Hello and welcome to The Unique CPA, where today we join Randy Crabtree and Phil Williams of Tri-Merit, the specialty tax professionals, for their LinkedIn Live discussion. Their topic is the newly passed reconciliation bill and the clarity and opportunity it provides in the realms of R&D, cost seg, and more. And now, here’s your moderator, Michael Warady.

Gentlemen, just to start out with, thank you both for joining today.

Yeah, thank you. Excited, a lot going on in the tax world right now. 

Just a wee bit, just a couple things that we’ve been waiting for, for the past couple of years, and it’s finally happening. So who wants to take the first question, or just give us an overview of the bill that just passed last week?

Well, I guess I’ll jump in there, Michael. And thanks for teeing us up on explaining a 680 page tax bill in 20 minutes. We’re going to be pretty darned good at this. So what we’re speaking on specifically for anybody that wasn’t paying attention over the course of the past probably, month or six weeks, we’re talking about HR 1, we’re talking about the big, the “One Big Beautiful Bill,” which again is something that a lot of us have a hard time saying. It sounds kind of comical. There was a ton of really, really important provisions in there for our clients. There was obviously a lot of political back and forth on what was contained within this bill. We’re not going to really get into a lot of those areas, we’re going to get into the ones that are specifically good or specifically bad, and have an impact on our clients. But long story short, this was a tax package that went through both House and Senate. It was signed into place by the president on Friday, and it’s going to have sweeping implications on almost everyone’s tax bill. So that’s what we’re going to get into today is what those implications are.

Beautiful, beautiful. Alright, Randy, anything to add before I just jump into some questions that people were peppering me with over the past couple of days?

Yeah, I guess the big thing is this did happen on a shorter timeline than I actually thought it could possibly happen. So they set a goal of July 4th and they made it July 4th. So you’ve got to give Congress kudos for getting it done. But it was quite a journey to watch over the last few weeks of votes and what’s going to happen, but we got it done. So it’s pretty exciting that we get to talk about this today.

Yes. Alright, so I’m going to jump right into some questions. I don’t know who wants to answer which ones, but I’m going to throw it out there for either one of you. First question that I got, and this is related to the Research and Development Tax Credit. I’ll start with that section. How does the reinstatement of immediate expensing for U.S.-based R&D affect innovation investment strategies?

That is a mouthful. I’ll answer it this way: When we started to have to capitalize R&D expenses, which happened in 2022, defined in the Tax Cut and Jobs Act, delayed capitalization of R&D expenses, or R&E, however you want to say it, until 2022, what we saw was a significant reduction in R&D expenditures—at least on our end, we saw that—because we were seeing a lot less R&D tax credits being filed for, so obviously, there was less expenditure in R&D. I think that can have a very negative impact on our US economy. Manufacturing is one of the lifebloods of our economy. The fact that now we can deduct R&D expenses immediately as incurred, which up until the Tax Cuts and Jobs Act that kicked in in 2022, we’ve always been able to do that, all the way back to 1954 it was, so pretty much forever, we’ve been able to do this. This was a major change, so we’re very fortunate now that that’s kicked back in. We are already seeing an uptick in R&D tax credit activities, we are getting a lot of people reaching out—I think at this point, we’re in the hundreds of clients that have reached out about looking at the R&D tax credit going forward. So from what the impact this has, I think is going to be very major on the innovation that happens within the U.S., and the proof is we are seeing a significant impact on activity around R&D tax credit already.

Perfect. 

Yeah, and that’s really not just drawing an allusion either. I’ve had specific conversations with clients that have said, “Hey, now that we have this,” they were essentially paying a 30 percent penalty on conducting research and experimentation, which is in and of itself going to be an impediment to growth, to innovation. They reach out, they’re saying, “Hey, we’re back on, we’re going to initiate this program. We’re going to launch this program.” So we’re actually seeing it play out in practice and we’re only what, three days into this? 

Yeah. So, and that ties in with the next question. So before we were capitalizing U.S. expenditures over that five year period, the treatment for foreign R&D, it’s still amortized over 15 years. What are your thoughts on the impact—this is what was written—the impact on global R&D allocation decisions, do you think that’s going to continue being outsourced, do you think, what are your thoughts on this, and maybe we can loop in that question about foreign qualified expenses.

I can jump in on this one. So I think the goal of that, the goal of that going all the way back to requiring the 15 year amortization coming out of the Tax Cuts and Jobs Act, was to have reshoring of these development responsibilities, and having dollars that are being spent on U.S. soil as opposed to offshoring. Anybody that’s done it, there are ways that you can offshore development work and you can get it done for a fraction of the price of what you can get that same work done for in the United States. So this was an effort to level that playing field a bit. 

So, will that work in practice? You need to see how the numbers shake out. I know some companies that I’ve spoken with, there are other strategies that they’re using. One strategy that some companies are using is they’re just opening overseas facilities. So they’re not U.S. taxpayers, they’re just doing the work over there, and absent some other type of an arrangement like some type of transfer pricing arrangement, it’s really not going to affect their U.S. taxes. So that is one thing that’s happening, but I think that this will start to see some of that development work shift from overseas to the U.S. Numerically, it’s going to start to make sense.

I’m pausing, dramatic pause for Randy if he has any additional comments on that.

No no, this entire bill, there’s a lot of impact on using foreign entities to do R&D, to do work with your renewable energy, and so yes, as Phil said, this is an effort to reshore, or make sure that we are continuing to have a significant impact on the manufacturing sector within the U.S.

Excellent. Alright, another question came through, we’re going to try and stick with R&D. Can small businesses benefit from retroactive application of full R&D expenses—two part question—and how should they be approaching amending prior returns?

Yeah, I can jump in on that and then Phil can fill in the spots that I miss. So the interesting thing in this bill is that it does retroactively allow expensing of R&D expenses for certain businesses, and what they defined as businesses with $31 million or less in gross receipts can actually make a decision to go back and amend their ’22 and ’23 returns and fully expense what they had capitalized during that time. If their ’24 return is not yet filed, they can do the same thing on their ’24 return. If their ’24 return has been filed, then they can amend that or, honestly, I think they can supersede it. I’m not positive on that—Phil, do you know if they can do a superseded return on that?

I think that depends on whether they extended the original return date. If they extended it and they filed after the timely file date, then they can supersede it, yes.

Okay. And so they can do that. That is an option. They can go back and they can amend those returns and fully deduct those expenses that were capitalized over that time. Another option is that they can ignore that and they can choose to deduct all the remaining in ’25 or amortize it over the final two years—or two more years—’25 and ’26. That’s the options for small businesses. For larger businesses, over $31 million, they don’t have the option of going back and amending. They have the option of deducting the remaining expenses over one or two years, ’25, or ’25 and ’26. So that’s what this new bill gave us those two options to catch up and deduct anything that we had capitalized over time.

I will chime in just a little bit on the mechanics of doing that. And remember, a lot of this is still being broken down. So we have what the legislature writes, the IRS is going to have to go through and give guidance on some of this as well, but you do have to make, if you are one of those qualified small businesses where you are going to go back and you’re going to change the treatment for ’22, ’23, or ’24, there does have to be an election made, there does have to be a change in accounting method which is made and we need to look at what those prior years had. So it may not be as simple, especially when it comes to base amounts, you do have to look at that and you have to make sure that you’re following the right steps in order for that to be effectuated.

And then one other thing on that, that you just mentioned—the elections and the timing of this—from what I understand, we have to do these amendments within a year of enactment of this law, so we don’t have a three year period or whatever to do an amended return, as far as I understand, we have to do that within one year.

Yeah, and I’ve seen June 30th, July 3rd, and July 7th as that date. 

Right, a lot of guidance still needed, a lot of guidance coming out, but we do have basic information that we can start sharing now, at least. I want to answer one thing, because we did get a question come in, and this is more of an opinion than “we don’t know,” although Phil may know more. People are asking if IRS may come up with a faster method for processing amended returns, because we’ve seen that that has taken quite a while over time. I’m sure part of what they’re thinking is with ERC maybe as well, and the time that it’s taken for that. IRS has got a little more sophisticated with the way they’ve looked at things, especially with renewable energy, and they had a portal in place. As far as I know, I have not heard any special procedures being put in place to manage and process amended returns faster.

Yeah, I would say the only difference here between this and ERC is ERC was a mandatory paper filing.

Right. Good point. 

Perfect. And I know starting this year with Tax Year 2025, 6765 has additional requirements and keeping that all into consideration for any businesses that are planning on filing for the credit now, either they stopped doing it or they’re just now doing it, take that into consideration, making sure that all the data is properly placed in the form when you file your returns. Alright, we’re going to take a break on R&D, wait for more questions to come in, but I want to skip over to bonus. 

You know what, Michael? 

Yes! 

I want to back up a second, because what you just said is super important. Because I think a lot of people don’t understand these new 6765 rules, because some firms were not doing R&D over the last few years, and didn’t realize that these new laws or new rules are in place based on IRS guidance and on court cases, but there’s a lot more documentation that is going to be required starting in 2025 to put on the form 6765. My question to you, Phil, that has been in place for amended returns, correct? Is that if people go back to ’22, ’23, and ’24 and amend, is that additional information going to have to be on the 6765 as well?

So if you’re going back and again, this is my take as of right now and from what we’ve seen, that’s been the case. There was a chief counsel memorandum that came out in October of ’21—I could be off by a month or so on that—October of 2021, and then effe ctive January of 2022, there was a requirement that if you’re amending for the R&D credit, you have to provide the additional five items of information. You have to get into business components. You have to get into what certain employees or certain expenses were attributable to. So if you’re going back and you’re amending to claim the R&D credit, that verbiage said, you have to do this for all R&D refund credit claims. If you’re going back to claim a refund, then yes, you would have to provide that information. As I’m looking at it right now, if you’re just going back and picking and changing what was capitalized to an expense, you would not have to provide that additional information.

Yep. Makes sense. 

More to come as we see that play out.

Excellent. For Tri-Merit, I was talking to the head of our R&D practice and I said, “Is that going to be a challenge for us? Are we going to need to adjust?” He goes, “Honestly, we’ve been getting ready for this type of requirement for years. Nothing will change.” So I was glad to hear that. But I know a lot of businesses are out there that have been claiming the credit, just doing a back of the napkin calculation. Those days are gone. That’s not happening anymore. Alright, let’s move to bonus. This is a big deal. I’m going to start out with what types of assets now qualify for 100 percent bonus under the new law?

Yeah, so it’s any of your shorter life assets. Anything, whether we’re talking about flooring and interior improvements all the way to site improvements. Anything that’s falling into one of those shorter life buckets is, and has been, eligible for bonus. The big difference now is you don’t have the sliding scale anymore. We had 100 percent bonus depreciation from 2017 through the end of 2021. Then you started to have a sliding scale down where it was 80 percent in 2023, 60 percent in 2024, placed in service in 2025 was 40 percent. Now businesses know that regardless of whether they place an asset into service on December 31st or January 2nd, they’re going to be able to rely upon 100 percent bonus depreciation for those shorter life assets.

Yeah, and the way this was defined is, it is permanent, because we’ve always had it for just a short term and then it goes away, or partially goes away, and so the fact that it’s permanent is going to be a major planning tool that accountants can use with their clients to determine the best value of deduction of capitalized expenses.

Yeah, and that’s one of those things—just a little bit of commentary on it—it’s one of those things where you may look at it as an outside observer and say, “Hey, that’s not that big of a deal.” It’s a huge deal, and it had a huge, huge price tag attached to it when they went through the scoring on this, so hopefully that is going to jumpstart quite a bit of spending and be an economic boom.

Alright, so, as you were discussing this, I got a whole story, but I got to the question at the end of the story: Permanent reinstatement of 100 percent bonus depreciation, how does that change your cost segregation? And I think we kind of answered that, but I just want to make sure we didn’t miss anything. But how does that impact a cost segregation study?

So, it doesn’t impact the study at all. What it impacts is the utilization of the results. The cost segregation study is going to go through, it’s going to identify the assets that can go into those shorter life categories. And then it’s just a matter of once those have been identified, you have the option—you’re not required to—you have the option of pulling those into First Year Bonus. So it’s more in the application than it is the study itself.

Perfect. And I love this next question because it goes right to the point: Bought a building in 2024, can I get a 100 percent bonus?

Likely no. It’s not out there yet, but they said that there is going to be transition guidance on businesses that were purchased prior to the effective date, which is January 19th of 2025. They were purchased before then, but they were placed in service after then, there may be some type of relief there. But again, we have to wait for the further guidance on that transition period to be addressed.

And if you bought a building, obviously there are certain assets that don’t qualify for 20 years or less, and they’re not bonus eligible, so not the entire building, and so that’s why you still need to go in and identify those areas that do qualify for bonus depreciation.

Alright, now this question, last question for bonus that I have right now, this looks like it came from somebody that is very involved in cost segregation and properties: What are the planning implications for qualified production property (QPP) eligible for bonus depreciation through 2029?

Good question, jumping right into QPP. As far as planning considerations, I think that’s going to be a little broad to answer on this discussion, because we have to look at it fast in circumstances to see what is there. But from a broad view, it’s going to allow those manufacturing facilities that are either acquired, or that are built and placed in service after, I believe the cutoff date on that was after December 31st of 2024, but they’re placed in service prior to, I think it’s December 31st of—it’s way off in the future, 2034, 2037—it is going to allow for the 100 percent depreciation of the manufacturing portions of those buildings.

From what I’m hearing, what we’re gathering as far as processing these new rules, the biggest dividing line there is going to be what portions of the business are attributable to manufacturing? Is there an office next to it, because the office is going to fall back into the maker’s discussion as opposed to just taking a 100 percent bonus on it. There’s going to be an impact, it’s going to be favorable for companies that have purchased or that have acquired or that have built those facilities. More to come on actual planning techniques around it.

Alright. We’re going to pause on that section for now. We may not come back to it today. Let’s switch to energy. There’s a lot that changed. Some good, some not so good, but I got a slew of questions: Is 45L still available?

I’ll jump into this but then you can add to it. So 45L, just to define what that is—45L is a credit available for developers of residential property. That credit evolved over the years, but it was over $5,000 per unit at this time for an eligible property. How you calculate that changed in the Inflation Reduction Act because it became reliant on energy, star ratings. So that’s just some background on it. Does it still exist? For a little bit. As of right now, the way I read this is the properties that are placed in service—but when you’re talking about 45L, you’re usually talking about it’s leased or sold—so properties that were leased or sold after June 30th, ’26 will no longer be eligible for 45L. This is an area where you do have clients that are developers of residential property, and they have projects in place, or they’re thinking about it, this is a time that you really need to look at accelerating these opportunities because at least as of now, June 30th, not as of now, but in the code, and believe me we’re five days into this law, but no longer eligible for properties, I assume, [with a] sale or placed in service date after June 30th of ’26.

That’s the same way I read it. Although it might be July 3rd or July 7th, 2026.

Exactly. We’re seeing multiple dates on some of these. 

If you want to play it safe, just make it a June date and you’re good. 

Yeah, stick with the earlier date, you’re protected then.

Alright, what’s the story with 179D? Is it still available? Possible? Somebody wrote, “Is it worthwhile?” I’m not including that, although I just did, and I apologize for adding that.

So 179D is still available, is still in its current form, meaning that you have a potential base deduction between—I could be a couple cents off on this because the cost of living adjustments have been pretty rapid with it, but you have a base deduction of somewhere between like 58 cents and $1.15 that can be enhanced if the construction of the facility utilized prevailing wage and apprenticeship labor all the way up to, I think it’s $5.81 for 2025. So, that does still exist. The only requirement that we have now is that there has to be a construction start date earlier than whatever that date is in 2026. June 30th, July 3rd, July 7th. If construction starts before then, then you can still claim 179D. 179D can still be claimed as an allocated deduction by the designers of those buildings as well when you’re dealing with not-for-profits, government entities, non-taxpayers, like that. So, still available, still worthwhile, depending upon the project scope. If you’re looking at a 10,000 square foot building, it’s only going to qualify at the very bare minimum with none of the bonuses, and it’s going to be a $5,500 deduction, and in a lot of cases, that’s not going to make sense. There’s not going to be an ROI on that project.

Makes sense. What about prevailing wages? Did they do anything with that? Change it?

Nothing was changed with the prevailing wage treatment or those bonuses.

Okay—now I have to say I’m sorry to the person that asked that. If they didn’t write a story—I can appreciate the stories, I should say.

And prevailing wage is super, super cumbersome and super complicated.

Alright, here’s the next question: 45X – manufacturer credit, was it affected?

It was affected, mostly in a good way, in that the available credit ramped up from 25 to 35 percent. There might be a sliding scale in there with some dates that I don’t have right now, but by and large, there were more items that were included. There was polymeric coal, or there’s a type of coal that could be used as one of the critical materials, and in 45X, it’s still a direct pay option. Still a good credit to go after. 

And just as a little more background, 45X is available for manufacturers. There are manufacturing components that go into some of the qualified renewable energy projects. So when we just talked about R&D in the two sections earlier, R&D tax credit is a manufacturing credit for the most part—software as well as another major user. But now if you have any manufacturing clients, 45X could be a potentially nice additional benefit for them in addition to the R&D tax credit.

Excellent. Alright, another question: What are the implications of the 12-month construction window for wind and solar projects to qualify for the credits?

Sounds like a Phil question!

There we go.

Sounds like a broad question! That caught a lot of chatter. That caught a lot of people’s attention.  There was some back and forth between the House bill and was there going to be a construction cutoff date of 60 days, and then have it ramp down, the available credit percentage, over the next couple of years. They went with the one year beginning of construction; if you don’t need that one year beginning of construction, then the project has to be completed and placed into service by the end of 2027. I would say the impact is going to be a rush. I have not spoken directly with some of the engineering firms and procurement firms that we work with, but I would have to imagine their phones are ringing off the hook with people trying to get these projects started. There was an executive order that was released either on Monday or Tuesday that said there’s going to be further guidance that’s released on what that start of construction date means. We’re relying upon 15 pieces of old IRS literature to define that, but basically, there has to be 5 percent of costs incurred, or a fiscal work requirement, and there has to be continuity of construction. So you’re not gaming the system and putting one pole in the ground and saying, “Hey, we started construction on June 28th of 2026, and completed it in 2036.” They want to have more rules and more guidance around that. Some people will tell you that that’s an attempt to be obstructionist on those projects—we’ve got to see what those rules look like. Those are going to come out on a 60-day timeframe.

Excellent. Alright. Two more questions. I promise we’re coming up to the bottom of the hour. First question of the last two: How does the phase-out of the PTC and ITC from wind and solar after 2027 affect long-term project planning?

I think it’s what you just said, it’s a matter of urgency on these things, but go ahead, Phil.

No, I was going to say, I’m caught a little bit flatfooted on it. As I’ve had that portion of the bill explained to me, there was not a ramp-down. There was in the House bill, but that wasn’t in the Senate bill as far as I understood—I hope I’m not wrong in saying that. If I am, I’m happy to be called out on it.

Being five days into this, I don’t think anybody’s going to blame you. It’s okay! Alright, last question. I don’t know if we can get into this, but somebody put it out there, so I’m going to ask it: Bill’s restriction on transferring credits to prohibited foreign entities. How does that affect joint ventures or foreign-backed projects?

Yeah. I can say, with the “foreign entity of concern” language that was included, there’s a couple of ways to look at it. So when it comes to partnerships and some of the more complex arrangements that are out there, definitely something to keep an eye on, especially if we’re dealing with Chinese entities or other countries that are on that list. I do know that as part of that specific provision, there are going to be some safe harbor rules that are released. Safe harbor rules, safe harbor percentages along the three different delineations of countries that are included in that, so I would say keep a close eye on that and that’s something else that’s going to be further dissected as we get more into this bill. It’s going to definitely be more complex than a bright-line test. There’s going to be some things to evaluate with it.

Yeah. Alright, gentlemen, we are at the bottom of the hour. I know there’s more questions coming in and I apologize I’m cutting these questions short. I promise you we will get back to you with answers and the best answers that we can give to you being that it’s five days in. Any closing thoughts, comments before we wrap up?

I’ll jump in fast and then give it to Phil to finalize everything. The bottom line is, especially when we’re talking about the energy incentives, a sense of urgency is the first thing you should be thinking with your clients. Talk to anybody that’s working on something, anybody that’s thought about something, if you see something new on somebody’s depreciation schedule you didn’t see before that maybe they were doing something that falls within this area. So yes: Sense of urgency, reach out to us. We are gathering the answers as fast as we possibly can and we’ll do anything we can to help you guide your clients the correct way.

Phil?

I think Randy summed it up pretty well. I think there’s going to definitely be some opportunities here. Feel free to reach out, and we’ll help you with that.

Gentlemen, thank you both. I appreciate it. I know there’s going to be more information and we’re going to get deeper into understanding and helping businesses and CPAs gain the best insights so that we can help them do things the right way, which is our mission here at Tri-Merit. If you do still have questions and comments, thoughts, want to meet with us and talk about your situation, reach out to us here at Tri-Merit. That’s what we’re here for, to help you go about the changing in the law, making sure that you’re going about it the right way so that you don’t have to backpedal at some point in the future. If you have any questions, reach out to us at Info@Tri-Merit.com. Thank you again. Enjoy the rest of your day. Take care.