R&D Tax Credits for Blockchain and Crypto Businesses

Tyler Kem, CEO of Visionary Tax, joins us to discuss an invaluable tax credit that businesses in the blockchain and crypto space should be looking into – the Research & Experimentation Tax Credit (R&D Tax Credit)

Tyler started helping businesses understand the R&D Tax Credit back in 2016. [00:42]

Tyler: One day, I think I was walking to work and I just had this idea: holy cow, everyone in this blockchain community is developing a new technology that has never been done before – they all qualify for the R&D Tax Credit. So, I’d gone to the partners of the firm and was like hey we need to be getting into this educating other CPAs to take advantage of the R&D Tax Credit.

The R&D Tax Credit has been around a while…but it’s just recently been made permanent. [02:30]

Tyler: The R&D Tax Credit has been around since 1981, it has expired eight times, it’s been extended fifteen times, and in 2015 under the Path Act, it was made permanent.

Not many companies are taking advantage of this credit, even though they should be. [03:10]

Tyler: I would say a majority, up to even 90% of the people that I speak to, don’t even know about the R&D Tax Credit and are not taking it at this time.

It’s a big number that kind of shook me a little bit but I think it is because the industry is still maturing and people are just getting comfortable with how to file these tax returns.

There are requirements to qualify for the R&D Tax Credit. To qualify, a business must pass the four-part test. [04:05]

Tyler: The first part is permitted purpose – the intended purpose of the activity is to create, improve the functionality, performance, reliability or quality of a product process, software, technology, patent, invention or formula. So, in our case, it would be the software, the technology, the patents.

The second part is technological in nature, so the activities must fundamentally rely on hard sciences such as Computer Science, Engineering, Chemistry, Biology, or Physics.

The last two go hand in hand – elimination of uncertainty and process of experimentation. At the outset of a project the business or the taxpayer know exactly how this was going to be done as it related to the design, the development method, or the capability. If not, were processes tried and tested along the way – which could be systematic trial and error, evaluating alternatives, and in our case really testing that source code to see if the blockchain technology is ready to be implemented and go live.

Qualified expenses fall under three categories. [06:18]

Tyler: There’s three categories of expenses when we’re looking to qualify certain activities, projects etc: wages, supplies, and contract research.

We really first look at if there are any W2 Box 1 amounts paid to those employees that are directly involved in the research or maybe those that are supervising and supporting the research.

The next one would be supplies and material, so any supplies or materials that are used or consumed during the R&D process – it’s not going to be a lot in the blockchain technology fields but cloud storage cost can be picked up as a supply material.

Depreciable items, like hardware, are not a qualified expense. [07:00]

Tyler: It can’t be a depreciable item that is within the code. For example, when we think about supplies and materials, we typically refer to a manufacturing facility where they’re testing these supplies that may not be used after commercial release.

There are a good number of expenses that qualify [07:45]

Tyler: One of the first questions that we ask is do you have any software developers, software engineers, data scientists, PhD’s, back-end developers on your staff or that you’re working with? That usually gives us a good indication if there’s some qualifying activities and expenses associated because they do fit that technological nature, they are doing computer science or engineering related work.

We really try to figure out how qualified each person is to ultimately determine what that qualifying research expenses total up to be.

Your company does not need to be profitable to claim the credit. [09:25]

Tyler: In the past, you really had to be in a profitable tax position to utilize these tax credits. Now, that’s not the case – you can actually use these tax credits against your quarterly payroll tax even if you’re not in a profitable tax position.

It’s a good idea to plan when you will take the tax credit. [11:00]

Tyler: The R&D Tax Credits are really a tax planning tool that can be used immediately or the tax credits also roll forward 20 years on the federal side.

It really depends on every company’s scenarios – what they project in the next few years. But, it most definitely can be used as a tax saving tool in year one through five.

Companies can amend their previous tax returns to take advantage of the credit. [13:00]

Tyler: You can go back now as far as the statute of limitations are open. Three years from the filing date on the federal side, four years in California; every state kind of does differ. But, you can go back now and amend these prior your tax returns and roll these tax credits forward if they’re unused.

The tax credits are a dollar-for-dollar reduction in here and tax abilities. Let’s say you generate $50,000 in tax credits on the federal level for 2018, and you are a C corporation, and you owe a $100,000 – ultimately the $50,000 in credits are going to be dollar for dollar, reducing what you owe. At the end of the day you really owe $50,000 to the IRS.

It’s important to get your accountant and a specialist like Tyler involved to see if you qualify. [15:30]

Tyler: I think the first thing would be to ask your CPA or accountant – do we qualify for the R&D Tax Credit? It’s always a good place to start because this tax credit has come and gone; because of this, a lot of CPAs and accountants have overlooked this tax credit.

What we do at Visionary Tax is not only help calculate, but we will help start documenting and substantiating these tax credits. Usually through an audit ready deliverable, that at the end of an engagement, we will deliver once we’ve compiled the contemporaneous documentation. But we really want to show the documentation that links certain qualified expenses and activities to these projects, and ultimately to these tax credits.

If you are trading crypto, it might be wise to look into the business-side of things. [18:05]

Tyler: I have worked with some attorneys out here that are helping a lot of these individuals set up businesses to transfer their assets or their property into their business – ultimately deferring the tax that they would owe on that crypto.

You can utilize your crypto in a business setting and not have to pay the taxes until you sell the business. If you and I are going to create a business entity together, and I’m putting in twenty-thousand-dollar cash, and you’re putting in your car for equity, crypto is really the same thing, its property – you can figure out the cost basis just like you can with your car. That’s what you’re contributing to the business entity.

You are just figuring out the cost basis and transferring the cost basis over to the entity. From there you can use the crypto, and then let’s say in three years decide to sell the business for times x, then you’re paying your gain on that initial contribution. So, it’s just a way to help defer some of the tax that you would owe.

There’s a lot more to the R&D Tax Credit – it’s certainly something any business in this space should look into. [21:45]

Tyler: We only just briefly touched on a lot of the topics here today, and more than happy if anyone wants to reach out directly. My email is [email protected] and you can also find out more at visionarytaxes.com. On our social media, we’re going to be found @VisionaryTax. I’m also pretty active on LinkedIn @Tyler Kem.

I’m more than happy to pass any sort of information that we can that can help any business of any size take advantage of these R&D Tax Credits. We can set up a preliminary analysis where we can help estimate and scope what the potential tax credits are and hopefully find the right path for any business that’s looking to take advantage the R&D Tax Credit.

If you enjoyed our podcast, be sure to check back frequently for more great discussions about a range of topics in the crypto space. If you have any questions for Tyler Kem, or want to schedule a consultation with him, he can be reached via his website visionarytaxes.com, or via email at [email protected].