Why R&D Tax Credits Make Sense To Me
 

The first time I realized the importance of tax write-offs was in business school at MIT.  I took student loans to pay for my MBA and those loans began to accrue interest before graduation.  What I learned, that most people don’t know, is that you can write off most educational expenses.  I was lucky enough to have a mother who had been an IRS field agent and she taught me this technique to reduce my taxable income. During a transfer pricing class at MIT, the adjunct professor teaching the class told me and the other students that you could not write off business school expenses. The professor did not relent even after I brought the IRS statute to our next class!  

By writing off my business school expenses, I saved myself over $15,000 which is a substantial amount for someone in their mid-twenties. This is an excellent example of how nuanced the tax code is, and how little the general public really knows about it.  That lack of knowledge often results in unnecessarily lost money.  I ran an Internet start-up while I was at MIT, so I understand how businesses (especially start-ups) struggle with cashflow and how vital every penny is for a business to grow and thrive.

I stumbled onto real estate accidentally not long after finishing grad school.  My mom encouraged me to buy a home rather than rent so I could make my money work for me rather than someone else.  She shared her knowledge of the tax benefits that property owners enjoy. I had no savings, but made an offer to buy one of the few places I could afford–a small tenant-occupied condo. When my offer was accepted, I had to use a credit card cash advance to come up with the down payment and closing costs.

While I waited for my tenant’s lease to expire so I could move in, I noticed that similar apartments in the neighborhood were renting for significantly more money per month than my tenant had been paying. If I became a landlord and increased my tenant’s rent to the average rent in the area, his new monthly rent payment would cover my mortgage payment, condo fees and leave me with a slight profit. This is the exact moment when real estate became my passion and within a few years I became a full-time real estate investor. Like many real estate investors, I struggled with cash flow as I was building my property portfolio.  One day I met a man named Albert Aiello at a real estate investor association meeting in Philadelphia.  Albert had an accounting background and he introduced me to the concept of ‘componentizing’, which is reclassifying components of a property as personal property.  Personal property depreciates over a shorter period than real property which allows property owners to save money on taxes and reallocate or reinvest that money.  I have used these accelerated depreciation strategies for over 20 years as a real estate investor.

A friend of mine started a software company a few years ago and he, like most business owners, struggles with cashflow.  He came to me because he’d heard my tax saving stories and I did some research and discovered that his software company’s technical activities qualify for a permanent federal business credit per IRC Sec. 41 and may allow him to offset some of his state business tax liability as well.

The R&D tax credit, despite being perhaps the most powerful tax incentive, is also one of the most underutilized.  Most businesses aren’t aware of its existence, and if they are, they usually assume it is only available to laboratories.  This is why awareness is so important because you don’t know what you don’t know.  That lack of knowledge needlessly costs companies thousands sometimes millions of dollars.  It doesn’t have to be that way.  My goal is to educate everyone who runs a business about this incredible tax incentive.