Name: TriNet + Arvo: Unlock R&D Tax Credits: A Guide for SMBs
Uploaded: 2026-01-29T20:11:15.250Z
Duration: 40 min 4 s
Description: TriNet + Arvo: Unlock R&D Tax Credits: A Guide for SMBs

Transcript for "TriNet + Arvo: Unlock R&D Tax Credits: A Guide for SMBs": Thank you for joining us today as TriNet welcomes representatives from Arvotec to discuss R and D tax credits. This session dives into eligibility criteria, strategies for monetization, and recent legislative updates, including retroactive benefits, and practical compliance tips, all tailored to small and medium sized businesses. Please say hello in the chat on the right to welcome to the stage from Arvotek Vice President of Tax and Operations, Monica Diehl and Director of Sales and Marketing, Emily Osborne. Hi, everyone, and welcome to the webinar today. My name is Emily Osborne with Arvo Tech. We also have Monica Diehl, and we will be talking today about Unlocking the R and D Tax Credits, A Guide for Small to Medium Sized Businesses. As you might know already, this is brought to you by TriNet. So we've been partners with TriNet for quite a while now, which I'll get into later in the webinar. But thank you, TriNet, for having us today. We'll go ahead and jump into the agenda here. So we'll do introductions, let you know who Monica and I are. We'll go through federal R and D credit eligibility. So if you think you're eligible for R and D, we'll cover if you possibly are and what the criteria looks like there. There were some big recent changes that impacted the R and D tax credit around Section 174. Monica will spend time there. One of those changes involved retroactive benefits, so we'll spend time on that. And then we'll talk about strategy compliance and best practices, and leave some time for any Q and A at the end. So with that, we'll go ahead and get introductions. My name is Emily Osborne. I'm the Director of Sales and Marketing here at ARVO. Been with the company for just coming up on four years now, helped the sales team and the marketing team get the word out about these tax credits, to small and medium businesses. So excited to be part of the webinar today. My name is Monica Diehl, I'm the VP of Tax and Operations for ARVO. I work with the team of CPAs and tax professionals. We work directly with clients to help them maximize their R and D credits and make sure we've created some good solid documentation to back up those claims. Great. And we'll get into very quickly who is ARVO. Like I mentioned, we've partnered with TriNet for quite a while now. Our goal is to bring the R and D tax credit to TriNet customers, whether they're small, medium or enterprise, and we'll focus today on the small to medium sized businesses. ARVO has been around since 2014. We were founded in tax credits and we've recently added bookkeeping and tax planning to our offering with the goal of just helping small and medium businesses understand their finances and figure out where there might be gaps and where they can fill those with tax credits. And a little more about ARVO by the numbers. So since our founding, we've served over 2,000 clients. We've helped identify over 600,000,000 in R and D tax credit. I think that's closer to 700,000,000 now that we're coming to the end of the year here in December. But since we've acquired the 700,000,000, we've had zero of those credits disallowed. So there might be some other R and D vendors out there, but ARVO is very proud of the fact that with all of the credits we've gotten for our clients, zero of them have been disallowed by the government, which we'll get into a little bit more on how our R and D credits are very defensible. But just a little overview on ARVO before we get into R and D. So with that, we will kind of go into a little bit of background on R and D. Some of you might be very familiar with R and D, some of you this might be your first time. So learning about the credit, so we wanna make sure that we cover all the bases. R and D has been around for forty five years. It was created in 1981. The purpose of the R and D tax credit is to encourage innovation by US companies using US workers. This was a time when offshoring began, and we may have been losing some of our innovation, our companies or our workers to companies that were overseas. So R and D was created to encourage companies to stay here and also to hire domestic workers. There are some changes that have happened since the founding of R and D in 1981. In 2015, the PATH Act was passed. This allowed companies to use the R and D tax credit to offset their payroll tax. Prior to that, you could only use the R and D credit to offset your income tax liability. This was a big deal because when you hear innovation, you might think of startups. Startups normally do not have income tax liability. So this allowed startups within The United States who may be pre revenue or do not have any income tax liability to use the credit to offset their payroll taxes. So that was a big change that happened in 2015, and it widened the tax credit significantly. In 2017, the Tax Cuts and Jobs Act required amortization of research expenses. Monica will get into exactly what that means. Long story short here in the overview, it made it a little more cumbersome to take advantage of the R and D credit. That was from the Tax Cuts and Jobs Act in 2017, and the requirements of that went into effect in 2021. So start or 2022, so starting in 'twenty two, you had to amortize all of your research expenses over five years. There were some companies that decided it just didn't make sense to take advantage of the R and D tax credit any longer once that went into effect. ARVO as an R and D tax credit vendor definitely saw a dip in some of our clients because it just didn't make sense to spend all that time on amortization when the return wasn't as high. There was some great news that came recently from the big beautiful bill that restored immediate expenses, expensing, and created retroactive opportunities to recover deductions. Basically, it removes the requirements from the Tax Cuts and Jobs Act. So starting when the big beautiful bill was signed in July, you were then able to begin immediately expensing, which is why we're having this webinar wanting to educate our partners and their users that there has been changes to the R and D tax credit, and those changes are very positive and can result in an end business user actually getting more credit than they would have the last three years. So that's a quick recap on the R and D credit and some of the exciting changes that have happened just in the last few months. Now, the next part would be great. The RD credit exists, there's some positive news around it. What do we do as far as figuring out if we qualify? So figuring out if we qualify leans on the four part test. This is the four part test that the government uses to determine if a project is R and D eligible and considered a qualifying project. So the part one is permitted purpose. Was your company or your entity improving the functionality, reliability, performance, or quality of a product, process, software, formula, or technique? So are you creating something new? Are you improving something that already exists? That is step one in answering the question of the four part test. Think in software, if you're creating a new software, manufacturing, maybe you're creating something that simply hasn't existed before, pharmaceuticals, you're creating a new drug or improving upon a past drug, those are all eligible under the permitted purpose. The second and third part of the test is elimination of uncertainty and then process of experimentation. So elimination of uncertainty is basically proving that you were not sure in the beginning, if this new product process or software, for example, would react the way that you wanted to at the end of your experimentation. So that lends to three, process of experimentation. You have a hypothesis, now you're testing if this new product or process that you're building will actually result in the creation or result in the expectation that you were looking for. So are you running scientific method, trial and error? Are you evaluating alternatives or develop testing hypothesis? Are you doing Q and A for a software, for example? And then are you evaluating the results? And how are you documenting that process? And then that goes back to eliminating the uncertainty of the overall process itself. So those are the top three. The fourth is the easiest normally to identify. It must be technological in nature. So it must rely on physical science, engineering, biological, or computer science in order for it to be eligible or considered a qualifying project for R and D. So if you're looking at a business, you want to just quickly to understand if there's potential eligibility there, you would look at permitted purpose, elimination of uncertainty, process of experimentation, and then technological in nature. So we covered how you might be eligible. Part of our roles here is determine eligibility and then actually help calculate the credit. So how much could you claim? So we'll stick with the software example, say you're a small software startup. Now we're looking at qualified research expenditures. The best way to think about this is how are these expenses tied directly to the qualifying project that we just qualified through the four part test? So this is broken out into three buckets. Bucket one is wages. This is normally the largest component that we see. Think engineers, programmers, product managers, product owners, anyone that's actively working on the qualifying project, their wages are eligible to become qualified research expenditures. And these are W-two box one wages that we're looking at. And the other caveat is that these individuals must be completing the work in The US. So if you have employees that are abroad, their wages would not be eligible. The second box would be contracting. So if you're contracting out to a ten ninety nine, or you're using an outsourced vendor to help with development, for example, that is also eligible as a QRE. It does take a little bit of a haircut there, 65% of the contract research expenses are eligible. As you'll see a theme here, the contractors must also be US based in order to be eligible to become a QRE. And then the third is supplies. Think of this as anything that's generally consumed or destroyed during the process. In software, it could be some cloud based services like Azure or AWS. In pharmaceuticals, it could be the physical chemicals that are used in the process of experimentation. So part of what our team does is evaluating the supplies to see what is eligible as a QRE. Then you tie all of those together. So you have your wages, your contracting expenses, and your supplies, and you're getting around seven to 10% of your QREs equals your credit. To make that a little clearer, we have this example. So this is a client of ours. It's a quick view of a case study. So they had just over 1,000,000 in wages. They had 41,000 contract expenses and 24,000 in supplies, for a total R and D spend of just over 1,100,000.0. Quick back of the napkin estimate there is 10% of that would be 116,715. So if you wanted to quickly look at a business, you would wanna look at those three buckets, wages, contracting, and supplies, and then apply the seven to 10% estimate there. And that is a quick estimate that you could do to determine the amount of credit that you might receive based on your QREs. Now, the next is we're qualified, we know how much credit we're going to get back, how do we monetize the credit? There are two ways, I touched on this a little bit in the timeline, but there are two ways to monetize the credit. The first is against your payroll tax. And think of this, the way to think of these is if you have income tax liability, you'll use R and D against your income tax liability. If you do not, then you would be eligible to use it against your payroll tax liability. Now there are some stipulations on the payroll side. Most of the time when we think of this, we think of a startup or a small business. They have to be within the first five years of any gross receipts, so that normally falls within the startup range. They have less than 5,000,000 in gross receipts for the current tax year. And then it can be claimed up to five times against the business's payroll tax liability. So it's the rule of fives, it's a quick way to remember it, but that is what was available starting in 2015 when they expanded the tax credit. On the payroll side, it must be used or utilized on an on time original return. What that means, for example, if you are to file an on time return in April of the beginning of a new year, then you would need to file for your payroll taxes on time. For the income, you can amend past returns, which I'll switch over to the income now. So income using it against your income tax liability, there are little to no restrictions. No restrictions on gross receipts. It can be claimed on an amended return. So it doesn't have to be included immediately on your on time return, you can go back and amend. Right now you can go back to the year of 2022, amend '22, '23, '24, to include the, or utilize or monetize the R and D tax credit against your income tax liability. And on the income side, there's no limit to how many times a business can claim the credit. Now, another important note is that it can be rolled or carried forward for up to twenty years. So one way to think of the R and D tax credit is you're accumulating it. You have the opportunity to use it against your income tax liability in the current year, or you could let it sit in an R and D bank account and let it roll forward for up to twenty years. Some clients may do this if they're expecting to have a large income tax liability in a coming year and they want to save up their R and D credit to utilize against that. So if you're looking at your business, do I have income tax liability? If not, do I have payroll tax liability? Those are the two options to monetize the credit. And with that, I will hand it over to Monica to talk about defensibility. Great. Thank you, Emily. So when we're working with clients, we usually get a lot of concerns around defensibility. What if I claim an R and D credit? Is the IRS going to come and audit us if our business has never claimed an R and D credit before and we decide to claim the credit? Does that open us up to audits? What I can say there is the IRS doesn't tell us exactly how they select people for audits for obvious reasons. But we do not see a direct connection between claiming an R and D credit and being audited. But our concern, along with the client's concern, is defensibility. I mentioned before that what we do is we focus on kind of maximizing credits for clients and creating good solid documentation for them so that their credits are supported. When a business claims an R and D credit, they're basically saying that they have understood the requirements in the tax code, some of the requirements that Emily just went through on what types of expenses, what types of activities are eligible for the credit. You understand those requirements and you have determined that your business does meet all those requirements. And so it's important to have a good solid study. The documentation is actually a requirement when the taxpayer claims an R and D credit, but you want to have a good solid study to document how you meet all those requirements and how the expenses that you claim for your R and D credit are eligible. And so that's what our goal is as well with working with clients and going through and kind of creating their R and D study is to make sure we have good solid documentation for them. And what we've done is in our study, lay out different components of the R and D credit that an auditor would be particularly concerned with. And we try to lay them out in a very clear format so that in the event of an audit, hopefully the auditor would come in, they would take a look, they'd be able to see the information that they need, and it would be evident to them that the business qualifies. So to start, we're looking at the business component. That's kind of describing the particular activity, the particular product or activity the business was involved with. And so that's going to be clearly defined in our study. We're going to look at the qualifying activities for the business and how those activities meet the requirements in the four part test. We're going to capture the qualified expenses that are supporting the qualifying activities and the process of experimentation that the business followed. And then in our calculation section, we're going to lay out for the business the calculation, how it was done under both of the eligible methods. Okay. So as many of you know, a new tax bill was passed by Congress in July. It included some significant updates to the R and D credit as it relates to section 174 and the amortization of R and D expenditures that were included in the bill. The new legislation gives us a couple of distinct timelines to consider. Starting in 2025, a new Section 174A was included in the tax code, and that gives businesses the ability to go back and fully deduct R and D expenses as they were able to prior to 2022. And so what we have happening here is where businesses were previously eligible to fully deduct their R and D expenses in the years paid, businesses were subject since 2022 to a capitalization requirement. And what that did is it caused businesses to take the expenses that they had incurred during a tax year, the cost that they had paid, and rather than being able to fully deduct those expenses in that year, they were required to capitalize and amortize those expenses over a five year period. And so with the change, this is giving businesses after the 2024 tax year the ability to fully deduct those expenses again on their tax return. Okay. So why the focus on the big beautiful bill and why the focus on 174? What does 174 actually mean? So 174 is the part of the tax code that actually tells a business how they are permitted to deduct expenses in their tax return, their research and experimentation expenses. And so before this change with the big beautiful bill that was passed in July, businesses were required to capitalize and amortize those expenses. Prior to 2022, businesses had always been able to deduct those expenses. But what happened was with the Tax Cuts and Jobs Act that was passed back in 2018 and the capitalization requirement that went into effect in 2022, businesses were very limited on the deductions that they were able to include in their tax returns related to the research and experimentation costs. After the Tax Cuts and Jobs Act, what ended up happening is that businesses that were previously able to fully deduct those expenses or capitalize those expenses over a five year period lost the ability to fully deduct those expenses in the year paid. So if we're thinking about a business that had $100,000 in R and D spend, rather than having a $100,000 deduction for their work that year, their deduction was limited. So rather than being able to deduct $100,000 the business was required to capitalize and amortize those expenses. And what it resulted in was the business having essentially just a 10% deduction for the year related to the spend that they actually incurred. And so the change with the big beautiful bill reinstating that expense made a huge impact on businesses. So if we look at the next slide, I'm going to go ahead and go through an example here so that you can see what that actually did to a business's tax return. On the left hand side, we're looking at the same set of facts on both sides. On the left hand side, we have prior to the Tax Cuts and Jobs Act, where the business was able to fully deduct the spend that they incurred during the year. So we've got income of $500,000 We have R and D spend of $400,000 which was fully deductible prior to 2022, resulting in taxable income of $100,000 And if we apply a 21% tax rate, that gives us a tax liability of $21,000 If we look at the same facts on the right hand side after the Tax Cuts and Jobs Act went into effect and taxpayers lost the ability to fully deduct those expenses, we've got the same $500,000 of income. Our R and D spend of $400,000 resulted in a deduction of only $40,000 just 10% in that first year, giving the business a much higher taxable income and much higher tax liability. And so this was something that was really difficult, especially for small businesses. Small businesses, early stage companies that were basically spending everything they were making, investing in their new products and their new technology, were really in a difficult position where they had these large tax liabilities that they hadn't anticipated before. In some cases, we ended up with businesses that were actually taking out loans to be able to pay their taxes because they were investing all their money back in their business. They did not have cash sitting in a bank account to pay these tax liabilities that they had not anticipated. So this change had a really dramatic impact on a lot of businesses, and it was a pretty tough situation to be in with that change in the law. So if we're thinking about 174, so 174 has to do with how the expenses are deducted in the tax return, what was the impact on research credits? What did that change in the requirement to capitalize and amortize those expenses actually do to the R and D tax credit? So we're talking about two different things here, the deductions and arriving at taxable income and the tax credit that can be used to reduce your actual tax liability. The Tax Cuts and Jobs Act didn't impact the taxpayer's ability to claim an R and D credit, the amount of R and D credit that they could claim, or how that credit would be utilized. The Section 174 requirement, that capitalization requirement was in place regardless of whether a business took advantage of an R and D credit, whether they claimed an R and D credit or not. Technically, any business that had research and experimentation costs in the year was required to capitalize and amortize those expenses. Now, in reality, when businesses did not claim a research credit, they also did not amortize those costs. They went ahead and deducted those costs in full in most cases is what we're seeing. So, if we look at the big beautiful bill and what that changed that was passed back in July, it was signed into law on July 4. It permanently reinstated the immediate expensing of research and experimentation costs for tax years beginning after 12/31/2024. And it did give the business the ability, if they chose, in some cases, the capitalization and amortization might make more sense for a business. Maybe they have significant losses, and they don't need those big deductions in the current year. Having the ability to capitalize and amortize costs was still available and is still going to be available going forward as an election. But the default 174A treatment will be to allow that full expensing of the R and D costs again and to allow businesses to be able to do that permanently. So we don't have some of the earlier versions of this bill and some of the earlier versions that Congress came up with, there were some suggestions of we're going to suspend that requirement to capitalize costs for a period of maybe four years. But then taxpayers, for planning purposes, that makes it very difficult. They have to worry about that coming back again. Eligible small businesses also have the ability to apply retroactively. So again, 174A is telling us from 2025 and forward, we're able to fully deduct the expenses that we paid during the year. An eligible small business is going to have the ability to apply that retroactively to the 2022 through 2024 tax years. Now, a business that falls into that category and would be defined as an eligible small business for this purpose has average gross receipts for that three year period, 2022 through 2024, of less than $31,000,000 So if they fall within that bucket, they're eligible to go back and make an election to apply that 174A retroactively. They would need to go back and amend the 2022 through 2024 returns by 07/06/2026 at the latest in order to make that election. So that election is only available for a limited time period. If businesses are interested in going back, they're eligible based on their gross receipts to go back and apply retroactively. They do have a limited time period of when they can do that. And then finally, the 280C election, that is permitted to be used. 280C is the election that allows a business to take a smaller R and D credit in exchange for not having to adjust their taxable income and treat that as income to their business. That's an election that is typically only available on an originally filed return. But as a part of the Bill two ADC, that election, if we're going back and amending returns, you are able to make the election or revoke the election on those amended returns, which typically is not available. Eligible small businesses do have the ability to apply 174A retroactively on those 2022 through 'twenty four returns, but there may be cases where some businesses don't want to go back and do that. They don't want to go back and amend those returns. I think in a lot of cases, those would be situations where the business had significant NOLs at that time period. Even the fact that they had to capitalize those R and D costs, they claimed their credits, they had to capitalize those costs and had those very limited deductions for that three year period, they still had enough losses that they didn't have any taxable income. They didn't end up paying any income tax. So going back and amending those returns is not going to result in a refund of the taxes paid going back to the business. So there might be situations, of course, even an eligible small business may not want to go back and amend the returns. And then, of course, businesses that have more than $31,000,000 in average gross receipts that were not eligible to apply retroactively, they don't have that option to kind of adjust those earlier years. In those cases, the businesses still have the opportunity to accelerate their deductions. And so we're basically looking at the deductions for 2022 through 2024 that the business was not permitted to take related to the spend that they incurred in those years, and they can accelerate those deductions in 2025 or between the 'twenty five and 'twenty six tax years. And so if we're looking at the example that we have here in this chart that's in front of us, in green we have the R and D spend for the year and then in blue was the deduction that was permitted for those years. And so if we look at 2020 and 2021, we can see R and D spend and the deductions are the same. That was prior to the Tax Cuts and Jobs Act change kicking in there requiring the capitalization. In 2022, you can see that deduction really drop off. So in that first year, they only got like 10% of their spend. You can gradually see that increase a little bit over 'twenty three and 'twenty four, and that's because the annual R and D spend that the business had, allowed annual deductions are starting to layer on top of each other. And so that's what you had for that three year period. And then if you look at 2025, what we're able to do in 2025 is to take a significant kind of catch up deduction. It's taking a full deduction for the 2025 spend, as well as the remaining deductions that have not yet been permitted to be taken for the 2022 through twenty twenty four years. And so we see 2025, we've got kind of this really large deduction that is available to the business. And then after 2025, you're seeing it all kind of even out again because of the change in the law with 174A. The bottom part of this screen is basically sharing the same information. We have the same thing happening. But all they're doing in that case is they're splitting those prior year deductions, kind of those catch up deductions between the 2025 and 2026 tax years, which is an option too, if that makes more sense based on the business' particular circumstances. Okay, so just to talk about the election for eligible small businesses and in particular deadlines that we need to be thinking about. A small business taxpayer has the election to apply that 174A retroactively, so we talked about that. And the way that that's going to work is revenue procedure twenty twenty five-twenty eight that came out in the last couple of months has specific details on how that election is required to be made. The election is made by attaching a statement, including specific pieces of information to the original or amended tax return. It's going to be an amended return at this point in the year. And the kind of specific details are described in Section three of that revenue procedure. Again, we're talking about a small business taxpayer with average gross receipts for that three year period, '22 through '24 of less than 31,000,000. The election can be made on the timely filed or amended tax return. Once the election has been made for one of those three years, it's important to note that the business is technically required to make that election for all three years that they had eligible R and D spend. So if the business had 174 spend, they're technically required to make that election for each of those three years, the 2022 through twenty twenty four years. And then finally, when we're looking at amending returns for 2022 through 2024 to apply 174A retroactively, we have a deadline of 07/06/2026. That's the deadline that was announced in the Big Beautiful Bill, one year from the date that that bill was passed. But we need to keep in mind that that does not extend the statute of limitations on tax returns. We might have an issue where the 2022 return, if it was filed on time in March or April 2023, the three year statute of limitations on amending and being able to refile that tax return is going to run out in March or April 2026. And so it's important to know that that deadline for going back and amending those returns is going to be the earlier of 07/06/2026, or the statute of limitations on that particular year's return. Okay, and so this last slide that I'm looking at here is talking about what the change was. If we're looking at the capitalization requirements in 2022 that were in place and how that would have played out for a particular business versus the change with the kind of fixed to use the catch up accelerated deductions in 2025. And so on the left hand side, we're seeing how this would have played out. We had 2020 and 2021. We didn't have a change yet. We're deducting everything we're spending. 'twenty two, 'twenty three, 'twenty four, this is where we're starting to see that deduction grow. And that's based on that five year spread of each year's R and D expense layering on top of each other. And then in 2027, what you're seeing is if the business had the exact same spend every year, that's where they would catch back up, And that's where they would have their deductions equal to the spend that they incurred during that particular year. And then on the right hand side, we're looking at the same information, but the change is that rather than needing to wait till 2027 to be able to get those full deductions again, we have that full accelerated deduction in 2025. And then for '26 and '27, we've got everything that we spent during the year being deductible again. And with that, I'll go ahead and turn it back over to Emily. Great, thanks Monica. So we've covered a lot about R and D eligibility, 174 retroactive benefits. Next is how can ARVO actually help you claim it and what is our process. So we work very closely with TriNet and TriNet clients. If you are a TriNet client or you work directly with TriNet as a CPA and you have a client that might benefit from this, we would have first an eligibility call just to meet with that specific company to learn about what they do and basically run through So we're going through the four part test, and we're asking various questions to make sure that they can use it against their income tax liability or payroll tax liability. Once that's confirmed, we get our clients logged into our software. So to compare some other R and D vendors, you might see a vendor using Excel to go through and calculate expenses, or have someone come on-site and do physical interviews in person with your engineers. We've taken all of those options and put it into an easy to use and easy to manage software. So you can have multiple logins, multiple employees filling information out, and then it allows our team and Monica's team to interact directly with you As you're filling out information on R and D, if there's anything that's missing or that our CPA team has questions on, we can communicate with you directly through our portal. So this allows our clients to get a study done quickly, but also accurately. So in case of an audit, we have all of the information provided and we can support you there. And the next slide is just demonstrating a little bit about that process. If there was interest, we had the engagement letter, you would get a kickoff call scheduled with our team, you get logged into the platform, our expert team would validate and review everything that you enter into the tax platform. And then we would provide all of the final tax forms for your tax preparer in order for them to include them in your annual tax filing. So we're offering eligibility review all the way to completing the study, as well as completing the tax forms to hopefully make the whole R and D claiming process much easier for our clients and TriNet clients. So with that, thank you everyone for joining the webinar today and a huge thank you to TriNet for having us. If you have any questions, my email is directly on this slide. It's just eosbornarvotech dot com. You can reach out directly. We'll also be following up with a little more information. If you have any questions, feel free to reach out and we'll make sure to get those answered as well. Thank you for joining us today. If you are not a current TriNet client and have questions about how TriNet can help support your business or anything we discussed today, we would be happy to set a time to speak with you at your convenience. Please click the button at the top of your screen that says Meet with TriNet, and a TriNet colleague will reach out. Thank you again for taking the time to join us, and we look forward to seeing you at another TriNet event.