IRS Pays You Money! All about Tax Credits

TRANSCRIPT

Episode 14 - Randy Crabtree

Mike Pine: [00:00:00] Welcome to today's Hidden Money podcast. Kevin and I are super excited to introduce to y'all Randy Crabtree. Today's podcast is focused on the hidden money in tax credits. Tax credits is something that we've alluded to in previous podcasts, but tax credits, they're a beautiful thing and we're going to talk a lot about those.

Randy and this firm at Tri-Merit. They truly just help people get checks from the IRS on a regular basis, and it's a beautiful, beautiful, beautiful thing. So Randy, thank you so much for joining us and thank you for helping educate our listeners and Kevin and I on tax credits. Thank you for being here, man!

Randy Crabtree: Hey, Mike, Kevin, thank you for having me. Looking forward to the conversation today. I get very excited about credits and incentives, so hopefully we have a lot of fun.

Mike Pine: How can we not have fun? We're talking about tax credits. It doesn't get better than that.

Randy Crabtree: It doesn't.

Kevin Schneider: Credits? Oh, my goodness! Yeah, the IRS [00:01:00] actually giving you money. So, this is definitely a very unique topic, and Randy, if you could, just tell us a little bit about your backstory, how you got into the business, and give us the lowdown of credits, deductions, the differences, and just some foundational education on what it is you do.

Randy Crabtree: Yeah, sure. So, I was born in 1962. Oh wait, maybe not that far back..

Kevin Schneider: We have a time constraint, Randy, but you want to start there...

Randy Crabtree: No. So, I am a CPA. I was a managing partner of a firm in the Chicago suburbs for many years. About 16 years ago, almost 17 years ago now, decided, it was time to try something different. I love tax; I got to stay in tax, but start a new firm that was just tax credits and incentives and we support tax preparers and their clients by bringing tax saving opportunities, (you've all said this already), but tax saving opportunities through probably about eight [00:02:00] different offerings at this point, and have been in business for almost 16 years.

It's been a fun run and I get to talk to people like you. So, what can go wrong?

Kevin Schneider: Yeah, nothing can go wrong when three CPAs get together. Nothing.

Randy Crabtree: Nothing.

Kevin Schneider: Yeah. So, can you explain the difference to our audience who may not understand the difference, maybe, between a credit and a deduction? So, what's so special about credits?

Randy Crabtree: Yeah, so both are important. Deductions everybody knows in general - "Hey, I pay my rent." - it's a deduction. A payroll - it's a deduction. There's some really unique deductions out there as well, but let's define the difference between the two. A tax credit is a analysis of certain expenditures you've made, and what we do is we turn expenditures into a credit.

So, we spent a $100,000 on something, that $100,000 we, maybe, can convert to [00:03:00] a $10,000 credit. We don't lose our deduction; we just get an additional thing, and a tax credit is a dollar for dollar savings, reduction of your income tax bill. So, if we calculate a $100,000 tax credit, and the company or the individual owes, let's say, $300,000 in taxes (we're going to pick a big number in taxes.)

what you do with the tax credit is you hand them your $200,000 cheque to pay your taxes, and you also hand them your a $100,000 credit and now you just paid your $300,000 tax bill by only going out of pocket $200,000. So, it's a savings of the income tax. A deduction is a great savings, but at a lower level. If I have a $100,000 deduction expenditure, and let's say I'm a corporate taxpayer, (which corporate tax returns... our now... tax rate right now is 21%), that $100,000 tax deduction is going to save me $21,000. [00:04:00] So, $100,000 credit's going to save me $100,000, $100,000 deduction's going to save me whatever tax bracket I'm in X the $100,000 and that's scenario 21,000. So, they're both very valuable.

A credit is just a lot more sexy in the long run because that's cash in your pocket.

Mike Pine: Absolutely. That's hidden money right there - reducing taxes dollar for dollar. So, we like to reduce taxes in any way we can, as long as it's legal.

but if we could reduce some more, it's better. Legal and more.

So, Randy, what are some of the bigger 'Aha!'s you see with new clients or CPAs you're just starting a relationship with, and they weren't aware of some awesome tax credits or how big and valuable they could be?

Randy Crabtree: We started the firm as an R&D tax credit firm. That was our first offering, and we've added a lot, but R&D tax credits are still under-utilized quite a bit, and anytime anybody's... and R&D [00:05:00] just sounds so out there like, 'Oh man! I've got to be this big pharmaceutical company' or 'I'm Boeing!' or 'I'm General Motors!' or something that is, y'know, putting all this time and effort into designing new products or formulations.. R&D tax credit is a really straightforward credit, that is, if you're spending time and effort figuring out a better way to do something from a technical standpoint.

So, it doesn't have to be 'new to the world' type stuff; doesn't have to be a time machine, doesn't have to be... It can be - you're a manufacturer and you're manufacturing a generic widget, and you want to figure out how to make this widget faster, cheaper, more efficient, less operations.. just want to be better at manufacturing this widget you're already doing - That is R&D in the IRS's eyes, and that can turn into a credit, or really simply if anybody's using technology at all, let's say from a software standpoint, and they're having to create [00:06:00] modules where, let's say you have an accounting system and a CRM system and an inventory system or whatever.. and you want to make all these communicate (you're going to develop software to make these modules communicate)..

that's R&D, and then we get to quantify that and see if there's enough there for a credit. So, R&D is... a lot of the biggest users are manufacturers and software developers, maybe architects and engineers as well, but you could really find an R&D tax credit anywhere, and just as a side story, I'm a part owner of a craft beer bar and liquor store in Chicago, and we did software development to create an online store where people can go order our products have them shipped or even pick them up, from the store - that software development to create that online store was R&D, and I was able to take an R&D tax credit for a bar (which you probably would never think that that's an opportunity), but that's why I'm saying they're kind of hidden. They're not everywhere, [00:07:00] but you can find them at places you don't expect to find them.

Mike Pine: I would disagree. I would think a lot of inspiration and research and development occurs in bars, especially in the CPA-realm.

I

Randy Crabtree: know I've done some really good work there.

Mike Pine: So,

before..

Kevin Schneider: Just quantifying it.

Mike Pine: Right! That's the hard part. But before we move on from R&D credits (and I know this is just the basics), but some of the things I've been surprised with is the kind of industries that truly can get huge research and development credits. It doesn't have to be technological, right?

It doesn't have to involve computer chips, it doesn't have to involve those types of things... What about contractors?

Randy Crabtree: You have to be careful with contractors. They definitely can - especially if they have like a design-build engineering staff on, and they're designing some new energy efficiency within a building, or they're designing some new footings in a, y'know area where may be earthquakes, or they're building [00:08:00] on sand rather than on clay or... so, they're designing something new - for sure! Your standard developer or construction company that's working on row homes that they've done over and over and over... probably not a lot of uniqueness there.

And the reason I hesitate a little, is IRS has looked at contractors and they're not thrilled with them. That being said, if you can show that you're doing something from an engineering standpoint that's a little different, that's being better - you can definitely... you want to look at that from a contractor.

So yes, we have taken them. I just caution - not every contractor will have an R&D tax credit but the lot more will have it than realize they do have it.

Mike Pine: So, with the disclaimer that not everyone in these industries might be eligible for R&D credit, what are some other weird, off the wall industries that have enjoyed the R&D credit that you've seen, that most people wouldn't recognize as, is normal?

Randy Crabtree: So, I'm going to sound like I have a theme here.. I'm going to go back to [00:09:00] beer again.. but breweries... Breweries - we've done a lot of credits for micro-breweries in general. If you're talking the Miller coolers in the Anheuser-Busch, they're going to have a nice big credit, but your local, maybe $2 million craft brewery that is just a tap-room type place - if they're doing one-offs, seasonal beers, test batches - all of that can involve a processive experimentation. They know that it's going to make a beer - is it going to make the beer that they expect it to make? And are they going to be able to sell this beer? And is it going to be servable? And, they're constantly tweaking those recipes.

Formulation is a qualified activity, called out in the R&D tax credit. So Craft breweries has been one where we've found that, just retail in general, like I said, with the bar, with software development... we've done insurance companies... again, if it's an area where you don't think [00:10:00] there's a potential for credit, it probably involves software development at some aspect.

Even a CPA firm, we were able to calculate a credit for; not that common, but we were able to because of software development.

Kevin Schneider: That's interesting! And what about restaurants? We have several clients in the restaurant industry. You mentioned craft breweries - so, let's say they want to develop a new menu item - I know that may be very low credit, but I guess, if they scale that R&D to several locations, it could maybe pile onto a bigger credit.

Have you seen it in the restaurant industry?

Randy Crabtree: Yeah, I actually have done a presentation for the National Restaurant Association on credits and incentives, and we touched on R&D. Now, the bigger operators for sure, if they have a test kitchen where, like you said, Kevin, they're working on new products, that is definitely going to involve some kind of R&D, or as you get bigger and you are going to ship product around the country, they try to figure out where is to make it [00:11:00] shelf-stable, or figure out how ingredients are going to keep it fresh, going from Portland to Sarasota, Florida, those types of things,

and so, packaging in general, for restaurants and food manufacturers, can be big. So yeah, restaurants in general, you can definitely see them. It's usually going to be at the larger operator level where you're going to see a significant credit to make sense to go after.

Kevin Schneider: Pivoting from the R&D credit, which I think can cover just a wide array of industries.. so, if anyone's listening and you... if any of these are kind of bringing a light bulb on and just saying, 'Oh! I'm developing something new here. I'm improving this process here.' - that should trigger a conversation with Randy and his team to just kick the tires and see what's there.

The worst that could happen is, 'No.. yeah, we can't do it', so, you might as well just try to see and harvest these credits. And outside of the R&D credit, there was another big one, a relatively new one, the employee retention credit or the ERC [00:12:00] credit, so, I'm sure when that came into effect, y'all are running around with your hair on fire,

but give us... this is a huge one that we've seen for our clients over the past few years, especially from COVID and all this laying off people and... Tell us a little bit of the backstory of the ERC, the power of it, how to qualify, and this would really apply to all of our business owners, but can you speak to the ERC for a little bit?

Randy Crabtree: I can. I'll try not to get on my soapbox too much on this. So, the ERC, we jumped into it pretty early, I mean, REALLY early, right after.. It was originally defined in 2020 and people couldn't take it in 2020 because you took PPP - you couldn't do both. That was the rules for about nine months, and then, all of a sudden, they changed the rules and said, 'Well, if you took a PPP, we're going to forget about that. You can still be eligible for the employee retention credit, ERC.' and so, as soon as that change happened, within a week, I was just obsessed with this credit and I was digging [00:13:00] in, left and right, and finding out everything, and within, two months, we had a webinar on it and just became... I'm going to sound like I have an ego, but we seem to became the experts in the industry on this. Now, it is a great opportunity for any business owner. Every business owner needs to look at this. Not every business owner qualifies, and based on the marketing you hear out right now, it sounds like everybody qualifies and that's not the case.

So, just look at it for sure. Analyze your... what you do, and the analyzation is pretty easy - did I have a significant drop in revenue in any quarter in 2020 compared to 2019, which is 50%? Or did I have any drop in revenue in any quarter in 2021 compared to 2019, and that drop is 20% compared to 2019?

That's a safe harbor rule; you have that, you qualify. It doesn't matter, you know, why that drop in revenue is there; you qualify for this credit. And [00:14:00] then numbers could be significant. The second way to qualify is where the truth gets stretched - I guess that's a way to say it.

Mike Pine: Mm-hmm.

Randy Crabtree: You have to be impacted by a government mandate.

You have to have something that restricted your ability to continue to do business as normal, and that has to have a significant impact. And so, you hear things out there right now like, 'Oh! you had supply chain issues, you qualify.' I'll tell you this, supply chain issues are extremely difficult to qualify under, but everybody is telling you in this marketing right now, and this is my opinion - you can get mad at me. Don't get mad at Kevin and Mike, but you can get mad at me.. that they're saying.. the first question they ask, 'Well, were you affected by supply chain issues?' And everybody's going to say 'Yes!' because everybody was.

Kevin Schneider: Chip shortage..

Randy Crabtree: Yeah, exactly. And you're hearing that,

but that shortage was not based on a government mandate. It was based on [00:15:00] supply and demand. It was based on people not staying in their jobs. It was people going to take unemployment. It was based on manufacturers throttling their production at the beginning of the pandemic because they didn't know what was going to happen, and so, we were all affected. People will point to the ports, 'Oh, ports were closed.' They were not closed. Ports were not closed, and that does not qualify you. So, if someone's promising you you qualify based on a supply chain restriction, be very careful, and the reason I want to stress this (and I don't want to sound negative), but the reason I want to stress this, is IRS is going to come calling.

They are putting tons of resources into auditing ERC because they know there's a ton of ERCs that are being claimed being pushed by upper-side providers that are not legitimate, and if you qualify for this, it can be a nice, really influx of cash, and so that's why everybody has to look at it, but do it with a cautious eye because this is a [00:16:00] very, very easy audit.

If I was an auditor, I would immediately know who I need to go look at for an ERC. If I'm a manufacturer, in some state that we know wasn't shut down at all (and there was no manufacturer shut down around the country for the most part), but if you're a manufacturer, let's say, in Florida, and you took a credit for six quarters, me as an auditor, I'm immediately going there because I know that if you don't have the drop in revenue, you're not going to qualify,

and so, that's why you got to be careful. Now, let's go back positive - if you do qualify.. again, numbers are tremendous and you have to look at this, but this is true, it could be up to $26,000 per employee. Now, we don't get a lot of clients that get to that level, but when you look at that, you get 10 employees.

260,000 is your potential - that's why you need to look at this. All right. I'm going to try not to rant too much on this. You guys want to ask me anything else on that [00:17:00] specifically?

Mike Pine: Let me ask one more specific on the ERC before moving on. So, I've heard clients... when I brought it up with them... they said, 'But we actually grew during the pandemic, but maybe they didn't grow nearly as fast as they were growing, or could have grown. Can you still grow in revenue and qualify for the ERC?

Randy Crabtree: You can grow. Now, you can't qualify based on potential growth. You can't look and say, 'Hey, we were going to do, 1 X _ revenue this year, and we only did 1.1 X revenue because of the pandemic - it can't be on that, but what it can be, you can show overall growth (and this is a secondary rule, this government mandate),

if I can show that I have a segment of my business, and I'm going to go back to... we're sticking with the beer theme here, apparently, but I'm going to go back to the beer theme..

Kevin Schneider: It's okay.

Randy Crabtree: .. yeah! my bar/liquor stores' in Chicago during the pandemic. Even though in Chicago we were closed or under restrictions from March 17th, [00:18:00] 2020 through June 11th, 2021, capacity restrictions at the lowest, completely closed at the highest-

overall, our bar/liquor stores revenue went through the roof, because people were buying beer to take home and drink; we're doing a lot of... bunch of virtual beer tasting, so our revenue went up, but I was able to show that a segment of my business - bar - was restricted by a government mandate for almost 15 months, and the rule is that segment has to be more than 10% of my 2019 revenue for me to qualify under government restriction - my bar was 40% of the overall revenue. My bar was under restrictions for 15 months; the overall business bar/liquor store qualified for the 15 months because I had more than a nominal impact to my business with the bar being closed. So yes, overall revenue up, still qualified for the employee retention credit.

Mike Pine: Wow. Hidden money right there. So I'm going to do a [00:19:00] small rant on this, and then I'll let Kevin talk, but some people I've heard say, 'Well, it's just not fair! I don't feel right taking money from the government...' or, 'We're still... we did better than a lot of people.. made it through.. so, why should I take this credit?'

The fact is, the reason we have tax credits, the reason we have incentives and deductions in our tax code is - we as a society, have come together and agree we need to incentivize certain areas in our economy to grow our economy, to be.. 'tad-better' the entire country and everyone in it. The reason these incentives are there is so we can do our patriotic duty as business owners, as consumers, and help grow our economy, make our country more safe and more secure.

So, If the incentives are there and you choose not to use it because you don't feel comfortable about it, that's completely up to you and that's okay.. but, don't think that it's unfair to try to utilize the incentives to grow our economy. Those are good things. That's our duty, in my opinion.

Randy Crabtree: Yep! I'm going to use your rant; I like it.. and [00:20:00] the employee retention credit was there because you continued to pay people during the pandemic. It was there for you whether you were successful through that or not,

it is a legitimate credit that if you qualify for, there's no reason to not do it.

Mike! That was awesome!

Kevin Schneider: And everyone's going to be impacted by the inflation. You got to be thinking about your business in the future - you might as well. All these impacts of credits and COVID and all this, it kind of catches upto the whole economy as a whole. You're going to be feeling the impact of inflation, so you might as well harvest some of the tax credits and the cash flow for your business, so that you can withstand future storms.

back to the ERC, right, Randy? Can they still file for the ERC today even for tax year 2020 and 2021?

Randy Crabtree: Yeah, that's a good question because there's a misinformation out on that, and in reality, for the whole year of 2020, the entire year, all [00:21:00] four quarters that you could potentially qualify, you have until April... whatever the tax due date is next year in 2024.. April 15th... but I think it's not.. 16th, 17th, whatever the date is next year, you have... but we'll go with April 15th. You have April 15th of 2024 before you lose the ability to take the 2020 credit and you have April 15th of 2025, before you have the... you lose the ability to take all the 2021 credit, so lots of time still.

Mike Pine: Awesome. So, a lot of our listeners, I think, don't own businesses. They're high earners in W2 world, and these tax credits we've talked about so far, just don't seem applicable to them. Tax credits can.. (even if you don't have any active income or material participation), tax credits can offset your personal income tax liability from your W2.

Can we talk about some of those that might be available to a non-business owner?

Randy Crabtree: Yeah, so [00:22:00] this is not my level of expertise on most of this stuff, but the Inflation Reduction Act, which came out last year, thrown out tax code, this was what?,, I think, August of 2022 maybe?.. there was a lot of incentives in there around energy efficiency, and so, at the individual level, it increased the amount of credit available for electric vehicles or alternative fuel vehicles available, and I think the credit can be up to 500 now this year, and you guys are not in your head, so, I think I'm right on that.

In addition, for homeowners, there was incentives for solar power, wind power, making your home more energy efficient - that came out, so, these things are out there on the individual level - those are the most... the ones I'm most informed on, because there was a lot of business incentives in that same act that we are offering to our business clients as well, and I have done some education on the personal end, but those are the two main things that I discussed there.[00:23:00]

Mike Pine: So, without getting into detail in any specifics, I went to.. (I think it was an internal revenue code... could have been the regs.. I think it was a code), and tried to count up.

I spent, like, two hours one afternoon trying to count up all those little sub-paragraphs to figure out how many credits there are actually listed in there, and I kept getting interrupted, and there were so many, I was never able to get a full count... but I think there's over a hundred different tax credits specifically stated in the tax law that people could be eligible for, and most people don't know them, and when I was reading them, I was firing off messages to Kevin saying, 'Hey, we need to look at this for our tax code.'

We hired someone... a military spouse!.. you know, there's so many things out there.

Randy Crabtree: Yeah, we have.. I have a tax preparer that.. I'm on the Intuit Tax Council and she's on there with me, and she has actually put together a list about tax advisory in general (a lot of accredited incentives), and I think her list is up to 400 plus right now that she's got listed there. So yeah, there's plenty of them out there.

Mike Pine: So.. if we're not going to cover all those today, and probably over the next [00:24:00] couple of years, but if we have not mentioned a tax credit that you think you might be eligible for, I would challenge you to discuss it with your tax preparer, your tax advisor or a tax credit specialist, because... you'd be surprised how many people are eligible for credits that they never heard of.

Kevin Schneider: And there's differences in credits as well. So, what Randy was saying on the personal credits on solar and on alternative vehicles, or EV credits. Those are non-refundable credits, meaning, you have to have a tax liability in order to take the credit, and there's income limitations. So, if you make too much money, you're going to to be disqualified and all this kind of stuff.

So, there are some hurdles on the personal side as well, that you need to... just don't go out and buy a Tesla and think everything's cool. You need to look at the details. They're going to sell you on the credit, but they're not your tax advisor. So, make sure you're working with your CPA and say, 'Hey, I'm thinking about purchasing this vehicle. Do I qualify given my income levels and my tax liability?'

Now, the ERC credit is [00:25:00] different, because the ERC credit is basically refunding you your payroll tax. Right, Randy? Is that...?

Randy Crabtree: Yeah... Pretty close? Yes, it's considered a.. it is a payroll tax credit, but it is a refundable credit, so you can actually get back more than you paid in taxes, so it's not limited to what you paid in taxes.

Kevin Schneider: Yeah.

Yeah,

Mike Pine: I love refundable credits.

Kevin Schneider: Refundable credits, college credits. If you're a college student listening to this, there's definite college credits out there. Even up there, is... even a small portion of the American Opportunity Credit, I think the AOC, that is partially refundable - there's partially non-refundable, partially refundable.

So they make.. they provide these credits to you, but they also make it very hard to understand. So that's where these... the three of us can come in and really guide you through these nuances of details, but there's so many credits out there.

Mike Pine: So, let's rewind back to earlier in your career, 17 years ago or so, when you founded [00:26:00] Tri-Merit. What was it, what happened to where you realized tax credits are just a powerful, beautiful thing? Like... what was the evolution in your mind or your career, your understanding?

Randy Crabtree: The first time I talked to somebody and said, "Hey, we're going to help you get $200,000 refund, rather than, 'You owe $200,000 in taxes." .. just made it much easier discussion point for me. So, that was probably it, and I was a 'generalist' before that, working at all different types of businesses, and for me, the fact that I could dig into a small part of the tax code and become so knowledgeable in that part that, you know, people would look to me as an expert, but I could go out and talk about it;

I can educate on it, which is a passion for me (educating, in general) - it just caught me, and I wasn't looking to start a tax credit and incentive business. I had merged my practice in with somebody else, wasn't sure what I was going to do next, took about six months off, [00:27:00] realized that I wasn't independently wealthy and needed to work, and credits came calling to me. So, it was just almost like a.... it was just meant to be. But as soon as I started digging into these opportunities and how much... how much they were not understood, you know... people, when we started 17 years ago, people were like, 'Whoa, whoa, whoa! R&D tax credits??

No, that sounds too good to be true. We can't do that.' and so that's, sometimes, the mindset people have. They're not... there are, people will push the boundaries - be careful with that, but man, if you file the tax law, the opportunities are so great. I smile every day just because it's so much fun to see us infusing... (not us, we're supporting the tax preparer for the most part), but give us, giving them information that they're saving their clients money.

It's just a passion that is fun. I don't work a day in my life because of that.. It feels like..

Kevin Schneider: Well, [00:28:00] Randy, before we close up here, is there anything you want to make sure we cover?

Randy Crabtree: Yeah, I

Kevin Schneider: Something

Randy Crabtree: you said, and Mike said, there's plenty of credits and incentives out there. There's a lot that just came out of the Inflation Reduction Act with energy incentives for commercial buildings, residential buildings, for developers that are just really important. My advice is - follow Mike and Kevin, and you're going to get well-educated and you're going to hear about all this hidden money that can help you personally and your business.

Kevin Schneider: Well, Randy, thank you so much for joining us today. You're an entertaining personality; you got a voice for radio, and you had me on the edge of my seat, but I'm also a CPA who nerds out on some of this stuff too. But if anyone wants to get in touch with Randy, go to tri-merit.com or check them out at The Unique CPA podcast on Google or Apple Podcast.

Randy, any final closing thoughts and nuggets of wisdom for us?

Randy Crabtree: Wisdom! Now you're putting pressure on me.[00:29:00] Again, I appreciate being here. I love talking about ways that taxpayers can save money, and what you guys do is great, and tax credits and incentives are my passion, and so, if anybody has any questions, do it like Kevin said - go look at our website and you can find information about me there that.. to reach out and see if we can talk.

Mike Pine: Thank you very much, Randy.

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