ROSS BRANNON

You specialize in a lot of areas of tax credits. Many of them apply to multiple industries. Let’s dive into the ones that dentists who own their own practice can use, and the benefit they get.

RANDY CRABTREE

The most common is the employee retention credit. This is something that came out in the CARES Act two years ago, and there are significant benefits for companies that could qualify. R&D is one we’ll want to discuss too, because I have a little bit of a soapbox issue with R&D in this industry. The other one is cost segregation, that has some benefits if they're buying or remodeling a building, and they want to build out.

ROSS BRANNON

Let's go into the ERC: How long is it going to be around for? What does it do in layman's terms? Who can get it? Is there a statute of limitations?

RANDY CRABTREE

There's a lot of misinformation on this specific credit. People were being told that if they didn't file by December 31, 2021, they were losing their opportunity to get the credit. That's not true. The credit is on your payroll tax returns, which are filed quarterly. Whatever quarter you qualify, you have three years from the original date of filing that 941 to amend it and claim this credit. So, from a time standpoint, we're not up against any time crunch at all. It's a nice, significant benefit going to a business. From a money standpoint, people should claim it now so they can get this money back into their business, but from a time standpoint, there's no worry.

ROSS BRANNON

Am I correct in saying that most CPAs will tell you to go find an ERC specialist firm?

RANDY CRABTREE

In general, that's what will happen. Most of our business comes from CPA firms. Our goal is to enable them to bring these tax saving opportunities to their clients. That is where we get our business, most of them are not doing it. It is not just, "Hey, one plus one equals two, go get the credit." There's a lot of inner play between different credits and incentives. The definition to qualify changed from 2020 to 2021. In 2020, you had to show a 50% drop in any quarter from the same quarter in 2019. That’s a big drop. In 2021, that number was 20%. We don’t want to see a 20% drop in revenue, but that’s a big difference from 50%.

Once you qualify in a quarter, the next quarter qualifies. That's the math portion of qualifying.

The part that gets a lot of misinformation, either from under-qualifying companies or over-qualifying companies, is you can qualify if you can prove that you had some restrictions placed on you by a government mandate, a government entity, a government order saying, "You have to restrict your business somehow." You have to close your doors for a specific period of time, for six weeks, everybody had to stay home, boom. That's a government order. Or, if you had to reduce the capacity, the number of people you could see in your practice. Or, you had to not reuse an exam room, because you had to disinfect it in between, and because you had to do that, you effectively reduced the number of patients you could see in a day, because you had restrictions placed on you. You can qualify on that, but you have to have an effect from that mandate. It can't just be, "I had to wear masks and therefore I qualify." It had to have some financial effect.

ROSS BRANNON

Some people and companies have called themselves “ERC specialists.” Are they all smoke and mirrors?

RANDY CRABTREE

There have been companies that have been doing specialty tax forever. We're 15 years into this, so you know we're going to be around for a while. I've seen companies pop up named “ERC something.” They got into business just to do this, but this doesn't mean they don't do it right - plenty of them do. The concern I have is people being offered credits that don't exist. People are saying, just because your state had mandates, you qualify, and that's the problem, you need to quantify that. I'm seeing way too many credits being promised. CPAs call me and say, "My client has just been contacted by this company that’s going to offer them an ERC. They’re telling them they have $5 million in credit. But I don't see that they qualify. What's your opinion?" Unfortunately, they’re usually right about that.

ROSS BRANNON

What are the consequences of doing it the wrong way?

RANDY CRABTREE

When you do a tax return wrong, you can be subject to penalties, and you're definitely subject to interest. Some of these people are just playing the audit game. "Hey, I'm only going to get 5% of these audited, so let's just apply for all of them." That’s just my opinion, but it’s what I'm seeing out there.

ROSS BRANNON

Once the statute of limitations is over, maybe even before, the audit police are going to come out crazy on this. This is a payroll tax. If a dental practice does $2 million in revenue and has half a million dollars in annual payroll, what credits are they looking at?

RANDY CRABTREE

It's more based on payroll per employee, not total payroll. Let's imagine a practice that has 10 full-time employees. For the year 2020, they qualify for the entire year, which actually began March 13^th, because that’s when this was defined. The maximum we can use for the credit is $10,000 per employee. That’s $100,000. The credit is 50% of that, so that’s a $50,000 credit for 2020. Typically, credits have to offset something else, like income tax, but this is actually a refund. No matter what you paid in, the government sends a $50,000 check.

In 2021, the credit is now a quarterly credit, so we get to do this math every quarter. If everybody makes $10,000 a quarter of qualified wages, there's now $100,000 available per quarter. It's also now a 70% credit, not 50%, so we have 70% of 100,000 each quarter, or $70,000. For most companies, only the first three quarters of 2021 were eligible for the credit, but if they qualify for all three at these numbers, that’s $210,000 for 2021 plus $50,000 for 2020. That’s a 10-person business. Let’s say it’s 100 people. All of a sudden, we're at $2.6 million in that same scenario, so that's how it grows pretty rapidly.

ROSS BRANNON

You start dealing in midsize companies that have 50, 60, 70 employees and this becomes an absolute racket for these fly-by-night ERC companies, and it's an absolute windfall for the businesses if they qualify.

RANDY CRABTREE

It's huge for the business. I don't want to be on the negative side, because even though I get calls daily about the ones that don’t qualify, there are many businesses that do qualify that haven't taken this yet. So, just because people are going to promise you credits that don't exist, that doesn't mean you shouldn’t investigate it. Every company should investigate this, because you never know if you're going to qualify.

ROSS BRANNON

Let's transition to cost segregation studies.

RANDY CRABTREE

For those of you who don't know, when you own a piece of real estate, you can depreciate that every year against your taxes. For commercial property, it’s 39 years. $1 million divided by 39 is not a huge deduction. Cost segregation accelerates the deductions. Typically, different portions are deducted at different levels, and you could have a dramatic tax reduction.

What do dentists need for this to make sense? If you're sitting in a building built in 1970, it's probably not near as good as a brand-new building today. Yes, this is a time issue. When did you put this building in service? When did you do the remodel? How much money did you put in? What numbers make sense? Usually, we'll tell a client, if you have $750,000 invested in this property, it's a point where it starts to make sense to look at improvements to your property.

Let's assume you have a dental office and during COVID you were shut down, so you decided to remodel the entire interior of your practice. Some new rules came in called the qualified improvement properties, that pretty much allow you to deduct almost all of that improvement in one year. So, if you do a million dollar remodel, instead of taking one-39th of that every year for 39 years, you're potentially going to be able to deduct close to a million dollars in one year.

ROSS BRANNON

Is that temporary or permanent?

RANDY CRABTREE

That is permanent right now. Not to get tax geeky on you, but there was a mistake when they wrote this in the tax cut jobs act. Its intent was to allow everybody to deduct these improvements in one year. By mistake, they didn't define the years that you could deduct this over, so it reverted back to 39 years. The CARES act actually fixed this. It said, "Okay, now that we have a pandemic, we're going to try to help our taxpayers a little bit.” It’s basically as permanent as tax code can be, because Congress can change that any time.

Even without the qualified improvement property, without this one-year bonus depreciation, especially with dental practices, you can find a lot of assets within that building that don't need to be depreciated over 39 years. Even just electrical and plumbing that are going into the exam rooms could potentially be depreciated at five or seven years. All the equipment inside is going to be depreciated faster: movable doors, redundant lighting, removable walls, none of that has to stay 39 years, so what cost segregation does is find all those components that can be depreciated faster, reallocates them to the five, seven or 15-year life, and then depreciates them over that shorter life. A lot of times they are bonus eligible too, so even when you say five, seven or 15 years, it may become one year right off.

Here's a real-life scenario. We just did this with a medical practice last year. After these qualified improvement changes came in, it was about $2.5 million of improvements. Before cost segregation, it was probably about a $63,000 a year right off. We rolled off $2.2 million in the first year. At 30% or 40%, that's a pretty decent savings there.

ROSS BRANNON

Talk about the financial investment to do a cost segregation.

RANDY CRABTREE

The issue is, we can't do these for free. We have engineers that analyze the building and determine where you can qualify and we're obviously going to get paid for that, but we want your return on the investment to be pretty significant. If our fees are $5,000, at a minimum we want you to have $50,000 in tax savings. That’s 10 times your cost, which is actually a low number. We usually see a mich higher return on investment. There's a point in time where it doesn't make sense, because the fees will be too great compared to the benefit, but usually you're going to get a nice return.

ROSS BRANNON

R&D tax credits sound awesome. It's free money, it just rains down from the sky, all you have to do is own the business, right? All right, seriously, what industries does this really work well for?

RANDY CRABTREE

Any industry can qualify, but the biggest users of this are manufacturing, software development, architecture, and engineering. Those are the top four. Similar to ERC, there are a lot of misconceptions.

A year ago, I was getting calls on this weekly, even daily. "Hey, my orthodontist was promised R&D tax credits, can you explain how they qualify?" I have a hard time responding. You have to have some technical aspect you’re working on to qualify, and you have to have uncertainty in what you're doing.

For example, maybe you’re designing a false tooth. You have to make it fit. You’re uncertain how you’re going to chisel this out. The IRS code directly says there is no R&D available if you are adapting an existing business component. You have a false tooth and you just have to adapt it. They specifically say, “adapt to each users specific requirements.” Buying new equipment and learning how to use it doesn't qualify. That's specifically called out, education is not a qualified activity.

The code says we need to develop a new, improved product or process or technique or formula or invention or software. That can happen in dentistry, just not to the level of giant credits. The credit's going to be about 10% of the expenses, so to get a $10,000 credit, that means you had to spend $100,000 doing research and development during the year. That’s not impossible in dentistry, because it could include salaries and wages, but it means you have to spend a significant amount. If you make $400,000 a year, it means you’re spending 25% of it doing things you're completely uncertain about. You have no idea if it’s going to work, and therefore, you don't know if you're going to get paid on this type of stuff.

ROSS BRANNON

Unless you're inventing a new device or technique, it seems like it's somewhat of a long shot.

RANDY CRABTREE

It is a long shot. The technical uncertainties are there. Using some science is definitely there. It's the developing that new improved business component that I don't see happening that often, especially in just a general practice. If someone has a huge practice, and they're working on constantly developing new procedures or processes or even materials of new ways to adhere a tooth, there's something there. It's just few and far between that there are significant expenses in a dental practice to get a credit.

ROSS BRANNON

Ultimately, if you’re in the dental space and you’re being promised R&D tax credits, you need to be very wary.

RANDY CRABTREE

In my opinion, there's going to be an audit rush on that industry. When the IRS sees a couple of these and does an audit and finds, "Okay, there are credits here that we can attack," look out. If you do R&D right, it's a great benefit, but it's also on the IRS's dirty dozen list because they know there's fraud going on in there. They know people are promising credits that don't exist.

In fact, new IRS regulations on the R&D tax credit took effect this year. Basically, you now have to identify every single business component that your credit was based on. Every new, improved product, process and technique. You have to identify every individual in the company that was working on each individual business component, what research activity they were doing on that individual business component, and what they were trying to discover or what uncertainty they were trying to overcome.

ROSS BRANNON

No one's going to keep those types of records.

RANDY CRABTREE

This is what we've always done from the start, but the client doesn't. We find it, we put it together. We've never had to submit it before, but we've always had it. In fact, I'm very proud of the fact that we started with this level of documentation when we started in business 15 years ago, because we knew the IRS was going to require this. We didn't expect it on each tax return, but going forward, that's what it looks like it's going to be. My impression is that for them, this is a test year. If this test year goes well for them, I have a feeling that's going to be on all tax returns.

ROSS BRANNON

Some people believe there is a higher probability of audit if you e-file versus paper file, what are your thoughts on that?

RANDY CRABTREE

I don't think that’s the case. I have never seen any data on that, but I don't see how that would even be possible. In fact, the paper ones are the ones that IRS is looking at closer, because they have a huge backlog on paper-filed returns right now.

ROSS BRANNON

What else does Tri-Merit do?

RANDY CRABTREE

We also work with the work opportunity tax credit. That is normally a company that is going to have a lot of turnover, a lot of new hires a year. If someone's hiring 50 new employees a year, there's a credit potential for a portion of those hires, if they meet certain demographic or geographic requirements. Fast food restaurants can use that, or even a manufacturing setting. I'm guessing it would not be used as much in the dental setting, but it could be.

In addition, we work with two incentives that are related to real estate. 45L and 179D are based on making property energy efficient. The users of that are commercial building holders. On 179D, if you own the property and we could show that an improvement you did made that energy efficient, it's like cost segregation, accelerated depreciation.

ROSS BRANNON

Many dentists own their building. Are we talking about something like putting in energy efficient windows, or solar panels, or is there more to it?

RANDY CRABTREE

Windows, a new HVAC system, new roofing, new insulation, lighting are all covered. You want a larger building for this, because it's based on the square footage. 10,000 square feet is doable, 20,000 square feet and above makes more sense to look at.

ROSS BRANNON

You’ve shared a lot of information that dentists can use. Thank you.