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Considering an Unlikely Tax Provision to Your Advantage in the Mortgage Industry

Children returning to school and dreaming of fall weather may be on your mind currently.  Fast approaching is the 2020 budget, interest rate changes, and what could potentially be the true cost to originate a loan.  For the latter, mortgage companies are considering a more efficient use of internal technology while making it easier to use for the customer.


When considering these items, there may be tax savings opportunities.  The Research and Development (R&D) Tax Credit was originally introduced in 1981 as a way for the federal government to help incentivize innovation and technology.  After a long history of extensions and conferences on effectiveness, the Protecting Americans from Tax Hikes (PATH) Act of 2015 permanently extended the Research and Development Tax Credit and expanded certain provisions. 


Research and Development Activities


Internal Revenue Code section 41 and 174 and the Treasury Regulations provide for the definition of R&D.  As originally defined, R&D includes all experimental and laboratory costs incurred in a trade or business to the development of an experimental model, plan, process, product, formula, and invention including the costs of a patent. 


Companies will need to provide evidence that the R&D activity meets the following conditions:

  • The activity is intended to resolve technological uncertainties that exist
  • The activity is related to the development of a new or improved business component or design of a component
  • The activity has included a process of experimentation involving testing and evaluation of alternatives


This can include the design, development, and implementation of new client relations management application or loan origination system.  As the definition has expanded, consider the efficiency of business processes to improve restoration and dissemination of information.  Internally used software does have additional conditions to consider including that the software is not commercially available. 


These activities utilize either computer science or network engineering as innovative processes to meet the statutory requirements.


Research and Development Expenditures


After determining evidence of R&D activities, companies need to accumulate the costs incurred.  These costs include:

  • Wages paid to employees for qualified services
  • Supplies used and consumed in the R&D process
  • Contract research expenses paid to third parties performing qualified activities (allowed at 65% of the actual cost and must be performed in the United States)
  • Research payments to qualified educational institutions and scientific research organizations (allowed at 75% of the actual cost)



Changes to the R&D Credit


Beginning in 2016, startup businesses with no federal tax liability and gross receipts of less than $5 million can take the R&D credit against payroll taxes.  The credit is refundable but capped at $250,000 for up to five years.  This election to reduce employer FICA taxes must be made on a timely filed income tax return, including extensions. 


Companies should consider these tax advantages while looking ahead at 2020.  Refund claims may be made for up to three years for past activities that qualify.  Consider the wages of any software development engineer, software test engineers, and technical writers (for documentation and process improvement).  You can also include those assisting in testing and design including accounting, marketing, and company officers.  The percentage of time budgeted for other R&D activities and unrelated time may further increase the benefit. 


Neal Armstrong is quoted as saying, “Research is creating new knowledge.”  When you are innovating your business and processes, consider the potential tax benefits provided under the R&D credit.


For any questions over the impact to your company, please contact Brad Marckx, Partner at BKM Sowan Horan, LLP.



About the Author

Brad Marckx


Brad started his career approximately 25 years ago working as a revenue agent with the Internal Revenue Service (IRS). The background with the IRS and a Master’s Degree in Taxation (MT) from University of Denver provides a solid foundation in helping businesses, both private and public. Brad’s area of concentration include federal and state tax planning and compliance , ASC 740, Accounting for income taxes (including documentation of uncertain positions), entity choice, and strategic plans and forecasts.


Brad’s clients benefit from tax strategies that work with the short and long range business objectives. Listening to individuals and management teams’ objectives and educating on the tax options provides a collaborative approach. This can involve merger and acquisitions planning in partnership and corporations, Mortgage Banking, Section 263A capitalization analysis, or other complex situations.


Brad enjoys the collaboration, the foundation of BKM Sowan Horan, that comes from working with dedicated professionals and managing a diverse group of clients.

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