In the latest episode of the Mind the GAAP podcast, host Sean Sullivan talks with Mandee Page, Director of the R&D Tax Credit service area at Redpath and Company. They dive into the intricacies of the Research & Development (R&D) tax credit, its purpose, and common misconceptions surrounding it. Mandee explains that the R&D tax credit was introduced in 1981 to encourage innovation in the business sector and stimulate economic growth. This credit offers businesses a dollar-for-dollar reduction in their tax liability, providing them with more capital to continue innovating. While it's often associated with new product development, the credit also applies to continuous improvements on existing processes, making it more widely applicable than many businesses realize.

Mandee emphasizes that U.S. companies are a primary funding source of R&D, and the credit is designed to keep innovation and jobs within the U.S. The credit incentivizes not just new products but also the improvement of existing products and processes, making it crucial for ongoing innovation. A significant misconception is that the credit is only available to highly technical industries, but as Mandee points out, industries like manufacturing, food production, and even wineries and breweries might qualify for the credit by making improvements in their processes.

The conversation moves to the eligibility criteria for the R&D tax credit. Mandee explains the four-part test that companies must pass to qualify: 1) the research must aim to improve or develop a business component, which could be a product, process, or software; 2) the work must involve hard sciences like biology, chemistry, or engineering; 3) there must be uncertainty at the outset of the project; and 4) the company must engage in a process of experimentation to resolve the uncertainty. These criteria ensure that companies are truly innovating and taking on projects that advance their industries.

Mandee also highlights the types of expenses that qualify for the credit, with wages typically being the largest. This includes not only the employees performing R&D but also those directly supervising and supporting them. Other eligible expenses include supplies consumed during the R&D process and contract research, provided the contractors are based in the U.S. She explains that while wages are typically the most significant expense, supplies used for prototyping and testing also count, as well as contract research costs, though with certain limitations.

Sean and Mandee also discuss the process of applying for the credit, which begins with an initial consultation to determine eligibility. This is followed by a thorough analysis of the company's records and activities to ensure they meet the necessary criteria. Mandee stresses the importance of substantiating claims with detailed documentation, such as meeting notes, emails, and internal memos, to demonstrate the process of experimentation and the uncertainties faced during the project.

The episode concludes with Mandee encouraging business owners to explore whether they qualify for the R&D tax credit, noting that many companies miss out on this valuable opportunity because of misconceptions. She emphasizes the importance of early planning, particularly for companies that know they'll be engaging in R&D activities in the coming year, as proper documentation and preparation are key to successfully claiming the credit.

Jon Fortin, Partner and Wealth Services advisor at Redpath and Company, joined Mind the GAAP to discuss trusting planning as part of a sound wealth management strategy.

Jon advises that everyone should have 4 things as part of their legal and wealth management repertoire: a will, a power of attorney, a healthcare directive, and...a trust.

Jon and Mind the GAAP host Sean Sullivan discuss why trusts are important wealth management tools and why individuals with complex wealth management and estate needs should include their entire team of financial advisors in the trust planning process.

Learn about the different types of trusts and how they can be used to preserve your wealth, create a legacy for future generations, and mitigate tax liability.

If you have questions about this podcast or any other wealth accumulation strategy, contact a Redpath and Company advisor here.

John Kammerer, Partner and Tax Leader at Redpath and Company, joined Mind the GAAP to discuss some of the sunsetting provisions in the Tax Cuts and Jobs Act (TCJA) of 2017. He also explains what business owners can do to prepare themselves for the many potential outcomes—which may be dependent on how the presidency swings in November of 2024.

While widely regarded as "sweeping tax reform" at the time of its passing, the TCJA is on its last legs without an act of Congress to either extend or make permanent the tax provisions enacted back in 2017. Outside of some provisions that have already begun to phase out, the clock is ticking as we inch closer to December 31, 2025.

Some of the provisions that are affected:

• Tightening of the interest limitation rules under IRC 163(j) by no longer allowing it to be based on adjusted taxable income that is before the deduction for depreciation and amortization (for tax years starting before 1/1/22).
• Beginning of the phase out of bonus depreciation (80% started in 2023).
• Required capitalization of research and experimental expenditures for years beginning after 12/31/2021.
• For years beginning after 12/31/2025, the 199A deduction will no longer available.
• The top rate of 37% is scheduled to once again move to a top rate of 39.6%. There are other changes to the tax brackets as well for years beginning before 1/1/2026.
• The expanded estate tax exemption is scheduled to sunset and be cut in half for transfers/gifts made after December 31, 2025.

While the changes that have started taking place have been impactful for many businesses, the upcoming sunset of the IRC 199A deduction will be especially significant and could cause many businesses to have to rethink their current tax classification or tax structure.

Kory Boyer, Director in the M&A Advisory Practice Area at Redpath and Company, joined Mind the GAAP to discuss how to leverage a current state assessment to set a solid foundation and inform your business growth strategy.

With all disruptions in the world—a pandemic, political, geopolitical, regulatory, technology, shifting markets, sourcing and supply chain challenges, etc.—it's no wonder that business owners are left contemplating how to move forward with a solid business growth strategy.

Appropriately responding to rapid change has always been, and always will be, one of the toughest hurdles business owners may face. And that's because the decisions you make and the direction you ultimately decide to go might be too subjective and rooted in emotion or gut feeling—versus cold, hard data.

So, what should you do as a business owner when the decisions you make seem to only be made to play "catch up" versus "getting ahead?" Establish a baseline and gather data that can help inform your decisions, set a vision, and ultimately prepare you for the future.

A current state assessment means going back to the tried and true and understanding the forces impacting your business and the overall market. Ultimately, what keeps you awake at night? Competition? New entrants? Supplier power and customer power? Threat of substitutes?

Customers

What is your customer history?

• Are you keeping or losing historical customers?
• How are you growing?

Of those customers that are staying:

• What do the conversations take you regarding what they'd like to see? New products? Variations to current products or services?

Of those customers that leave you:

• Why did they leave and what are their true sensitivities? Product? Service replacement? Pricing? Customization? Customer service?

Competition, Barriers, and Substitutes

Competition, regulatory barriers, and substitutes are highly inter-related pieces of the market puzzle, and you should consider the following:

• Where are you positioned with competition? Leader, laggard, or on par?
• Are there any high barriers to entry, including capital outlay or regulatory approvals?
• Have you seen a lot of new entrants?
• Is the market evolving? Are your products and/or services being impacted by new trends in the market (AI, on-demand, cloud, new safety, ESG, etc.)?

Suppliers and Supply Chain

Since the pandemic, this has been a huge strategy piece due to supply chain shortages, cost hikes and continued inflation.

• What has been your biggest impact to the supply chain? COGS, timing, or other?
• Have the suppliers started controlling the pricing and timing (less negotiations)?
• Have you evaluated multi-sourced supply chain?

Now that you know where you are, do you know where you are going? This is a great time to revisit the objectives, priorities, and metrics of the company.

You should consider and review data regarding:

• Market development
• Market penetration
• Diversification
• Offering Development

Final Thoughts

Never stop evaluating your business. Keep it moving forward. Will Rogers once said, "Even if you are on the right track, you'll get run over if you just sit there".

Don't be afraid to have a conversation with your advisor. Even if it is over a cup of coffee and writing on a napkin. Reach out to a Redpath advisor here.

In this episode of the Mind the GAAP podcast, Rebecca Petersen, Director in the Government Industry Practice at Redpath and Company, joined host Sean Sullivan to discuss the steps local governments can take to help avoid falling victim to phishing scams and the impact of failing to do so.

Falling victim to a phishing scam may not—unfortunately—be a question of "If?" but a question of "When?"

According to a 2023 article by Forbes magazine:

• Phishing is one of the most prevalent cybercrimes and it continues to grow.
• 500 million phishing attacks were reported in the U.S. in 2022—double the number of attacks of 2021.
• Email is typically the most commonplace scam with text messaging and phone calls becoming more prevalent.
• There were 300,000 phishing victims in the U.S. in 2022 .
• Phishing scams resulted in a total loss of $52 billion in the U.S.

Listen and find out:

• Why do local governments fall victim to phishing scams?
• What makes them vulnerable to this attack?
• What steps or best practices can local governments follow to help protect themselves?

Examples discussed:

• January 2022 - Tenino, Washington
  • Loss of $280,000
• May 2022 - Kosciusko County, Indiana
  • Loss of $300,000
• August 2022 –Portland, Oregon
  • Loss of $1.4 million
• September 2023 – Fort Lauderdale, Florida
  • Loss of $1.2 million

Emmett Mulcahy, Partner and Valuation Services Practice Lead at Redpath and Company, joined Mind the GAAP host, Sean Sullivan, to discuss the impact and potential outcomes of Connelly vs. United States—a Supreme Court case that has the valuation world on edge.

At issue is how corporate-owned life insurance (designed to fund the redemption of a deceased shareholder's stock) impacts the fair market value of a company and the value of the decedent's gross estate.

So, the questions the Supreme Court will help answer are:

• Will the proceeds of an insurance policy owned by a corporation and payable to the corporation be considered in determining the corporation's fair market value?
• Is there an off-setting liability that ultimately affects the fair market value of the business?

The implications are huge considering the potential estate tax liability—and that's really why this case has risen to this point. And business owners may even need to consider if life insurance owned by the entity is even a smart business strategy—or one rooted in potential controversy.

In addition to the Supreme Court's pending decision, Mulcahy explains how the buy/sell agreement became an issue and a determining factor in the lower courts' rulings on the business's value.

Business owners need to carefully consider:

• How their buy/sell agreement is crafted
• The clarity and language in the buy/sell agreement
• Adherence to the agreement

While it may be some time before a final ruling comes down from the SCOTUS, business owners should start having conversations with ALL their advisors, including attorneys, valuation experts, and wealth advisors to help ensure financial decisions and agreements are not made in a vacuum.

While Minnesota is not the first state to institute a fee for products delivered across its border—and most likely won't be the last—the continuing trend of states searching for additional revenue is beginning to catch steam since the South Dakota vs. Wayfair court case was settled just a handful of years ago.

So, what is the retail delivery fee and what does it mean for companies (collecting, remitting, and administering) and consumers in the state of Minnesota?

Teri Grahn, Sales and Use Tax Practice Lead at Redpath and Company, joined Mind the GAAP podcast host Sean Sullivan, to discuss the new fee (don't call it a "tax!") and how states are looking for new ways to boost revenue.

Updated March 11, 2024 - In a decision issued March 1, 2024, U.S. District Court Judge Liles Burke ruled that the Corporate Transparency Act (CTA) is unconstitutional. Finding that the law "exceeds the Constitution's limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress' policy goals," Judge Burke issued a summary judgment in favor of the plaintiff, the National Small Business Association, preventing the enforcement of the CTA against this group. It is important to note that the court's ruling applies only to the NSBA and its members. The Department of Justice is expected to appeal this decision and to request a stay, or temporary pause, of the ruling while the case proceeds through the courts.

The Financial Crimes Enforcement Unit of the U.S. Department of Treasury has made clear that the law still stands for all other reporting companies and will continue to be enforced. At this time, all reporting obligations and associated timelines remain in effect. Entities formed on or after January 1, 2024, which do not qualify for one of the 23 exemption reasons, must make their initial report within 90 days of formation. Reporting entities formed prior to January 1, 2024, have until January 1, 2025 to submit their initial report. All reporting companies must file updated reports within 30 days of any changes to or for their beneficial owners.

We will continue to monitor this case as it progresses. If you have any questions or concerns regarding the CTA and your reporting requirements, you can reach out to a Redpath and Company advisor here.

Original Summary from December 11, 2023:

Melissa Doumbia, manager at Redpath and Company, joined the Mind the GAAP podcast, hosted by Sean Sullivan, to discuss the Corporate Transparency Act of 2021 that goes into effect January 1, 2024. The Corporate Transparency Act will have a significant impact on many small businesses regarding personal data they will need to report to the Federal Government. Failure to comply with the new law may result in hefty penalties.

The Act was passed by Congress in 2021 and its intent is to identify beneficial owners of businesses in order to curb fraud and criminal financial activity. While past legislation has typically focused on large corporate businesses, this new law focuses on small businesses and could affect upwards of 33 million entities.

The Financial Cromes Enforcement Network (FinCEN), a bureau within the US Department of the Treasury, will be responsible for the administration and monitoring of the provided data.

However, if you are a business with more than 20 employees, $5M in total gross receipts, and a physical office in the United States, you may be exempt from reporting.

If you do not meet the exemption tests, you may be required to report and will have to establish an account with FinCEN to begin reporting personal data about all beneficial owners within your organization.

Beneficial owners may be defined by any of the following tests:

1. Senior officer of the organization.
2. Individual with the power to appoint/remove senior officers.
3. Individual that is an important decision maker over company structure/finances.
4. Catch-all provision (i.e., a "judgment call" of sorts regarding any other circumstances in which an individual might need to identify and report as a beneficial owner).

Large fines may be assessed for those organizations that do not remain in compliance (e.g., failure to report or failure to update changes to personal information in a timely manner).

For more information and guidance from the Federal government, you can visit https://www.fincen.gov/boi-faqs.

If you have further questions, you can visit www.redpathcpas.com/contact and fill out a form to have an advisor contact you.