Tax Update for Startups | One Big Beautiful Bill

Mike Luistro:Thanks Mimi. Mike Luistro. I am also a senior tax manager in the corporate tax group. I am out of the Raleigh office and our office here in Raleigh is really close to Research Triangle Park. So lend itself to me specializing more so in life science tech companies. I do a ton of startups, so working directly with CEOs and that kind of thing. And then early stage companies and even grant funded companies as well, which we'll touch on some of the impacts specific to those moving forward here. And with that, let's jump right into it. Oops.

Starting with section 1 74, this is something that has really been a thorn in the side of my R&D companies really since it was passed back in 2018. It was actually passed as part of the Tax Cuts and Jobs Act. Republicans kind of threw this into the legislation essentially as a pay four to make the numbers kind of work for the other reductions in tax that they were passing at the time. They really knew that it wasn't great legislation, it didn't encourage research and development. It was sort of just a way to get the bill passed. And because of that, they set a January 1st, 2022 enactment date. So the idea was that they would have three or four years to figure out a mechanism to get this either repealed or delayed or just not go into play where it's actually hurting R&D companies.

Of course, the other side knew that this was bad legislation as well. It became this sort of political football that the two sides would negotiate against. And in typical government fashion, seven years later we finally got a fix. So it took some time, but we are certainly welcoming it. So this change was actually not to section 1 74, it was to the change of the treatment in section 1 74 expenses. So we'll go into a little bit more detail on what a 1 74 expense is, but generally speaking, historically we were allowed to deduct these section 1 74 expenses. This change back in 2018 required us to capitalize and amortize them over five years if it's us or over 15 years if it's foreign. So if it fell in this 1 74 bucket, we could no longer immediately deduct it. We had to essentially put it on our tax balance sheet and only take a portion of it year over year.

So what is section 1 74? So that is a very old and outdated portion of the tax code. I think it actually even predates the internet and computers and all this stuff that's sort of mainstream today. So the applicability to the modern world is somewhat limited, and the definition itself is extremely broad. So it's defined as all the cost incident to the development or improvement of a product process, technique, pilot model formula, invention, patent or similar property. The way I like to talk about this with my clients and taxpayers is we start with our R&D credit eligible expenses. So Mimi's going to go into a lot more detail on what those are, but essentially those are our US wages, our US contractor expenses at 65% and our US supplies, so that's governed by section 41, but anything that's generally a section 41 R&D credit eligible expense generally qualifies as section 1 74.

So we start there, we add in the remaining contractor expense, we add in foreign R&D we take our total wage burden, so that includes payroll, taxes, benefits, all that good stuff. There's even a overhead component to it in utilities and rent that you have to allocate directly to this 1 74 and capitalize it. And of course something like rent and utilities, it's hard to, those aren't really expenses that you would typically directly allocate to R & D. So they did come out with sort of a shortcut to doing that. You can take your percentage of R & D wages, so you take your R & D wages over your total wages, get a percentage, and that's how you would allocate some of these different overhead pieces. But it's pretty easy to see based on this list here, how an R & D heavy company can really quickly fill up their 1 74 bucket and be really, really impacted by this.

And just a note there at the bottom, there are two tests that we sort of look at to see if this is a research and development expense qualifies as 1 74 and for 1 74, 1 of these two items needs to be true. So the taxpayer either needs to retain substantial rights to the research or they need to bear the financial risk. So that's an OR for section 1 74, but I believe it's actually an and for the r and b credit. So again, a little bit lower of a threshold for 1 74, the bad. Then R & D credit the good, the best way to sort of explain that is kind of using two different examples. So let's say we are A CRO, A contract research organization. We are getting paid by a third party to do research on their behalf. And of course they are probably going to retain those rights to the research.

So they're going to have control over whatever information is generated from that research and that kind of thing. So number one, if we're CRO is probably a no. It's also true that they're probably going to pay us to do this research regardless of whether or not it gives them the desired results or is successful. As long as what we're doing, what they ask, they are going to be paying us. So we don't really bear the financial risks. That one's also a no. So generally speaking, again, this is not a complete yes or no, but generally speaking, CROs don't have a ton of R & D that would qualify as 1 74. Now the third party that's paying them to do the R & D, they would probably capitalize those expenses as their section 1 74. And likewise, they're also the CROs are not eligible for the R & D credit in most circumstances.

The other example would here would be a grant funded company. So let's say we're a company that got a large SBIR from the government to do research and develop a certain product. Now the government's going to pay us that money to do that research and they are not going to usually in most circumstances, retain any rights to that research. We still get to develop anything that comes out of it. Again, not a hard and fast rule, but generally speaking, so that usually is a yes for a grant funded company, number one there. Number two though, that's usually something they're usually going to make these grant payments to us regardless of whether or not we ultimately develop anything or have what we call successful research. So we're not really at financial risk. So we got a one yes and a two no as a grant funded company. And it's really retaining that substantial rights that puts us on the hook as a grant funded company for this 1 74. And unfortunately because we don't bear the financial risk, we're usually not eligible for the R & D credit, at least the funded portion of our research. Anything internally funded could still qualify.

So who is affected by section 1 74? Well, so all companies that are doing R & D are generally affected in some way, but if you were pre-revenue during 2022 through 2024, you probably didn't really notice a significant impact. Yes, you might be doing a significant amount of R & D, but even if you lose millions in expenses, you really don't have any income to be taxed on. So you probably didn't have a cash tax impact, but I'll get into this a little bit more. But there are for those companies with that profile, there are opportunities with the OB three to kind of plan for when these expenses are ultimately deducted.

Grant funded companies, as I mentioned, were extremely impacted by this, even companies with a little bit of revenue and a lot of R & D could have seen a cash tax impact. And the best way to illustrate that is with the example to the right there. So let's say we got a hundred thousand dollars in revenue grant, revenue service revenue, whatever it is, we spend 90,000 of that on research and development. We spend an additional 70,000 on g and a, so we're a little bit self-funded as well. We're posting a book loss of about $60,000. So below there we take that tax adjustment, we remove the 1 74, we get 10% of that back as amortization, and we're still left with taxable income of $21,000 and a tax bill of 4,400 bucks. And of course, as I mentioned, if we're grant funded, we're not getting the R & D credit to offset that. So by no means is a hundred thousand dollars a huge grant. There are companies out there getting millions. You can see how they might have tax bills up in the six figure area pretty quickly from 1 74 only.

Fast forward to 2025, the fix is finally in for 1 74. And the fact that there is this retroactive piece was actually a nice surprise to a lot of us who have been following this since it came out in 2018. We've had a couple tax years and filing seasons go by where this has come into play. So really last year was kind of the last year. I had hope that there would be a retroactive fix to this because now the government has their money, the administrative burden to go back and change that would be a lot. So this was a huge nice surprise that kind of came in at sort of the last minute with this legislation. So the o OB three created a new section 1 74 A that governs domestic expenses only. So that's the first important thing to note. This fix only applies to our US sourced section 1 74 R & D.

All of our foreign expenses still need to be capitalized and amortized under that 15 years, but we do have two different routes that we can take as far as deducting this, assuming we are a small taxpayer. So first, let's define small taxpayer. Small taxpayers for this purpose are those with 31 million in gross receipts on average or less in the previous three years. So that would be 20 22, 20 23, and 2024. So those that qualify as small taxpayers can elect to retroactively deduct domestic research and development for costs on amended returns. So there are a couple of very important words in that sentence there. The first is the word elect. So I think the legislation kind of spelled this out and said the taxpayer would file an election in a manner prescribed by the secretary, I think is the words that they use so far. The secretary has not prescribed a manner yet.

So we do not know how to get to make this election where to make it and what is included in this election. So at this point, it's sort of a waiting game. We're waiting for that IRS guidance to tell us how to go about the ins and outs of making this election. The one thing they did include in the legislation texts is that there is a due date to make this election by. So it is July 4th, 2026, one year after the enactment date of the bill. So of course we know when it needs to be made by just don't know how to make it. The second important word in that sentence is the word amended. So the text of the legislation specifically said that this needed to happen on amended returns. So of course we are not through the 2024 filing season just yet. Corporations on extension have until October 15th to file.

So I know personally I have a ton of clients who are on extension and sort of in a waiting period do we actually have to capitalize R & D on a 2024 return only to subsequently amend it right after that? It seems a little bit redundant to get to the same place, but as of right now, we don't have anything else to go by. The word amended is included in there. So we would theoretically have to file that capitalizing 1 74. And the other argument is the definition of a small taxpayer is one with average gross receipts in 20 22, 20 23 and 2024. So if we don't file 2024, how would the IRS know that we would qualify for this election? So a little bit of a waiting game here. I'm kind of just having the conversations with my clients and putting it out there, making sure they're aware of this and talking about what it's going to look like to amend and that kind of thing.

But actually not really submitting anything until we get this information and hopefully that'll be coming within the next few weeks. So that was the retroactive piece for small taxpayers. The second way we can do it is all taxpayers, small or large can elect to deduct the unamortized research and development on 2025 or 2025 and 2026 returns. So this is that planning piece that sort of comes into play when we're talking about if we were pre-revenue in 2022 to 2024, it's most of the time it's pretty self-explanatory. If we had a tax impact in those years, we probably want to go back to amend and that kind of thing. If we didn't, then it's more of a conversation piece. I actually have a client where this is going to end up helping them. They fit the bill of most life science companies that aren't grant funded.

They were pre-revenue from 2022 to 2024. Heavy R & D capitalized millions in 1 74 but had no income to be taxed on. Fast forward to 2025, they have a significant income event. So we are actually able to plan for those expenses and take them all and get millions more in deductions to kind of offset this 2025 tax burden that we normally wouldn't have had. Yes, they would've gone into our net operating losses for those years, but those can only offset 80% of taxable income, whereas a deduction like this, there's no real limitation to it. So really it's just about planning with your tax advisors and talking through the different scenarios when it makes sense to do this, when it makes sense to amend and when it makes sense to take it in 2025 or 2026. And now we will turn it over to Mimi to talk about the research and development credit.

Mimi Nguyen:Thanks, Mike. With the changes that Mike has said, it makes the RD tax credit a lot more beneficial now for everybody. And so I think it's just best to go over just the overall credit and eligibility as well as changes to the new 67, 65 from 24 going forward. And so with this, this is just a quick benefit at a glance for what the RD tax credit can give companies eight to 10% of a company's annual qualifying RD expenses QRE can be applied dollar for dollar against its federal income tax liability. The RD tax credit can be carried back one year and pushed forward up to 20 years. For qualified small businesses, there is a refundable component via the payroll tax offset of up to $500,000 starting in 2023, in 2022 and before it was 250,000. So even if a company doesn't have any federal income tax liability, we're still able to monetize it for small startups and other companies that would qualify. The credit beyond federally is also available in over 40 states for RD and RD related investments. For states like Pennsylvania, New Jersey, Connecticut, they have refundable components. And depending on the state, there are certain applications that need to be applied for as well. So if we're looking at state credits, it's better to do it early than do it later.

And here these are just some common eligible industries that we worked with. SaaS, life science and healthcare architecture, financial services, engineering, manufacturing and artificial intelligence, ai. And for specifically the payroll offset for qualified small business eligibility, you can claim an RD tax credit within the deadline extensions included. So it has to be done on a original or extended return. You have to have less than 5 million in gross receipts In the current tax filing. The company has to have zero gross receipts prior to the five years from that tax filing. And the use of PEOs does not disqualify the taxpayer. And to note gross receipts here is any receipt including interest or diminish amount. So it is not just gross receipts. We've run into cases where there are companies who just have $5 an interest and that disqualifies them from or doesn't disqualify them, but it starts their five-year clock whenever we find gross receipts.

So with the RD tax credit, we need to do qualified research. And what is qualified research? It's based on a four-part test. It has to be activity based and it has to be US based. The activity must relate to a new or improved product or process, which is also known as business component intended to improve either functionality, performance, quality or reliability. This activity must be technical in nature, which means it relies on the hard sciences, physical, biological engineering or computer sciences. It has to be intended to eliminate technical uncertainty concerning capability method or design. And you have to be engaged in a process of experimentation, which means an iterative process of trial and error.

Here's some qualifying activity examples such as product development, manufacturing process improvements, drug formulation development, designing, cloud-based software and solutions, quantitative trading strategies or algorithmic development, artificial intelligence and machine learning investments or development excluded activities include those that are not done in the US funded research, which is what Mike was talking about before, which is grant, government grant related, or other type like SBIR, type of R & D and reverse engineering. So for activity that we find that is qualified, we're able to take four buckets of qualifying costs. One is taxable wages for employees who perform or directly supervise or support these qualified activities, cost of supplies using qualified activities including extraordinary utilities, but excluding capital items or general administrative supplies. So usually we cannot take equipment, we can't take anything that's depreciable. We are also able to take a hundred percent of contract research expenses, but we take 65% of that for qualified activities provided the taxpayer retained substantial rights to the activity and must pay the contractor whether it succeeds or fails.

And lastly, we're able to take rental or lease costs of computers used in qualified activities. These are payments to cloud software providers like AWS, snowflake, Azure, Google Cloud for the cost of renting server space to develop or improve a component. So we're only able to take costs for staging and development purposes and not for production and hosting or production and storage. And with that, there have been changes to 67 65 going forward in 2024 specifically, that's when it started going into effect. And I'm just going to go over some of the new sections that we haven't seen before in the past, specifically section E, which adds five new consistency and QRE related questions. This section included identifying the number of business components that the company worked on in the given tax year. It also added the amount that you are qualifying your wages for who are officers usually We never had to identify these before, but now going forward, those things need to be identified by the company and put on the form.

And then there's section F which summarizes total QREs and it also flags for a section G requirement. And section G is usually where everyone gets a little bit frazzled because it requires a lot more documentation, well more documentation than it has in the past. And so with section G, it is a detailed business component reporting and it includes names, types of business components, expense breakdowns, and a possible narrative depending on the company. Let's see, I already mentioned officer wages. There is a requirement for you to identify if you RA control group, and this just requires the detailed group structure and member level QRE reporting. And like I said, there is a business component identification, not by name this year but by number.

And so for section G, we need a little bit more of an expansion because it requires a little bit more, but it does have to be noted that it is optional for 2024, but it is required going forward. And so with section G what needs to be identified, you need the business component name and you must report at least 80% of your total QREs, but no more than 50 components. You need the business component type. You can identify it by, I believe it is product process or other. I believe that is the instruction. There is a QRE breakout that needs to be identified by the QRE activity has to be broken out by direct research, direct supervision and direct support by wages and then also by the supplies, the contract research and the cloud costs. To note, there is a, in section 49 F, there is an exemption. 49 F is the narrative option where you do have to identify what was being researched and your technical uncertainties that you need to go into. However, you do not need to do 49 F in two scenarios. One is if you are A QSB claiming the payroll offset, which is section D where you check the box. And the second scenario is if your QREs are less than 1.5 million and your gross receipts in that tax year is less than 50 million.

And so with this section it requires a little bit more on companies who aren't used to this type of mechanism yet. And so this is just helpful documentation to gather a master list of business components for the year with a clear naming convention. This is very much needed in section G because you do have to name your business components in some capacity project. Short descriptions to have on hand project documentation for technical meetings, notes, process of experimentation, substantiation, test logs, modeling simulations, lab notes. Also expense detail by category such as time reports, payroll allocations. But generally the best practice is just to keep all info organized by component with clear links between activities and expenses and maintain it throughout the year. And so we have that option for 24 and if because we know that it's coming in 25, this is really the best practice to go forward.

I think we have some questions here. Clinical trials can be considered RD, yes. Clinical trials on a medical device that is being developed can be considered R & D. That is some. Can you give examples where, oh, when I meant a hundred percent contract research expenses, that means that we can take that cost but no matter what, we still have to, we can only take 65% of it. So if you're paying a contract research another company to do research on your behalf and you retain your own rights as well as you are of you're paying them in a payment term that is acceptable to the IRS code, we're able to take that. Let's say you get a hundred thousand dollars for qualification purposes, we're only able to take 65% of that and that's just for the RD credit in the past, before the 1 24 where we would have to for the 1 24, we'd have to take the full cost for that. I think that is it. I'm going to pass it to Bridget to discuss section 1 2 0 2.

Mike Luistro:Surprise, that's actually me. I'll be doing section 1202. Oh, sorry, I thought it was good. I apologize. No problem at all. So section 1202 is unlike section 1 74. This has always been a really beneficial part of the tax code and the OB three really just made it even more beneficial and more desirable for companies. And I will preface this discussion by kind of saying I do not consider myself a 1202 expert. We have a dedicated 1202 team here at EA that sort of does this analysis. Some of these requirements will probably sound a little straightforward, but because we're talking about such huge exclusions and such a huge reduction in tax, there's a lot of documentation and calculations that need to go into any 1202 analysis to determine qualifications. So probably is not as straightforward as these requirements may make it sound. So what is section 1202?

So 1202 provides for the full or partial exclusion of capital gains on qualified small business stock. And so for this purpose, we're really talking about two very important dates. So there is one set of rules for a stock that is issued after September 27th, 2010. Now before that date, there are several other rules that come into play, but for our purposes as startups, we're going to assume nobody has stock going back past that. So we have one set of rules and we have an enhanced set of rules governing stock that's issued after July 4th, 2025, and that's the date the OB three was enacted. So this exclusion is basically $10 million or 10 times the basis in your stock. The stock, the larger of those two figures, that is the max amount of the exclusion. And again, these are old figures per shareholder and per issuer. So you can kind of see how this is a very important item that you'd want to qualify your stock as.

Now, there are several different qualifications to get this treatment. So one, you have to be a domestic C corporation or an LLC taxed as a C corporation. You have to check the box there with gross assets that do not exceed old number 50 million before or immediately after stock is issued. And couple important add-ons here. So the first is that I'll just go ahead and tie this back in with our 1 74 discussion When we're talking about this 50 million asset threshold, we're not just looking at our balance sheet and saying, okay, we have 40 million in assets so we qualify, right? We're looking at the tax basis in our assets, so not the fair market value, but actually the tax basis. A lot of times those will end up being somewhat similar, but section 1 74, right? If we have a ton of unamortized 1 74 that we've capitalized for tax purposes only, I guess that's another point about the 1 74, it is only a tax adjustment.

Your books are not affected by this change. That is something that's not on our book balance sheet but is on our tax balance sheet. So it actually gets us closer to that $50 million threshold quicker. So there's that. And the other important point is that you cannot have been an S corporation at any point during your life cycle to meet this qualification. Now, I can't tell you how many times I've had a startup come to me as an S corporation because they were advised to be that to save a couple of bucks in payroll taxes. Unfortunately that blows their eligibility for this much, much larger tax benefit. So the second one here is the stock must be original issue and that means directly from the corporation in exchange for money property or as compensation for services. So no secondary markets. And the other thing is no redemptions.

That's another important piece here. If you have any stock redemptions, I suggest you talk to somebody about what 1202 statuses could be blown because actually if you have a redemption, it's possible that you've tainted and blown the QSBS status of stock issued even a year before that redemption was done. There's a two year window that you test for one year before and one year after the redemption. Now there are a couple of exemptions of the redemption rule. If it's a redemption, I believe it's for services, like if you no longer provide the company services, there's an exemption there or death. Death would be the other exemption as well. So two big ones so far, don't be an S corporation if you've got redemptions, talk to a 1202 expert. Third one here is it used to be a bright line five year holding period. We hold the stock for five years, we get a hundred percent gain exclusion. Fourth one here, we've got an active business requirement. At least 80% of our assets must be used in an active trader business. There are limitations to the amount of cash we're allowed to include in this calculation and really they want to make sure we're not holding millions in an investment account with readily available for sale securities in it. And then finally there, the last thing is that we cannot be a disqualified business and really that's mostly our service businesses, law, accounting, consulting, athletics, that kind of thing.

So here I'm kind of just going through the differences in we have our stock issued after 9 27 20 10 and then the new beefed up benefits of section 1202 for stock issued after July 4th, 2025. So as I mentioned, we had a $50 million gross asset threshold that has now beefed up all the way to 75 million and that's extremely important because I'm sure there's CEOs out there that are in the middle of raising a round who maybe thought that this round would not qualify as 1202 stock because they were just over that $50 million threshold. It is now possible that they do qualify and that is probably something that CEO and prospective investors would really, really want to know. So very important there. Our holding period went from a bright line a hundred percent, you get it or you don't after five years to a tiered exclusion. So you get 50% even after three years, 75% after four years and a hundred percent after five years.

Then finally they decided 10 million of exclusion was not good enough. They bumped that up to 15 million and it will be indexed for inflation year over year. Given how the way things are going, that could be a pretty sizable increase, right? Or still the other limitation is 10 times your basis in the stock, the larger of the two and there were no changes to original issuance, qualification, the act of business requirement or disqualified businesses. So a couple of key takeaways that if you don't know anything else about 1202, know these, don't be an S corporation if you ever want to receive these benefits, if you have redemptions, try to get out in front of it if you can, definitely talk to a tax professional at that time and then just maintain as much documentation as you can. For all my clients, I kind of have a 1202 kind of file that I can kind of store everything that we would need as documentation to actually prove that our stock is 1202. Some of the required documentation can go back to incorporation. I mean we're talking articles of incorporation, anything substantiated substantiating what founders paid for the stock cash balances each year, the max amount of that. Going back to incorporation, again, the list goes on and on and that's really the biggest hurdle with these 1202 analysis is kind of getting the correct documentation in place.

So I will turn it over to Bridget as well to speak about some other benefits of the OB three.

Bridget Mackolin:Thank you very much, I appreciate it. First I want to talk about we're going to let the good times roll. We're going to keep talking about these changes that have been, they're going to be really positive to your tax line for startup companies. Bonus depreciation in section 1 79 both allow for an asset that you've capitalized for book and tax purposes to be immediately expensed in the current year that it was placed into service. So what does that mean? Normally when you would capitalize an asset, you would appreciate it for book purpose over 5, 7, 10 years, whatever the useful life would be, and your tax depreciation will run somewhat concurrently with that dependent on the prescribed useful lives. The section 1 79 and bonus depreciation benefit is that you get to expense that entire cost basis In the current year, OB three called for the limitation on 1 79 assets to be doubled. So you used to be able to place up to and take an immediate expense for one and a quarter million dollars and now it's going to be two and a half million. One of the caveats with Section 1 79 is that it cannot push you into a tax loss. So there are some considerations when you're choosing between whether you're going to immediately expense an asset under 1 79 or you're going to take that a hundred percent bonus depreciation.

Bonus depreciation a hundred percent is reinstated as of for assets required and placed into service after January 19th, 2025. Prior to that date. From January one to January 19th, your assets will only be subject to 40% bonus depreciation and then the rest recovery will be through makers for your 2024 year bonus. Depreciation remains unchanged at 60% and then you'll be able to take makers on the remaining cost basis. Temporary, there is a hundred percent allowance for qualified production property, which is in the instance where you are maybe building out a lab that this would not normally have qualified for bonus, that's going to be eligible for construction that begins after January, 2025 and January 19th, very specific 2025 and before January 1st, 2029, and it has to be placed into service before January 1st, 2031. The goal of these provisions is to save taxpayers in the current year and encourage, encourage basically spending money and developing the economy on related projects.

Another good provision, another taxpayer friendly provision in OB three is your 1 63 J business interest limitation calculation has changed in the Tax Cuts and Jobs Act from 2017. 1 63 J had a phase out where the first two or three years you were eligible to compute your interest floor using depreciation and amortization. That fell off in 2023 and that was really not friendly to many taxpayers who are placing a lot of assets in service or they're amortizing a tremendous amount of R & D. Those deductions no longer increased your 1 63 J floor and it was just based on earnings before interest in taxes. Now starting on January 1st, 2025, you're going to go back to an earnings before interest and interest taxes, depreciation and amortization. This is obviously another taxpayer friendly and it will also reduce the cost of debt, which is good in the current environment.

For all of the positive things that came out of OV three, we do have to touch on a couple of not so friendly provisions. If you have a foreign controlled corporation, so you have a US parent company and you own A CFC, the net tested income is included on your US tax return at a hundred percent. If you are in a tax paying position, if you're taxable income position, you're eligible to deduct 50% of that. So that left you with a net 50% inclusion. Going forward, that deduction is limited to 40%. So now you're going to have a net 60% inclusion for years beginning January 1st, 2026.

That is called your guilty inclusion. For some reason it would be three. They didn't like the name guilty, so they changed it to your net CFC tested income. The foreign derived and tangible income deduction, which is shortened to fi, that benefit is going to be reduced from 37.5% to 33.34. That is now also a name change to foreign derived deduction eligible income and for any taxpayer is subject to B. The rate has increased from 10 to 10.5%. Again, these provisions are designed to encourage US development for companies to keep their IP in the US and further inspire onshore activities and discourage companies from moving IP abroad. That is all that we have. I will go through some of our q and a here. Mike, I did see one of the early questions was about twofold that you addressed first being what qualifies a small business taxpayer.

Mike Luistro:Yeah, so to reiterate there, that was if we have 31 million of gross receipts or less for the previous three year period, and for our purposes that's going to be 20 22, 20 23 and 2024. So if our average gross receipts are less than that number, we are good. We qualify as a small taxpayer and that's the only time we're able to employ this retroactive piece and actually amend returns and get some cash back hopefully. I also saw some other questions around this about more questions about what you do if you haven't filed 2024. As I mentioned, there are several things that the legislation just left open with the idea that the secretary is going to come out with this guidance to exactly tell us how to do it. So for 2024, the answer's pretty easy, right? If you're a large taxpayer for 2024, you got to capitalize. There's no way around it. You can deduct that in 2025 and 2025, or excuse me, 2025 and 2026 if you'd prefer. But you can't go back, which would be to 2024 and actually deduct if you're a small taxpayer, you do have that option and hopefully they will give us a shortcut so that we don't have to file and amend.

I can't say that with a hundred percent certainty they're actually going to come out with something that allows us to shortcut this. It seems like the IRS wants as much as administrative work as they could possibly get at this point,

Bridget Mackolin:Especially in a timely fashion too. We're rapidly approaching the deadlines for calendar year taxpayers for 2024. So the outlook is not as positive as it was on July 4th about this getting cleared up.

Mike Luistro:I couldn't agree more. I actually did notice a question on due dates as well in the chat. The 10 15 due date applies to C corporations, our pass throughs, partnerships, S corporations, anything with a K one, those are going to be due essentially nine 15. So there was a question just clarifying that I, and I actually did see a pretty good question about a foreign subsidiary, two related parties, one in the us, one foreign and how section 1 74 kind of plays a role there. And really what that boils down to is who's holding the ip? Are we a US company that's getting paid by a foreign subsidiary or probably a foreign parent to do R & D on their behalf, but the foreign company actually owns the ip? If that's the case, we might very well be a CRO for our related party and any R & D we're doing for them wouldn't be ours to capitalize. It'd be theirs, but of course they're not abiding by the US laws. And then vice versa, right? If we're doing the work or if we're paying our foreign subsidiary to do some foreign R & D in their outside of the us, but where all the ips being kept in the states, that's probably still going to be 4 1 74. That will continue to have to capitalize.

Bridget Mackolin:Another question that we did see come through, kind of differentiating between 1 74 and the R & D credit costs, yes, they are independent of each other, but they must play nice together. If you are capturing costs for 1 74, I'm sorry if you're capturing costs as qualified for the R & D credit, they're going to be 1 74. I can't think of a good situation where they would be eligible for the credit and not under 1 74, but they are separate computations and they will not be a hundred percent the same. To Mimi's point earlier she talked about if you have a hundred percent, you're only eligible to take 65% of those qualified costs for the credit that you're going to have to pick up a hundred percent of that likely 4 1 74. So you could see there'll be differences in those computations.

Mike Luistro:Got a couple of 1202 questions I can jump on here. One is about if we're a startup, right? And we've got these shares at 0.00001 and our basis is not going to be very much, just remember that it's the greater of 10 times your basis or now 15 million used to be 10 million. So luckily it's the greater of there so you're not completely stuck. And then another question, so if stock was issued in January, February of 2025, it is subject to the old rules so that the new beefed up rules unfortunately only apply to stock that's issued July 4th, 2025. And then I think we have one more question. The gross asset threshold, does that include pre or post valuations in capital raise? I believe there's, you have to meet that threshold before or immediately after. So I can't say I know exactly what immediately after is or when the cutoff date is, but I believe it's going to include the capital in that case.

Bridget Mackolin:There are a couple of other Q and As, I think they're a little bit more specific. So we'll be happy to send a message and reach out to the individuals who ask questions that were not addressed on the call. Gabbie, I think I'm ready to hand it back to you.

^{Transcribed by Rev.com AI}