How To Qualify For Tax Credits

How To Qualify For Tax Credits

Eric & Michael Procaccinni
Devin Miller
The Inventive Journey Podcast for Entrepreneurs

How To Qualify For Tax Credits

So they think their last step is running the payroll, hire an employee, coming out on the front. We want to create the other last step which is let's take a look at your expenses. Maybe beyond having an expense on your profit loss, we can convert that into a tax credit. If we could use it for the payroll tax credit, that would be great, or else it counts as income tax. We do a lot of planning, phone calls, exchange information. I also want to say that we use technology. We do a lot of zoom and teleconferencing. We record a lot of our discussions and our interviews. Every single thing we do is to save time for the client.


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10 payback based on their r d expenses so they they think their last step is you know running the payroll hiring employee coming out with the product we want to create the other last step which is let's take a look at your expenses maybe maybe beyond just having an expense on it on your profit loss we can convert that into an already tax credit let's let's start the planning if we use it for the payroll tax credit that would be great or else against income taxes so so we do a lot of planning phone calls exchange information so and i would also want to say that we use uh technology we do a lot of zoom or in teleconference we record a lot of our discussions and our interviews every single thing we do is to save time for the client [Music] hey everyone this is devin miller here with another episode of the inventive journey i'm your host devin miller the serial entrepreneur that's grown several business startups into seven and eight figure businesses as well as the founder and ceo of miller ip law where we help startups and small businesses with their patents and trademarks if you ever need help with yours feel free to go to and we're always here to help now today we have another great expert episode today it'll be with uh michael and eric pratachini or as close as i can to pronouncing their name but a few things that we'll go over is one that is maybe not as sexy of an area as far as experts but definitely has an impact both on the bottom line and one that can impact a business especially if you're startup or small business which can be a lot to do with tax credits and more particularly a lot to do with r d tax credits kind of what is a tax credit how do you get you know what how you might qualify what you might want to consider and kind of how you might anticipate that and kind of what or and have a good discussion from there so if that much is an introduction welcome on the podcast eric and michael thanks for having us yeah thank you so much so now before we dive into all of the the excitement of tax credits and kind of what that all entails maybe just give kind of the audience a two or three minute overview a bit of your background and a little bit why you're an expert and why they should trust and listen to you sure sure so thank you again for the time here today and i'm going to go ahead of eric uh if you don't mind i guess osato with my credentials that i am a cpa so i'm a certified public accountant but i'm also a chemical engineer so those credentials and law in addition to my experience makes me consider uh an expert for the irony tax credits i i was lucky enough to spend a little bit over five years working at a public accounting firm so that's really where everything got started and it's fabulous uh opportunity to to learn how to really how to manage clients and also uh just a general intro into the different tax entities so you have the c-corp escort partnership and i did that for about five years and then the last 15 years i worked with a group in montreal focusing on usa r d tax credits and then i i was lucky enough to work with a group out in california so that was my commute right from rhode island to california about one weekend a month and i would travel to california and then i would travel up and down the west coast uh palo alto san francisco and and that was my uh intro and my experience with a lot of the startup companies all the software and so up until that point i was mostly with manufacturing companies uh so that was my intro into the into the software world the summer of 2017 i decided to go on my own and in addition to working on my own last year i joined uh an exciting international group fi group they're located in paris france so i'm lucky enough to work with true uh global companies with the ird credits and a couple of other tax incentives that we work with no that was a great introduction definitely makes sense and uh eric is your son if i remember right so he he works with you and does a lot of the the leg work and setting things up and uh making sure things get through or get done as well is that right yep right on yeah a little less exciting than my dad here but just just learning the ropes and falling alongside him well that's awesome and i've had an opportunity to work with my dad on several projects and different startups and it's always a fun dynamic sometimes it can add a little bit of stress but it also adds a lot more fun to it as well so definitely well maybe with that let's dive in for and chat a little bit about uh you know the the reason of area of expertise which is tax credit so before we get necessarily into specifics of r d tax credits maybe just help people understand a bit of what is a tax credit or why they're offered or why they might consider it kind of then we'll get into the specifics on the r d side no that's definitely so uh like it's almost like an ideal client that they invest in innovation technology new or improved products and even without the client even knowing about the r d credit they're in survival mode they have to be one or two steps ahead of the competition so even without the r d credit they're doing some things for themselves that they really need to do hire engineers figure out uh their current products that they have or software so it's so interesting that the irony credit should be almost like an afterthought before we dive into r d let me back up just real quick because tax credits and you can correct me where i'm wrong because i'm by far not an expert on it i kind of reasonably understand it but a tax credit is basically where the government has different categories of qualifications that you can get reductions on your taxes such that they're saying hey either we'll give you a credit so you don't have to pay as much taxes or will reduce what you owe on your taxes because you qualify for different areas is that is that a fair kind of summary of what a tax credit is yeah it is and we always ask we use the 10 percent rule of thumb so if someone has 100 dollars of r d expenses they'll get roughly a ten percent or or a ten thousand dollar federal credit it's almost equivalent to on a w-2 you have your federal withholding or you make your quarterly estimated payments it's very similar to that yes okay so if in other words if it's so backing that up just a little bit tax credits i should look and say okay there's a lot of different tax credits out there that can help me with my business and so some of them can be you know if you're to look at personal tax returns it can be you may you know you have earn child income you can that would be a tax credit if you have so many kids if you're a parent and depending on how you do that now when you get into startups and small businesses there's different ones and you know different kind of thing but similar to the you know they have some of them that are for with covet and that that you can get for a deferral of how much you pay in the you know i think it's um the credits for how much you pay maybe for unemployment or you can have different credits so you pay for if you have you know different qualifications one of which has been around for a little bit longer certainly predates coved which is you keep referring to is r d tax credit which is a lot of times applicable for startups and small businesses that are doing r d which is research and development and so that's bringing or developing a product figuring it out or researching it and then bringing it to market and they give a credit or for credit depending on if you qualify for how you're able to do that development if you're incentivized basically companies that are trying to bring new products to market so maybe talk a little bit about kind of the you know within r d because r d can be very broad broadly used term within businesses too can everything from you know r d if you would ask a restaurant they're saying i'm developing a new recipe to a you know technology company that's developing a new product to maybe a medical company that's developing a new medical device so when you look at kind of the r d tax credit what is things that what are things that qualifications that startups or small businesses should be considering when should they start to look at it and how do they qualify right excellent so i've actually nicknamed it the wrist credit so somebody starts off with r d they think about the white you know the white coats and in an actual r d research center but if you if you take a step back really it's a risk credit so somebody's taking a risk on hiring an engineer or buying a new kind of product or they're trying to have innovation where there's a financial and technical risk where maybe it work out or maybe it will not so people feel more comfortable oh they don't really understand r d but risk the risk tax credit michael as you're nicknaming it i feel more comfortable with that so so now you take that and so my follow-up question to that is so does any startup qualify meaning if i'm taking because i mean almost every startup takes some risk right in the sense that they're going they're they're going out on their own they're going to start investing either take their own money and invest it blood sweat and tears they're going to do starting up would a restaurant a mom-and-pop shop a technology company and a medical device company all qualify or there's some that qualify better than others right so um if they if they have uh technical employees so as you're gonna find we try to oversimplify everything so instead of going through the irs four pod tests and everything else we start off with is it a stable company is it stabilized is it making money so we we try to like circle the wagon do you have by the way do you have any engineers or a computer uh computer science specialist that work on your and then i ask big questions like why do you hire them oh we hire them to solve our technical problems and so really we try to convince them that they're involved with the rd cycle so and it's just a matter of having a discussion like we're having today ask the right type kind of questions and that way the air we feel comfortable about the r d level and then they do as well no i definitely think that makes sense now i'll follow up with another question which is you know if what are some of the company flipping the question almost a bit on his head what are some of the companies you're saying you're going to have a difficult time qualifying or you may not want to consider it it may not suit you well so you know what i'm trying to do is help so you know if you're a startup you're saying great i can get a tax credit everybody wants tax credit nobody wants to pay any more taxes they want to pay the taxes they're owed because they don't want to get audited but you don't want to pay more than you have to but are there companies you're saying yeah if you're in this area or this area you probably are going to have a difficult time or you may not you may not want to go down this route versus hey here's a sweet spot it sounds certainly like you have engineers software technical people that's an easier area are there ones that are more difficult to qualify on perfect so let's first talk about the 100 non-qualifying client okay okay they have no financial risk they have no technical risk they have no technical employees like at all and they've hired the right attorneys that have made sure that they take no risk at all so the bottom line is heavy their tax liability is heavy and i cannot help them out at all all right so now let's say let's say i qualify for one of those so i have risk i'm putting in my own money i'm putting my money or my savings at risk but i don't have technical employees and i'm not solving a technical problem can you still qualify is it more difficult should you consider it not consider it you need to have that and it was the last point you made you have to be connected to the sciences the hard sciences engineering software physics medical you have to have some kind of a uh a hard science attempted to that so we're always trying to check the box and that would be put them in a hard i wouldn't be able to provide the credit really at all they have to be connected to technology one way or another so in other words and not putting words in your mouth but putting your words in mouth um you have to have some sort of science technical or solving some sort of technical issue meaning really if you're a mom and pop shop is opening up a a small cert or convenience store even though you have some risk involved probably not going to have the technical people same thing on a restaurant unless you're like an uber or you know somewhere where you have software you have ubereats or you know some of those different ones doordash and that they do have a technical aspect but if you're opening up a new restaurant those are incredibly risky because a lot of them don't make it but it doesn't have that technical aspect on the flip side if you're doing whether it's software you're doing electronics you're doing some medical devices where it has some hard sciences to where you're going to have to invest with you know have employees or independent contractors or different individuals that are going to be doing a lot of that research and that development then you'd be a reasonable candidate now one question to follow up on that is it too early i mean let's say i come up with the world's best idea for the next you know whatever device it is i'm going to create the next iphone that's going to just knock everybody's socks off of and i start my i get my llc or my s corp my c corp whichever it is set up tomorrow i go get i go get investment dollars and i hire 20 engineers can i can i and do it this year can i get started or when should i get started how early in the process or late in the process should i consider it it's probably the sooner the better the early planning stages there is some as far as the r d credit you know as the irs never lets us down right they want documentation they want evidence they want so you're better off starting it as soon as as soon as the irony cycle starts out because the information's fresh the project listed fresh everything's right there so so to go so right now this is 2021 for us to go back and do a r d credit for 20 19 and 18 the information gets diluted over time so i'm better off getting involved early on and a couple of uh as far as the startup companies are really a really an ideal situation so we have a general definition of a start-up but the irs has a start-up where they have a five-year rule you know one two three four and five will uh create the amity credit and they can check the box and elect to use the r d credit against payroll taxes okay no now another and i'm just kind of a lot of different questions that i'm getting anticipate people would have does it necessarily matter if you have whether it's an employee and it's you know 1099 employee versus an independent contractor versus a part-time for full-time do those matter as far as irs are qualifying for the credit as far as which type of employees you might have no and that's that's a great point so uh if they they can have employees or they can have contractors you know we go through the interview process the same exact way you get they get the bigger the bigger bang for the park with the w-2 wage earners but the start-up they have so many things to worry about and hiring somebody is usually low on the list right so they have outside contractors they pay them at 10.99 and that could also provide the rd credit for them as well okay so in other words it while 1099 might be a bit easier you could certainly even if you have independent contractors or other arrangements with employees you could still qualify one other question that comes up and then i'll hit on or one of my questions i like which is intellectual property but before we head there let's say i've been doing an r d project for two or three years and i just heard this podcast episode or i just found out about your specialty or any number of things can you go back and recapture some of that credits or is it only moving forward meaning hey i've been doing this for two or three years i didn't realize i qualified is there any way to recapture that or is it more hey now that i know about it i can capture it going forward yeah now great so you know even like an individual tax return you have you have three years from when you filed it to go back and amend and that's what really opens up the opportunity to go back for the prior years so the answer is yes yes definitely go back if it's available and part of the planning is to really figure out that whole net benefit you know it's one thing to do the credit for the prior years there could be an ordered risk that has to be managed and understood as well it's so much easier to do it in the current year where the audit risk is i think less than one or two percent for the empty tax credit the prior years it's somewhat of a it's not a order risk but it's a flag item you're a minute in return for one reason for the hourly tax credit but if you burn the already expenses and you've earned the rd credit you have nothing to hide it's definitely uh worthwhile okay now one one additional follow-up and i think we chatted a bit about it and certainly an area that i that i i'm a bit biased towards which is intellectual property and i think you talked about that as one of the places that it helps to qualify or you can show her you can show that as part of the r d is that right yep it's so true and the irs would have they have a safe tax harvest and they have it for the irony credit and they only have two and one of them is the intellectual property so we can it's not required to have intellectual property but if you're involved with r d activity of the activity is connected to intellectual property it's a safe tax however the irs will lightly review everything because the uh it's so much more difficult to get iep than it is to have ir sorry r d so if we can make that connection um between the r d and the ip it's a really nice secure way to to have the credit and you're building a very easy audit file a lot of advantages all right awesome well that's just another reason to get intellectual property because it makes the audit audit uh trail all the easier if you ever get audited and also to substantiate it so just for everybody listening go get as much hype no i'm just kidding as much as you can but do it do it if it makes sense so so now talking a little bit we've kind of gone through a bit of what the i or what the tax credit is some of the qualifications what you might consider now you know you've done this for a period of time and you've also get full disclosure to the audience you've you've done it for us as well for one of my companies and it was a great experience but you know as you do it you mentioned a little bit we talked a little bit about different companies you helped and that give us an example is you know is it hey this is going to save me a few hundred dollars to hundreds of thousands or millions of dollars or kind of what should they anticipate and is it worthwhile is in their for startup or small businesses time to put in the time because it does take a little bit of time expense you want to make sure to keep the audit trail you want to make sure to substantiate you don't want to just put your uh you know put your finger up in the air and make a guess but you want to actually have it substantiated so give us people a bit of an idea of kind of what or what they might be looking at as far as why it might be worthwhile yeah maybe we just go through a couple of a quick uh case studies so working with a manufacturing group out in california and uh 2020 was actually year number seven so we provided a a really a very very good already tax credit it was federal and state so california has has a strong state credit as well and i believe the credit was about 40 000 it was about 25 federal and west california and it was very humbling engagement where they they were going to use that rd credit as a reason to hire someone so that's really to have to provide the credit not only to save taxes but to justify hiring somebody else you know it's very meaningful to us another case study is with a software company that was year number three and they're a c co-op they had net operating losses so we're able to do the r d credit for 2020 19 and 18 and with special rules the irs has we just reported all three years of r d credit on the 2020 tax return so in that case they did not have to amend you know at all so i think the credit was a little bit higher there they hired about 20 over 20 software engineers and that the credit was i think it was over it was over two hundred thousand dollars oh cool definitely worth uh worth the savings and worth a little bit of effort to do that so now people were to you know they're thinking about it help them understand so full disclosure you know you're also we're setting you up we as people may have caught we're doing what called a strategy on demand sessions where they can you know get a half an hour of you guys time to kind of go talk through see if they qualify and what makes sense but let's say they come and they you know they sit down with you for half an hour kind of chat through what they have going on see if they lines up and makes sense they do that through the strategy on demand or otherwise connect up with you you know as far as i'm a big proponent of you know transparency and cost how much it's going to cost up front all of miller ip law stuff you can go on our website and you can see exactly what our flat fees are what everything costs so if they're to approach you and they say hey you know i assume you guys don't want to do it for free for everybody i'm sure everybody would love it but i assume that you actually guys want to stay in business and make money yourselves so people were to say okay what is this going to cost me and kind of how long does it generally take kind of what are those two criteria well that's great so we really have really two sets of clients one that's not only new to us but they're new to the rd credit so with them we'll uh uh we'll typically uh start off with maybe a uh maybe a 20 fee okay so we're almost like a finder fee we try to come up with maybe a 20 fee of whatever that net benefit is but we try to move like the very next year into a flat fee all right so there's no sticker shock there's no element of surprise at all then we have our other clients that have already they're familiar with the rd credit and they're already familiar with a different kind of different kind of a pricing structure so we'll ask about that if we're able to duplicate that then we'll do that as well okay so it sounds like there's a couple different options if they're already fairly familiar with it you guys will set up at what would be a fair reasonable price for the people who are new to it or otherwise you win usually year one there's a a percentage that you'll take afterwards it'll move to a flat fee is that about right yep and then we also have it's a little bit corny but we always talk about we want to take the journey with them especially for the startups if they're if the money's a little bit tight and the credit they don't utilize the credit in year number one and you have to do a carry forward then we want to have that discussion so we want to have our deliverable want to have our fee but the actual payment we we want to have a lot of flexibility with that if they're going to use it two or three years down the road we'll take that journey with them we don't want to we don't we don't want them to worry about paying us we want it it's more important to get that r d reported as currently as possible and just contribute that way okay perfect makes definitely makes sense and now a lot i think the last question maybe or maybe not i always say your last question i always have more questions but if or one of the last questions and maybe i should start saying one of the last questions that works better um is you know as far as the length of the process are they looking at you know they were new to it they hadn't gone through it before are they looking at a day a week a month a year kind of how long should they anticipate kind of or how many hours or whatever is a fair way to measure it as far as going through the process with you guys wonderful we try to do a four to six four to six weeks so week one and two is exchange of information week three and four some interviews really coming up with like a draft calculation and then week five and six we want to review our calculation convert it from a draft to a final have a a report so we like to say we want to we want to just visit them we don't want to really move in with them so we want to have a start date and an end date so they can actually check the box hey mike and eric did a great job the rd credit's all done and then we want them to move along with their lives with their operation and everything else here so that's how we try to do it four to six weeks all right definitely makes sense and yeah i know it's my i'm guessing that is as much as people don't typically although i hope i'm the exception don't want to go see a lawyer typically my experience is they don't like accounts of tax people any better because they're wanting to focus on things and the thing that's exciting for them so i think that that's definitely a reasonable time frame and uh when we went through it with one-on-one business with you guys it was a fairly non-invasive it wasn't an overly burdensome and it was a fairly quick and easy process and so definitely would recommend it well as we wrap up you know and i always ask one question at the end of each expert episode and we're kind of reaching that now which is if you know with the r d tax credit if they if you could if you're talking to someone that's in a startup or small business and they only could take one step to get closer to getting going aside from talking to you guys which i'm sure would be the first step but if they're to start saying hey i just want to take a look at this i want to understand and i want to get going what would be the one piece of advice or one action item that you give them to start getting things kicked off that there's a 10 payback based on their r d expenses so they think their last step is you know running the payroll hiring employee coming out with the product we want to create the other last step which is let's take a look at your expenses maybe maybe beyond just having an expense on it on your profit and loss we can convert that into an already tax credit let's let's start the planning if we use it for the payroll tax credit that would be great or else against income taxes so so we do a lot of planning phone calls exchange information so and i would also want to say that we use technology we do a lot of zoom or in teleconference we record a lot of our discussions and our interviews every single thing we do is to save time for the client awesome well i definitely i i'm sure they definitely appreciate that as as like as as everybody always has more things to do than time to do it so that that's awesome so well as we wrap up definitely one option that people if they want to reach out they can go through the strategy on demand they can sign up there they want to reach out to you directly or otherwise find out more about you guys or anything of that nature what's the best way to find out more reach out to you guys or otherwise getting get involved yep they get uh contact eric yeah probably either uh usually linkedin linkedin's always good um pretty active on there and then our website as well at yeah all right well i definitely encourage people to either check you guys out on linkedin make those connections go to or use strategy on demand any which will make sure to help you get those tax credits well thank you guys for both coming on it's been fun it's been a pleasure and i don't most people don't usually say that when you talk about taxes because it's usually our but i've been enjoying having you guys on i appreciate all the expertise you guys have shared definitely um an area where i think people can have some savings and benefit their business now for all of you that are listeners if you have either expertise you'd like to share or a journey you'd like to share on the podcast feel free to go to and apply to be on the podcast two more things if you're a listener one um if uh if you uh our listener make sure to click on uh subscribe on your podcast player so you get notifications as all of our awesome episodes come out and two leave us a review so new people can find out about the podcast last but not least if you ever need help with your patents trademarks or anything else reach out to us at miller ip law by going to we're always here to help thank you again both of you and uh wish the next leg of your journey even better than the last you

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