manufacturing webinar insert presentation title here series · 2019-12-05 · insert presentation...

Insert Presentation Title Here Manufacturing Webinar

Series

July 24, 2013

© 2013 Rehmann

WebEx Introduction

Moving around

• Lines may be muted upon

entry.

• Should the audio

disconnect, view the event

info tab.

• If you connected via phone:

We will unmute the lines for

questions at the end.

CPE

• In order to receive CPE you

must remain connected

throughout the webinar and

participate in the polling

questions and evaluation.

We value your opinion

• An evaluation survey will

pop up in separate window

upon closing out of the

webinar.

Technical difficulties

• Please contact

[email protected]

or call WebEx at:

866.229.3239 or

1.408.435.7088 for

international assistance.

To ask a question,

use the chat box

and choose “all

panelists” or

use the Q&A

if available.

This

session

may be

recorded.

If voice and video

are not synced,

click “View” and

“Sync Display.”

.

Insert Presentation Title Here

Innovating Your Way to Tax Credits with Research &

Experimentation Presented by:

Mike Powell, CPA, MST

Mike Powell, CPA, MST Principal

• Rehmann

• Provides tax consulting services, including Research and Development Tax Credit studies and Domestic Production Activity Deductions

• More than 16 years of accounting experience

[email protected] 248.458.7930

Agenda

• Research & Experimentation (R&E) Tax Credit

Overview

• R&E Defined

• Qualifying R&E Expenditures (“QREs”)

• Examples of Qualified Projects

R&E Credit Overview

• R&E Credit: Government Incentives

– Experiment, Innovative, Develop Products &

Processes

• Tax Credit vs. Deduction

– Dollar-for-dollar credit

– Three times more beneficial than a deduction

R&E Overview

• Projects eligible for the R&E Credit:

New product development

Product improvements

New manufacturing processes

Manufacturing process improvements

New formulas or techniques

In some cases, the development of software and revising software code

R&E Credits - Business Test

• Taxpayer must bear the economic risk for research

activities

– Two-prong test

• Financial risk

• Substantial ownership of IP discovered

• The research must be performed within the U.S.

– However, activities taking place both within & outside

U.S. can qualify

R&E Credits - Four-Part Test

1) Eliminating

(Technical)

Uncertainties

2) Process of

Experimentation

3) Technical in

Nature

4) Permitted

Purpose for the

Project


1) Eliminating Uncertainty

– Activity must be intended to discover information that

would eliminate technical uncertainty concerning the

capability or method for developing or improving a

product or process, or the appropriateness of the

product design

– Other considerations:

• Appropriate material

• Correct production throughputs

• Production fixtures with quality issues

• Integrating technologies to achieve a specific goal


2) Process of Experimentation

– Evaluate alternatives (concept phase)

– Develop hypothesis

– Test hypothesis

• i.e. prototyping and testing

– Refine or discard the hypothesis

• Reworking of prototype or product

– Success or failure


3) Technological in

Nature

– Discover information that

fundamentally relies on

the principles of:

• Physical science

• Biological science

• Engineering

• Computer science

• Metallurgy


4) Permitted Purpose

– New or improved product or process related to

• Function

• Performance

• Reliability

• Quality

• Significant cost reduction

Polling Question #1

• The following types of activities may qualify for the

R&E Tax Credit?

– New product development

– Product improvements

– Development of new manufacturing processes

– Discover ways to improve current manufacturing

process to increase cycle times

True or False

R&E Credits - Qualifying Costs

• When activities associated with a project are

deemed to be qualified R&E, the following expenses

connected with the project may be applied towards

the credit

– Wages

– Supplies

– Contract services

1 2 3

Wages of

those

individuals

engaged

directly in the

qualifying

activity

Wages of

individuals

supervising

individuals

performing the

qualified

activity

Wages for

individuals

supporting the

individuals

performing the

qualified

activity

Qualifying Costs - Wages

Qualifying Costs - Example of Supervision • Individuals supervising an R&E activity can include

– Participating in brainstorming and/or feasibility

meetings

– Overseeing qualifying project

– Lending technical expertise to individuals performing

R&E activities

– Reviewing test results to determine what design

alternatives are most appropriate

Qualifying Costs - Example of Support • Individuals in support of an R&E activity can include

– Quality assurance individuals testing the results of new

product development (or materials) or testing items

associated with a new manufacturing process

development

– Laboratory or R&E assistant entering data into a computer

as part of the research activity

– A secretary typing reports discussing the research results

– Assistants cleaning items associated qualifying research

– A machinist fabricating a portion of an experimental model

for manufacturing or test stand equipment

Qualifying Costs- Supply Expense • Qualifying supply costs are those items that are

used during the process of experimentation

– Examples:

• Materials used to perform experiments

• Prototypes

• Small tools consumed in the experimentation

• Greases, lubricants or other materials needed to run

machinery for experimentation or testing

• Anything else, that is not capitalized or sold to a customer,

which is required while experimenting or testing

TG Missouri Corporation

• TG Missouri Corporation, 133 T.C. 13 (2009)

(“Missouri”)

• Holding: The court held, the production molds that

Missouri sold to its customers are not assets of a

character subject to the allowance for depreciation

and were properly included in supplies

– The court stated, generally, only taxpayers with an

economic interest in an asset can deduct depreciation

with respect to that asset

Qualifying Costs - Contract Services • Costs qualify if the taxpayer would have paid an

employee to perform the same type of qualifying

activity

– Types of qualified contract services

• Outside test labs

• Outside engineering services

• Temporary employees

• Outside software development firms in some cases

Non-Qualifying Projects/Activities

Examples of R&E Qualifying Activities • Project Engineering

– Assisting in new product concepts

– Technology development

– Analysis of the structural integrity of new products

– Analysis of new materials to be used in products to

improve products or to reduce the amount of specified

materials to be within new code restrictions (i.e. lead)

– Assist in determining product failures and improve a

Company’s manufacturing process

Examples of R&E Qualifying Activities • Manufacturing R&E

– Developing new tooling or processes to improve cycle

times and quality, or reducing scrap, production costs

and defected parts

– Developing new tooling or processes to produce new

products at commercially viable speeds

– The development of new software code or algorithms

associated with manufacturing equipment

– Developing new upstream or downstream equipment

to improve a manufacturing process

Polling Question #2

• If a project is deemed to qualify for the R&E Tax

Credit, the following costs can be applied towards

the credit?

– Wages

– Supply costs

– Contract services

True or False

Basis of Regular Tax Credit Calculation

1) Fixed Base Percent 3) Gross Credit

Base Year QREs / Base Year Receipts

Lesser of excess CY QRE over Base Amount; or 50 percent of CY QRE * 20 percent

2) Base Amount 4) Net Credit

Avg. Gross Receipts *Fixed Base Percent

Reduce deductions by gross credit; or elect reduced credit of 13 percent

Basis of Alternative Simplified Tax Credit Calculation

1) Base Amount Gross Credit

Average of prior 3-year Qualified Research Expenses * 50 percent

Excess of CY QRE over Base Amount * 14 percent

Net Credit

-If no qualified activities in prior 3 years, then current year qualified expense * 6 percent

Reduce deductions by gross credit; or elect reduced credit of 9.1 percent

Example of Increasing Qualified R&E Expenses • Tax Year 2012 Qualified Research Expenditures

WHO HAS THE FIRST QUESTION?

Disclosure - Circular 230 • Please Note: This document is intended for internal

training purposes only

• NOTICE TO PERSONS SUBJECT TO UNITED STATES TAXATION: DISCLOSURE UNDER TREASURY CIRCULAR 230

• The United States Federal tax advice, if any, contained in this document and its attachments may not be used or referred to in the promoting, marketing, or recommending of any entity, investment plan, or arrangement, nor is such advice intended or written to be used, and may not be used, by a taxpayer for the purposes of avoiding Federal tax penalties.


• True North: Finding Your Financial Way with Proven

Strategies Presented by:

Gerald Wernette, CPA, CEBS, AIFA, C(k)P Jeff Phillips, CFA, CPA


How Do I Effectively Save for Retirement Without it Costing Me a

Fortune?

Securities offered through Royal Alliance Associates, Inc. member

FINRA/SIPC. Investment advisory services offered through Rehmann Financial, a Registered Investment Advisor not affiliated with Royal Alliance.

Gerald Wernette, CPA, CEBS, AIFA, C(k)P

Principal - Director

• Rehmann Financial Principal

• Rehmann Retirement

Builders Director

• Provides retirement plan

strategies [email protected]

248.579.1163

Retirement Savings Options

• Defined Contribution Plans

• Defined Benefit Plans

• Non-Qualified Deferred Compensation Plans

Defined Contribution Plan Options • 401(k) Plan – Safe Harbor (3% to all or up to 4%

match) or Not?

• Alternatives to focusing on key employees

– Profit Sharing: Age Weighted

– Profit Sharing: Cross-Tested

– Profit Sharing: Super Integrated

Defined Contribution Plan Options:

Defined Benefit Plan Options

• Traditional defined benefit plans

• Cash Balance plans

• Multiple plan designs

– Defined benefit and defined contribution combined

plans

Defined Benefit Plan Options

Key Considerations in Plan Design

Management of fiduciary liability

Impact of retirement accumulation goals and employee demographics on plan design

How much is needed and where will it come from -retirement plans vs. “selling the business

Considerations on benefiting other key employees

Flexibility for ongoing funding requirements

Managing retirement risk

Polling Question #3

• How much of an employee's income do think your

company retirement plan will replace?

25 percent

50 percent

65 percent

75 percent

Plan Design Example • ABC Company

– 3 owners • Age 40 years, 49 years, 50 years

• Each receive base salary of $255,000

– 23 additional employees • Age 21 to 60 years

• Total compensation of $827,000

• Based on 2013 limits: – Straight profit sharing plan total cost = $318,400

• Owners receive $153,000 or 48.1% of total contributions

– Cross-tested safe harbor 401(k) total cost = $199,850 • Owners receive $158,500 or 79.3% of total contributions

– Defined benefit plan plus safe harbor 401(k) profit sharing plan total cost = $340,000

• Owners receive $265,200 or 78% if total contributions

Cross-Tested/New Comparability Plan Design • Put employees into different classes/rate groups and

give differing contribution rates to the different groups

• Must pass certain coverage and non-discrimination rules

• Works best when there is a large disparity in salary between owners and employees

• Contributions are converted to “benefits” and the benefit accrual rate is tested

• If the plan does not provide for broadly available allocation rates or age-based allocation rates, the employer contribution must meet a “gateway” threshold

– (Allocation rate of Non-HCEs is at least one-third the allocation rate of the HCEs or at least 5%)

Ideal Profile for New Comparability Plans

Large compensation and age difference between HCEs and

NHCEs

Better with low EE count, but can help control costs in larger

groups

Owner earns more then $100,000 and wants to max savings while

minimizing costs

Closely-held businesses work well

Don’t want to worry about employee participation

Other family members in business – Opportunities!

Desires to benefit other “key” employees or provide incentives to

certain classifications of employees

Cash Balance Plan Considerations • Advantages:

– Recruitment and retention tool

– Often less cost then a traditional DB plan

– If designed appropriately and assets invested properly, fluctuations in cash contributions and financial statement impact may be minimized

– Greater funding flexibility

– Opportunity to provide greater or additional benefits than a DC plan

– If group is > 25 employees and DB is combined with DC plan, you are not subject to combined plan deduction limit and may not need to cover all NHCEs in DB plan

• Disadvantages: – Need to follow all qualified plan

rules, so more expensive to administer than a DC plan due to annual actuarial valuations and PBGC premiums for groups > 25 employees

– Annual required minimum contributions

• Ideal where plan sponsor’s income is steady or have peaks where additional contributions can be made to lessen the requirements during down times

Maximum Contribution Comparison for 55-Year-Old Participants • Note: The table assumes a max contribution credit

for each plan and 5% interest crediting rate

Multiple Plan Design Example

Multiple Plan Design Tax Savings

Other Considerations • Qualified Automatic Contribution Arrangements

– Deferrals start at 3% - 7% and increase 1% per year, up to 6% - 10%

– Matching employer contribution of 100% on 1st 1% and 50% on next 5%

– Annual employee notice requirement

• To Roth or not to Roth – tax deferred versus tax free benefits

• Managing fiduciary risk while focusing on participant retirement readiness

• Federal Bankruptcy Protection – IRA’s up to $1,170,000 (indexed) and all qualified plan

assets or assets rolled from qualified plans

WHO HAS THE FIRST QUESTION?

Nonqualified Deferred

Compensation Plan

The Nonqualified Incentive Bonus Plan

The Nonqualified Incentive Bonus Plan

Presented by:

Jeff Phillips, CFA, CPA

Chief Investment Officer & Director of

Operations

Rehmann Financial

[email protected]

248.458.7885

Get a Nonqualified Solutions Edge

The Principal is a leading provider of nonqualified

deferred compensation (NQDC) plans.*

Our comprehensive plan services provide everything

you need — plan design, financing options,

implementation and plan administrative services.

* Based on total number of recordkeeping clients, PLANSPONSOR Deferred Compensation Buyer’s Guide,

December 2012.

The Challenge for employers

Retaining key employees

Retaining and motivating employees is essential to the ongoing

success of most organizations. Changing economic conditions and

demographic shifts of baby boomers toward retirement expose

organizations to a higher risk of losing these employees.

High cost of losing key employees:

• Estimates suggest that the cost of employee turnover often

ranges from 50% to 200% of the employee’s annual salary

based on the type and level of job he/she holds.*

• Hay Group employee opinion norms indicate 20% of

employees plan to look for a new job in the next two years

— and another 20% plan to leave their employers within the

next five years*

* Report Retention of Key Talent and the Role of Rewards

by WorldatWork, June 2012

A Solution

Nonqualified Incentive Bonus Plan

A tax-deferred bonus program* that gives employers a

retention and reward tool for key employees with limited

options. Qualified plans have contribution limits and NQDC

plan participants must meet “top-hat” eligibility requirements.

The Nonqualified Incentive Bonus Plan solves this with:

- the opportunity to provide additional compensation to

the top-hat or non-top-hat employees they choose

- while offering the ability to set vesting schedules that

help meet business goals.

* Contributions to the plan are subject to FICA when

benefits vest. Distributions are taxable to participants upon

receipt.

Nonqualified Incentive Bonus Plan

Not subject to ERISA

• A “bonus program” as defined by the Department of Labor –

not a “retirement plan”

– No participant deferrals, employer contributions only

– Total time from date of contribution to date of payment cannot be

more than 10 years

• A plan not subject to qualified plan coverage and testing rules

• A plan not subject to the “top-hat” rules of ERISA

• A plan not subject to the fiduciary and reporting

requirements of ERISA

Top Hat and non-Top Hat employees may participate in the plan.

Tax-deferred accumulation of earnings

Ability to further defer the receipt and taxation of plan benefits,

as allowed by plan design

Ability to design an individualized investment strategy

(unlike many incentive programs)

Complete account, vesting and transaction information

Benefits for the plan participant

No participant contributions into the plan are permitted.

Plan is not subject to Employee Retirement Income Security Act

(ERISA) protection, and assets financing the plan are owned

by the company and subject to company creditors.

As allowed by plan design, elections to defer receipt of benefits

and delay taxation must be made within 30 days after the

employer contribution is made.

Company’s non-compliance with deferred compensation

rules under Section 409A of the Internal Revenue Code may

result in individual tax and penalties.

Considerations for the plan participant

Polling Question #4

• An incentive compensation plan is always subject to

409A regulations?

True or False

Retain and reward selected key employees

(both Top Hat and non-Top Hat) by making discretionary incentive

contributions that are tax deferred.*

Set vesting schedules that meet corporate objectives.

Assets accumulated to finance the plan remain an asset

on the company’s balance sheet, while providing liquidity

for benefit payments.

Plan is simple, no testing, no required audit, and no 5500 reporting.

Benefits for the company

* Contributions to the plan are subject to FICA when benefits

vest. Distributions are taxable to participants upon receipt.

Distributions to plan participants must be paid within 10 years

from the original date of each company contribution.

To qualify as a bonus plan not subject to ERISA, the plan cannot be

designed to “systematically” provide benefits to participants after separation

from service. This determination must be made by the company.

Deferred income tax deduction vs. a current income tax

deduction on plan contributions. The company accrues a deferred

tax asset to reflect the temporary difference.*

Plan administrative service fees apply.

Considerations for the company

62

* For taxable corporations

Plan financing options

An Incentive Bonus plan is an unfunded & unsecured contractual

obligation (liability) to pay a future benefit. The company finances

this liability in one of three ways:

UNFINANCED

TAXABLE INVESTMENTS

VARIABLE COLI

The best approach depends on the company’s:

Income tax bracket - Long-term cost of money

Earnings assumption - Realized vs. unrealized distributions

Cash flow requirements

Advantages Disadvantages

• Simple

• Company benefits from ROA greater

than growth in participant accounts

• Provides cash to grow the company

• Liquidity (increased risk to

participant)

• Company liable for benefit

regardless of earnings

• “Legacy vs. liability”. Leaving

future benefit management the

responsibility for cash flow to pay

benefit liability

Unfinanced approach



• Many investment options

• Direct link of earnings on assets to

plan liabilities

• Highest cash flow to support tax

on earnings

• Transaction accounting &

recordkeeping may be difficult

Financing with taxable investments



• Earnings accumulate “tax deferred”

• Tax-free distributions (subject to

contract limitations/charges)

• Tax-free life insurance death

proceeds (subject to rules regarding

selection of insured's and consent

requirements)

• Policy charges

• Process of underwriting

• Educating participants about

insurance

66

Financing with variable corporate-owned life

insurance (COLI)


Nonqualified plan administrative

services system

Concentric system design

Plan management system

• Selective employer contributions to reward valuable

employees

• Ability to set vesting schedules that meet corporate

objectives.

• Typically NQDC plans are only for “top-hat” employees

• Ability to design an individualized investment strategy

• Ability of participants to further defer the receipt and

taxation of plan benefits

Problems to solve

Summary

Questions and Comments

Disclaimer

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal or its representatives are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Before investing in mutual funds or variable life insurance, investors should carefully consider the investment objectives, risks, charges and expenses of the funds or policy and the underlying investment options. This and other information is contained in the free prospectus, which can be obtained from your local representative. Please read the prospectus carefully before investing.

Insurance issued and plan administrative services provided by Principal Life Insurance Company. Securities offered through Princor® Financial Services Corporation, 800/247-1737, member SIPC. Principal Life and Princor are members of The Principal Financial Group®, Des Moines, IA 50392.

No part of this presentation may be reproduced or used in any form or by any means, electronic or mechanical, including photocopying or recording, or by any information storage and retrieval system, without prior written permission from the Principal Financial Group®.

Copyright ©2013 Principal Financial Services, Inc.

BB10870 | 1/2013 | t13011701zy

Thank you for attending!

Insert Presentation Title Here Manufacturing Webinar

Series

July 24, 2013

manufacturing webinar insert presentation title here series · 2019-12-05 · insert presentation...

Documents