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Tanner Montague came to town from Seattle having never owned his own music venue before. He’s a musician himself, so he has a pretty good sense of good music, but he also wandered into a crowded music scene filled with concert venues large and small.But the owner of Green Room thinks he found a void in the market. It’s lacking, he says, in places serving between 200 and 500 people, a sweet spot he thinks could be a draw for both some national acts not quite big enough yet for arena gigs and local acts looking for a launching pad.“I felt that size would do well in the city to offer more options,” he says. “My goal was to A, bring another option for national acts but then, B, have a great spot for local bands to start.”Right or wrong, something seems to be working, he says. He’s got a full calendar of concerts booked out several months. How did he, as a newcomer to the market in an industry filled with competition, get the attention of the local concertgoer?

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by Sarah Brouillard
August 2005

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More firms can get R&D tax credits, local CPAs say

Many accounting firms this summer are galvanizing their marketing efforts to inform clients about a change: the recent loosening of a federal tax law that rewards credits for companies’ research and development activities.

R&D Tax Credits

Created in the early 1980s, the research and development (R&D) tax credit/incentive program had only been applicable to hard-sciences companies, such as manufacturers, that demonstrated truly inventive, leading-edge research and development.

That bar was lowered in December 2003, allowing more routine, run-of-the-mill R&D at these companies to qualify for the tax credits. As a result, companies merely trying to improve a product or internal process — even if those efforts are ultimately unsuccessful — can get money back for wages they paid, and materials and supplies they expended toward those ends, say certified public accountants. The credits are meant to encourage innovation and keep creative brainpower in the U.S.

“Under the old regulations, you pretty much had to reinvent the wheel and the atom to be eligible,” says Alan Delage, a tax-services CPA and shareholder with Froehling Anderson, Minnetonka. “That’s no longer the case.”

Now that their busy tax season is over, and they’ve had some time to bone up on the changes, CPAs and their staffs are working hard to get the word out to clients.

Many are mining their databases, culling lists of clients they feel might be eligible for the credits. Others are quickly building alliances with consulting firms that specialize in seeking out R&D tax credits.

Dollar for dollar

Similar to withholding on an individual’s tax returns, the credit offsets a company’s tax liability dollar-for-dollar, and can number in the tens of thousands of dollars or more, depending on the amount of R&D expenses. Companies can claim the credit on their 2005 tax returns, or wait to claim it on future tax returns. Companies can also amend their tax returns from the previous three years to gain the credit. The formula for calculating the credit varies depending on a number of factors, including whether the company was in existence when the original tax law was passed.

As a rough estimate, “your credit will probably equal approximately 6.5 percent of your R&D expense,” says Mark Kammer, a CPA with Froehling Anderson.

For CPAs, the exploration process for determining what qualifies for a credit can be short and simple, or long and complex, depending on the client and its line of work.

“Some of it is stuff that just screams R&D,” says John Csargo, a CPA with Blanski Peter Kronlage & Zoch (BPK&Z), Golden Valley.

In other cases, a little investigative work is in order.  Kammer says his firm is looking into tax credits for eight clients. As part of the process, he typically tours a company’s manufacturing line to understand how it works. He also interviews employees “in the trenches, whether it be the job foreman or the project engineer,” he says.

Getting the owner’s input is less important. “The last thing you want to do is to get anybody who might embellish to get a bigger credit,” he says.

Sometimes the process requires more hands and feet. Through its membership with accounting network CPAmerica International, St. Louis Park-based Cummings, Keegan & Co. has formed a partnership with Houston-based alliantgroup, a group of former Big 4 accountants that has lengthy resumes dealing with complex R&D matters going beyond the purview of traditional CPA firms. The partnership is barely six months old — so new that Cummings, Keegan & Co. has worked with the group on just one project so far.

Working with such niche firms not only adds “horsepower,” says John Frees, a CPA and partner with Cummings, Keegan & Co., but it also boosts credibility when presenting to prospective clients.

Windfall for some

During their summer campaign, CPAs are discovering that some clients have never heard about R&D tax credits. Others, they’ve found, simply assume they don’t qualify.

“Sometimes clients mimimize what they think their R&D is,” says Tim Kenyon, a tax partner with Cummings, Keegan & Co. They often have a misperception — rampant especially among small companies — that R&D is only legitimate when it involves a white lab coat, he says.

Mike Urquhart, vice president of operations for American Converters Value Added Service (Amcon/VAS), a Fridley-based foam fabricator, had labored under that assumption until his boss last year forwarded him a call from ActiFi, now Black Line Group, a Plymouth-based consulting firm that specializes in R&D tax credits.

Turns out that a number of Amcon/VAS’s research and development activities were and are eligible for tax credits, says Urquhart, whose company posted revenue of $14 million last year.

The company had developed a foam material, dipped in a special black ink, that conducts static away from cellular phone parts and other electronic components during assembly and shipping. Additionally, it had created an in-house software program that enables engineers to take data stored on internal computers and put it into an e-mailable form to send to customers.

Together, these projects resulted in tax credits worth $15,000. Since the company has an employee stock ownership plan (ESOP), each employee got a piece of the windfall, says Urquhart.

Cashing the check was easy, of course. Gathering the data to amend Amcon’s past tax returns was a more arduous task, especially for Urquhart.

As point man for the task he was briefed by Black Line Group on how to do the due diligence, which involved poring over months-old files, interviewing employees, and breaking down engineers’ salaries to quantify the company’s R&D expenses.

Ultimately, he determined that 10 employees spent some percentage of their 2001-2003 salaries on the projects. Once all the number-crunching was accomplished, Black Line Group helped the company refile its returns.

Getting over that initial data-gathering hump was time-consuming, says Urquhart. But the subsequent year was easier, as the company automatically tracked its R&D data and filed away the proper spreadsheets used to compute the credit during tax season.

With the extra money, the company hired an intern — an engineering graduate student from the University of Minnesota — to help with R&D, knowing it could justify the cost by claiming the hourly wages toward a credit.

While Black Line Group no longer plays a role, Amcon/VAS’s CPA firm, BPK&Z (which partners frequently with Black Line Group to help clients) now assists with any lingering R&D questions, which are few now that the company has figured out the process, says Urquhart.

Details a must

Keeping a paper trail is extremely important, not just for calculating the credit, but in case of an audit, says Adam Ostrow, a tax consulting manager with more than nine years of experience specializing in R&D credit studies at Virchow Krause & Co., Bloomington.

Well prepared companies that keep detailed logs are less likely to attract the attention of the Internal Revenue Service. Ostrow says he makes sure all of his clients keep thick binders full of supportive documents.

He also advises his clients to take a moderate approach when coming up with a figure to claim for credit. Extremely aggressive companies who push for large credits can draw red flags at the IRS. They’ll get into trouble if they can’t back their claims with the proper paperwork.

Some accounting firms, too, are guilty of jumping the gun, he says. A few are wildly inflating clients’ expectations in the midst of their marketing bonanza. The more unscrupulous ones encourage clients to claim a large credit so they can get a fatter fee, but then disappear when auditors start sniffing around.

“It’s great to get people excited about this. But it’s best to not do it in a crazy fashion,” says Ostrow. “We’re not curmudgeons — we want to get clients the maximum they’re due — but we’ve been around long enough to know that, if you’re audited, and you don’t have the right documentation…it can be pretty painful.”

[contact] John Csargo, Blanski Peter Kronlage & Zoch: 763.546.6211; jcsargo@bpkz.com; www.bpkz.com. Alan Delage, Mark Kammer, Froehling Anderson: 952.979.3100; aland@fapw-cpa.com, markk@fapw-cpa.com; www.fapw-cpa.com. John Frees, Tim Kenyon, Cummings, Keegan & Co.: 952.345.2500; jfrees@ckco-cpa.com, tkenyon@ckco-cpa.com; www.ckco-cpa.com. Adam Ostrow, Virchow Krause & Co.: 952.835.1344; aostrow@virchowkrause.com; www.virchowkrause.com. Mike Urquhart, Amcon/VAS: 763.574.1044; m_urquhart@amconvas.com; www.amconvas.com