maybe R&D because so much of it is just a necessity of building the software. But a lot of things that we’ve mentioned here, they sound like many things that people are doing all the time. It could potentially qualify. So what might the process look like if somebody says, “Okay, I think I might qualify?” They would go to yourself or CTI. What should they expect in terms of a process? How does CTI benefit from this relationship? What should they know?

Morgan: We meet with different companies all the time, various startups and software companies included. Ultimately, to start the process, I’ll loop in one of our research and development practice leads. We have a meeting, a discovery call, really with the business owner or the founder or the CEO, whoever it might be, maybe their financial team. And we just have a discussion about what are the things, the operations that you’re doing in your business. Understanding from our end, are they performing the proper activities that would qualify for this credit? After we have that discovery call and determine that it could be a viable opportunity, that’s when we typically would engage with the business owner there. And our process begins with the feasibility phase. We hold interviews with whoever is involved with the research and operations aspects of the business, whether that’s the operations director, manager, the finance team, really anyone who’s going to be having a hand in tracking time and effort related to those technical projects that they are working on. So this process, we interview everyone, we are building a study to ultimately support and fully substantiate the claim that you will ultimately be making at the end with this research and development tax credits. We take all that into account, we calculate the credit based on how much you as a company are spending. That is really what the value is as well, how much expenses am I incurring doing all of this development, doing all this research, doing all these technical activities, how much is it costing my company to pay for the engineers, the developers that are on the payroll, that are working towards this project, how much am I paying for any supplies and materials that are going towards the development? There are quite a few things that we look at in that. Once we develop or have the final report, that is then given to the business owner and whoever their CPA might be to put in their return for that year. 

Dave: So this is something that kind of gets filed along with your taxes, but they could do it any time. It’s essentially some sort of statement of validation or of that we believe that they are eligible, statement of eligibility so to speak, that kind of gets filed along with your taxes. And any idea how long the process usually takes? About how long does it take to get everything from start to finish?

Morgan: We work with a lot of different businesses that have different filing times. Maybe they do file in April, but maybe they file a different month of the year, whatever their filing deadline is that they work on, that they’re comfortable with, that’s part of their process as a business, we fit whatever that mold is. If you are filing your tax and let’s say a month and you reach out to us, we’re going to put all of our effort and time into completing that study so you have it ready in time for when you’re going to file your return. So we can expedite our service to fit your needs. I would say if you’re filing maybe a week from when we meet, maybe a week might be not enough time. But I would say as long as you have, I’d say a couple weeks to a month’s notice, we can make it happen, especially if it’s a smaller operation, it’s not as heavy lifting. But I’d say on average, generally speaking, our process, our studies, they take anywhere from I’d say one to three months. And again, that’s just on average depending on a lot of different factors that come into play there and also depending on the urgency of when it would need to be complete.

Dave: Sounds pretty flexible. So I think the general message is, hey, if you think you might be eligible, you should explore this because there’s not really much of a downside. But I’m sure you run into some common scenarios that tend to be exclusions for people. I could be mistaken, but we had talked at a previous time about if you earn too much revenue, it sounds also maybe if your tech team is not based in the US, are there any potential exclusions that are worth throwing out that will save you that time from having to break someone’s heart later?

Morgan: I would say the biggest exclusion would be offshore work and offshore development. Anything that is done outside of the US, it can’t be included in the credit or into the study or anything that’s going to be going towards the credit, just because the whole point of the program is to incentivize US innovation and any type of research and development operations that are happening within the US. If you maybe have a staffing company that you’re using out of Florida that’s hiring folks overseas, just because that staffing company is in Florida, this work is still being done overseas. So the physical actual development has to be taking place within the United States. And that’s the biggest exclusion to look out for. As far as revenue, that is a provision that divides what the IRS defines as a startup company versus just a regular business that’s not a startup. The IRS defined a startup as anyone who’s a business that’s making under $5 million in revenue a year. When that is the case, there is a special provision that’s available to startups where they can use the R&D tax credit to offset their payroll tax liability as opposed to income tax liability, because when a startup is in the first couple of years of existence, they’re not going to really have any tax liability yet just because they’re usually not profitable for a couple more years. So we don’t want them missing out on the tax credit just because they don’t have income tax to offset. So they are allowed to use the credit to offset their payroll tax liability because no matter how old a business is, if you have employees, you’re paying those employees, and you’re also incurring a payroll tax along with that. So that hopefully that’s not too confusing, but that kind of wraps up the question about any exclusions.

Dave: No, I don’t find that confusing at all. I think it makes a lot of sense. But I figured we would bring it into the discussion because I know that’s what someone would ask listening to this. That’s great, Morgan. I appreciate you walking us through the R&D tax credit that you guys work with and who potentially qualifies, who does not. For people that want to get in touch with you and learn more, how should they do that?

Morgan: They can absolutely just send me an email. My email is m.doyle@ctillc.com. Anyone can just send me a LinkedIn request or message me on the Slack channel, and I’ll have my contact information listed on this post here.

Dave: Yeah, we’ll definitely have you featured. And of course, like you said, you’re in the PTE community, and people who are part of PTE can always message you through that. Thanks so much, Morgan, for being on the show.

Morgan: Thank you.