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EPISODE 101: The Research Tax Credit

Casey and Jarrod are joined by CPA Steve Levy to discuss the Research Tax Credit. This under-used tax credit can be a major boon for practice owners.

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EPISODE 101 TRANSCRIPTION

Announcer:
Hello, everyone. Welcome to The Millionaire Dentist Podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances and business practices to help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue, and may not be safe for work.

Casey Hiers:
Hello, and welcome. This is Casey Hiers, back at The Millionaire Dentist Podcast. In-studio today, I have co-host Jarrod Bridgeman, and special guest, Steve Levy, Mr. CPA, and JD; a lot of initials after those names. You're becoming a quasi-regular guest, which I like because that means we're getting some really good expertise and things that are very germane to our audience.

Steve Levy:
Absolutely. Happy to be here.

Casey Hiers:
Jarrod, do you know what that means, germane to our audience?

Jarrod Bridgeman:
Yeah. That's the... Those are plants. Right?

Casey Hiers:
Plants?

Jarrod Bridgeman:
Yeah. Germanes.

Casey Hiers:
No. No.

Jarrod Bridgeman:
Okay. Well, as far as I got.

Casey Hiers:
That's why I say it. So I just... It makes me feel smart.

Jarrod Bridgeman:
I'm dumb. It's fine.

Casey Hiers:
Oh, but your hair looks great today.

Jarrod Bridgeman:
Thank you.

Casey Hiers:
So, I had to balance it out. Right?

Jarrod Bridgeman:
That's right.

Casey Hiers:
All right. Well-

Jarrod Bridgeman:
It's either beauty or brains.

Casey Hiers:
For our audience, the Research Tax Credit; anytime somebody hears tax credit or ways to get more money, get more of your money from Uncle Sam, we find that to be a good topic to get into. So, Steve, we wanted you to come in, and first of all, tell us, what is the Research Tax Credit?

Steve Levy:
Well, the Research Tax Credit, which another name for it is the Credit for Increasing Research Activities.

Casey Hiers:
Ooh, that sounds vague.

Steve Levy:
Right. The Research Credit, it's a pretty valuable credit; could be up to 20% of the expenses that you have going towards research against your tax liability. It's been around a while. There's been unsurety, as far as if it applies to people. So one of the goals I have for today is to educate folks on what actually might be the rules that it applies to.

Jarrod Bridgeman:
So that's a good point to go on to the next question here. What are the activities that can be included in that?

Steve Levy:
Well, it can't be just everything.

Jarrod Bridgeman:
Okay.

Steve Levy:
It has to be specific things, and the activities to qualify-

Casey Hiers:
Let me back up. Is this for a small business? Is this for dentists? What's the-

Steve Levy:
Everybody can qualify for this.

Casey Hiers:
Can I? I do a lot of research.

Steve Levy:
You can. If you have expenses that qualify for it if you're involved in it then... But not all your activities might qualify.

Casey Hiers:
How dare you.

Steve Levy:
So, qualifying research breaks down into really three components. The first is there has to be uncertainty as to the development or improvement of a product or process. So you're not sure how it's going to be done, how to develop it, how to improve it, of a product or process. And that's one thing that's often overlooked is it doesn't have to be like a tangible product all the time. It can be a process, a process in your office that you're looking to improve on.

Steve Levy:
And the second component is that your activities are technological in nature, that it relies on principles of science. It could be computer science like you're using the computer science to help your billing process, or certainly physical sciences, because you're in the dentistry world, that it could to be involved in your process of how you're helping patients.

Steve Levy:
And the last prong is that you are doing things to eliminate that uncertainty and that you are experimenting not necessarily, but more considering alternatives to solve the uncertainty. So three components, uncertainty, involves some kind of science, not purely cosmetic, and that you're going through sort of a process of experimentation.

Casey Hiers:
All right. I want to drill down deeper, give some examples.

Steve Levy:
Okay.

Casey Hiers:
In dentistry, I guess, specifically.

Steve Levy:
Right. So one example might be, okay. I am wanting to figure out how to serve my patients better in a certain way. I'm not sure how I'm going to do it. I want to... Let's just say in the billing area, and I want to enhance how I'm billing, and that involves computer science. I'm going to get some of my staff involved on this project. How am I going to get more efficient in billing or better customer service with the billing? So we're going to maybe develop or improve on what's already there.

Jarrod Bridgeman:
Could this even be included in terms of researching other central softwares?

Steve Levy:
Potential softwares, but also seeing how you can incorporate it into your own practice too, maybe with some enhancements. So it can't be completely a purchase of something, it has to be some time involved in developing something or improving something.

Casey Hiers:
Okay. Here's an example, because I need more clarity. Let's say I'm a practice-owning orthodontist, and I have two staff members research how to have better processes for your example of billing. And let's say they spend 30 hours each and determine that there is a better spreadsheet on their internal office computers to help figure out accounts receivable and who owes what and to build them better, and it's just more efficient. Does that qualify?

Steve Levy:
That's a great example of something that does qualify.

Casey Hiers:
So it can be internal processes?

Steve Levy:
Internal processes are just fine, and often one that's captured.

Casey Hiers:
So then if those two employees, you take their rate of pay times, I guess, 30, and times 30, and then that number, you get how much of a refund?

Steve Levy:
Well, it's 20% of those expenses come out to a credit.

Casey Hiers:
Wow.

Jarrod Bridgeman:
So basically, what, 12 hours, at 60?

Steve Levy:
Right. So, if you have large projects, if you're like, "I really want to put a lot of time in." Also, the-

Casey Hiers:
And this can literally be an internal process? I'm just trying to understand-

Steve Levy:
Yeah.

Casey Hiers:
... who... Because the IRS is hiring tens of thousands of more people to scrutinize every breath we take.

Steve Levy:
Right.

Casey Hiers:
How in the heck is this getting checked? I guess. Like, if there's an internal process, and there's X amount of time, and here's my formula and here's how much I pay them, and therefore I want this 20% reimbursement for this project. That's it?

Jarrod Bridgeman:
So I guess the question is how do you prove it?

Casey Hiers:
Yeah.

Steve Levy:
There are different ways, and contemporaneous documentation is king. If you are having emails, if you are having meeting notes while you're discussing this, that is the king. You can also do, if you don't have that, oftentimes folks that do third-party studies capturing the R&D credit for others, do questionnaires of those that are involved in these projects. And that can serve, if you don't have the documentation, the meeting notes, the emails at the time of the project, then you can answer these questions about them. How much time did you put it into it? What was involved? And that can serve as documentation too. Also, designs. If you're designing something, the process, or product, those designs go into the documentation. Whatever you've got, that can be a paper trail, a case for the activities. That's the best thing you can do.

Casey Hiers:
So that's how you prove it is you literally just have emails and documentation and meeting notes and things of that nature?

Steve Levy:
Evidence. Whatever evidence you have on it.

Casey Hiers:
But it doesn't have to be just a business? How about a home? How about a home? If I have research on how to streamline my fire pit, having fire, and I determined through research that by spending X amount of money on natural gas to more efficiently get fire, do I get 20% reimbursement in that?

Steve Levy:
You need a business.

Casey Hiers:
Okay.

Steve Levy:
You need to have a business.

Casey Hiers:
Okay.

Steve Levy:
It's a business credit.

Casey Hiers:
So you need an LLC.

Steve Levy:
Right.

Casey Hiers:
Okay.

Steve Levy:
Any kind of business form.

Casey Hiers:
Okay.

Jarrod Bridgeman:
But if you had your own LLC-

Steve Levy:
Yeah. If you have your own LLC and you've got income, you can offset it with that credit.

Jarrod Bridgeman:
Wow.

Casey Hiers:
So what are other examples in the dental practice? I mean, obviously billing and processes and things like that, but a lot of dentists like to work with their hands and play with some different products and things. What happens if they're spending time and maybe money on-

Jarrod Bridgeman:
On the clinical side, like on implants?

Casey Hiers:
... playing clinically, but nothing ever... They don't want to get a patent. They don't get anything real.

Jarrod Bridgeman:
Sure.

Casey Hiers:
But they say, "I've spent a hundred hours of my own time on this research," do they still get credit?

Steve Levy:
Absolutely. And also, it doesn't have to be an accomplishment in the end. Let's say you scrap whatever you developed or improved, that's still okay. It doesn't have to be a success. Also, the people that aren't hands-on with the project, the people supervising, they're involved in this as well. So you can capture some of the supervising time, and also administrative time if there's someone that's involved administratively with the project.

Casey Hiers:
So those are examples of expenses that qualify for the credit. Are there others?

Steve Levy:
Yeah. So it's mainly wage-based, but there are supplies that are used in the process of experimentation that can also be involved in the credit. Those are... Also, if you're involved in contracting out of the project, that's another one.

Jarrod Bridgeman:
So again, like you said, if you hired a third party company, but you're supervising that third party company, that would-

Steve Levy:
Yeah, their expenses. Now, they get a haircut on the amount you can capture for the contractor. It's not a hundred percent of their time. It's more like 65%. But it's a hundred percent of internal wages, a hundred percent of the supplies involved in the R&D Act.

Casey Hiers:
So in terms of supplies, would that even break down as simple to like electricity in the building, the internet costs, and things like that? Does that count towards that at all?

Steve Levy:
No. It's more, let's say you're developing some kind of prototype. It's more that kind of thing. So it's not as much on utilities, but if, let's say you're involving like a 3D printer, that can be something that could be captured as well.

Casey Hiers:
Wow. Is this worth dentists and specialists time? More specifically, how much is this credit? What are we talking about here? Because I could see how this being, "Yay, tax credits." And then I could also see lot of time being wasted, trying to capture this, where in reality, they can just make a whole bunch more money producing or doing other things. So I guess, how much are we talking?

Steve Levy:
So we're talking about 20% of the qualifying expenses turning into a credit. So let's say you had a hundred thousand dollars of wages and supplies dedicated to it, $20,000 credit. So we're not talking about small change, and it can be as big or as small as you can get. There's no minimum amount. If you have it, great, then go for it. It's just really low-hanging fruit if you have the activities that might qualify.

Casey Hiers:
All right. And that's on a federal level. Is there just kind of one and done, or does this also drill down to a state level where, I don't want to say double-dip, but...

Steve Levy:
Well, yeah, lots of states have the same credit. Really, most states do, including Indiana, New York, California. Michigan doesn't have it, but really, most states do.

Jarrod Bridgeman:
So don't go to Michigan. Got it. All right.

Steve Levy:
But they have their own... Because they want... Really, it's an incentive for people to develop product, develop processes, and that's the kind of businesses that most states and the federal government want people to have is they're looking for new and innovative ways to serve the public and develop products.

Jarrod Bridgeman:
And businesses are efficient. Have more clients, or sell more products and make more money, and then more taxes.

Steve Levy:
Exactly. So sometimes the credit for state might be even bigger than what you can get for federal. So it's-

Casey Hiers:
So my mind goes to, are there any strings attached? When you get the federal government involved in anything, there can be unintended consequences. So let's say there is some fantastic new process or research phenomenon that is created from this and you get your tax credit. Is there anything that, there are strings attached, the government owns any intellectual property? Anything of that nature?

Steve Levy:
Not at all. It's all owned by the business itself. Also, if you are thinking about it for this year, you can go back and think about it for the three previous years as well. Let's say, okay. I had some things going on back in 2019, or even 2018. I had some of that then. I want to see what I can get as far as a credit then too. So you can go back to the three open prior years and see what you can get if you qualify.

Steve Levy:
The key thing is qualifying. If you don't have an uncertainty that you're trying to solve in a technological way, then you don't qualify. Just simply buying a fancy piece of equipment and you're using it and you want to use it for both your practice and this credit, that's not going to fly. You got to have the kind of activities that the government wants to see.

Jarrod Bridgeman:
Which are?

Steve Levy:
Which are... You are-

Casey Hiers:
True innovation, I guess?

Steve Levy:
But it doesn't have to be innovative to the world, just to you.

Casey Hiers:
Wow. Now, you said this has been around for a while.

Steve Levy:
It has. And actually, I've been involved in it for really over 24 years. And at Four Quadrants, we can provide this service, what's called an R&D Tax Credit Study. And what's involved there is, there's an initial meeting where someone that thinks they qualify, we talk about, "Okay, what kind of general activities do you have?" And we'll estimate what your credit might be. And then there's a little more digging into seeing, "Okay, do you really qualify? What kind of activities? What kind of evidence do you have for this?"

Jarrod Bridgeman:
And is it worth your time, ultimately? I like the estimation too, because like we said, the people we're dealing with for our audience are dentists and specialists producing dentistry. And so it's, you never want to trip over quarters to get the dollars, but it sounds like that we can almost do an estimate on the front end so that they know this is what it looks like. This is the time, this is what it'll ultimately lead you to.

Steve Levy:
Exactly.

Jarrod Bridgeman:
Nice.

Steve Levy:
Yeah. And we want people that qualify to go get these credits.

Casey Hiers:
It sounds incredibly, almost like open and subjective and gray and vague, which is very rare for IRS and government. So I'm almost confused because it seems like people could use this in a fraudulent way if they wanted to.

Jarrod Bridgeman:
Well, I guess my question would be, going off all that, is what's the line between training and research?

Casey Hiers:
Ooh.

Jarrod Bridgeman:
You know what I mean? Like if you're-

Casey Hiers:
Co-host with a great question.

Jarrod Bridgeman:
Finally.

Steve Levy:
Excellent question.

Jarrod Bridgeman:
After a year. So yeah. If you're a newish employee, maybe they've been there a few months, but they're training on, maybe they're working on... I'm going to go off my own thing, marketing. Maybe they're learning Facebook marketing.

Steve Levy:
Okay.

Jarrod Bridgeman:
That's part of their job, but-

Casey Hiers:
20 hours to ramp up the trainings.

Jarrod Bridgeman:
Yes. Yeah. How much of that is considered research versus on job training?

Casey Hiers:
Part of the job.

Steve Levy:
Right. Well, if you're learning something that's just existing already, it's just... Like Facebook marketing, that exists already. You're not developing or improving something.

Jarrod Bridgeman:
Okay. So if they are... Okay, sorry to really dig in here. If Dr. Z already has Facebook, it's not doing that well, they don't post that much, new person does their "research," and then they have a thousand new followers. You know what I mean?

Steve Levy:
Right.

Jarrod Bridgeman:
Does that then become-

Steve Levy:
Marketing is certainly a process, and there's computer science involved in it.

Jarrod Bridgeman:
Okay.

Steve Levy:
So yeah. If there's-

Casey Hiers:
So we talked about a billing process internal, well, how about 3,800 other offices already have this internal billing process, but then this office figure it out, if it already exists, but it's not being utilized, what's that line looking like?

Steve Levy:
Well, it's just development or improvement of your own processes.

Casey Hiers:
Okay.

Steve Levy:
If someone else has this, and you can't necessarily reverse engineer, where, "Okay, this other office has this, so we're going to just basically copy what they're doing." It has to be something where there's some uncertainty.

Casey Hiers:
You need to. Yeah.

Steve Levy:
Just uncertainty, but not unique to the world, just yourself.

Casey Hiers:
Well, this has been a fascinating appetizer into a research tax credit, which, again, people always want to figure out ways to pay less in taxes. And this is food for thought. Thank you. Thank you for coming in and enlightening this topic with us.

Jarrod Bridgeman:
Yeah. Thanks, Steve.

Steve Levy:
Absolutely.

Announcer:
That's all the time we have today. Thank you to our guests for their insight and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentist Podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, going over to fourquadrantsadvisory.com and see why year after year they retain over 95% of their clients. Thank you again for joining us, and we'll see you next time.