Best Practices For Billing and Collections

16 Nov

Collections should not be thought of as something that only happens on the back end of the billing process. It should start by properly conveying your policies and expectations in advance to both patients and staff. Here are some tips you can implement in your practice to improve your patient collections at little or no cost.

Office Visits – Front Desk Responsibilities

1) Patients need to understand and acknowledge in writing that they are personally responsible for any charges not covered by insurance. They should be required to sign your financial policy at every visit, not just the first visit in order to remind them of their obligations. This should reduce the number of patients who have the attitude that their insurance made a mistake and it’s therefore not their problem.

2) Of course you always want to collect co-pays at the time of visit, but what does your staff do when a patient says they didn’t bring any form of payment? Turning the patient away is costly both in terms of a wasted appointment slot as well as the potential loss of that patient’s future revenue. Instead, train your staff to introduce themselves by first name to make a connection and then hand the patient a pre-addressed envelope to remit funds when they get home. For example, “My name is Karen and I’ve written my name on this envelope along with our address. As soon as you get home today, please put your check in this envelope and mail it back to my attention as I will be keeping an eye out for it.”

What to include and not include on your billing statements

3) Is your phone # on your bills? This may seem obvious, but some bills do not show a phone # and that delays payment by making it more difficult for a patient to call if they want to set up a payment plan or ask a question about their bill. Now they have to take the time to look up your phone # and they may put that off until later.

4) Is there a due date on your bill or do you just show the date the bill was generated? Many bills do not show a specific due date which implies that payment is due whenever the patient feels like paying.

5) Are penalties specified for violating terms? Is there any consequence to paying late? Why not include a late charge in order to give your bill priority over other bills which don’t incur penalties? A flat late fee is much easier to manage than a percentage of balance.

6) Do you show aging boxes on your statements? The use of aging boxes on statements which show 30, 60, 90, etc balances conveys exactly the opposite of what you want. It shows that you expect your patients’ balances to age and you’ve even made a provision for that right on your statements when you really want to convey an expectation of getting paid as soon as the bill is received. Aging boxes also train patients to only pay the portion of the balance that is the oldest rather than paying off the balance in full.

7) The use of colored paper for late reminders is helpful in getting patients’ attention as they stand out among the pile of white paper in a patient’s stack of bills.

Establishing Internal Collections Policies

8) Just like other aspects of your employee handbook, your collections policies should be in writing. This makes it easier when training new employees and demonstrates the importance placed on collections. Include performance benchmarks ($ collected or # calls made during a specific time period or establish a maximum % of AR over 60 days). Review and update your collections policy as needed while keeping it clear and simple. Determine how returned mail should be handled.

9) Define “past-due” and include the next steps for handling a past-due account. How many written contacts will be sent? How many phone calls will be made? When will this follow up occur and at what intervals? Evidence shows it is best to vary the form of follow up at regular intervals of 7-14 days.

A recommended process would be 2 mailed bills + 1 phone call + 1 warning letter and this should all occur within 90 days or less. If a patient has been asked to pay 4x in 90 days and you’ve gotten no response, they’re sending you a message and need to be in the hands of a third party agency because continued first party efforts at that point will not generate a good ROI.

Making Collections calls

10) Be careful when leaving voice messages so as not to “advertise” a debt owed to your practice when your message might be heard by others in the household.  Ensure that your staff is fully compliant with all Federal, State and Local Regulations regarding first party collections and telephone calls, or utilize a service to make these calls for you who is compliant.

11) Try to make a connection with the debtor by speaking clearly and enthusiastically. And stay firm by using phrases such as “It’s my policy that….”

12) Make the call with the mental attitude that you will get payment in full on one call, not that you’re going through a list and making calls just to get it over with. Your mental attitude affects what comes out of your mouth, so expect success!

13) If a patient says they don’t have enough money to pay their balance, ask, “How much are you short?” rather than, “How much can you pay?” This small change in language conveys an expectation that the majority of the funds are available and that you’ll be working out a payment plan for the smaller remaining balance.

14) Never make “idle threats”. It is a violation of collections laws to threaten to send a patient to collections unless using a collection agency is a normal practice for you.

15) Train your collector to take good notes so that if they have subsequent conversations with the patient, you can refer back to their notes and if that staff member leaves, it will be a good starting point for someone else to pick up their work.

Avoid Costly Violations

Use only an employee or a licensed 3rd party agency/attorney to collect for you, never an unlicensed 3rd party.  Only use 3rd parties who are committed to full compliance to all Federal, State and Local regulations regarding both first and third party collections.  Only use a 3rd party who provides you with a “hold harmless”” agreement as a matter of course.

Do not share information about a balance due with parties other than the debtor or their spouse. For example, if you call the debtor’s office and someone else answers the phone, do not leave a message about a balance due, only a message to return your call. 



Prior to discussing any patient A/R information with anyone outside your practice, make sure that you have a HIPAA Business Associate Agreement signed and on file with the individual or agency.

Collection Myths

All of these items are things to consider when establishing your practice’s individual collection policy, but they are not legal requirements.

  • There is no law that says you have to warn a patient that you’re going to send them to collections before you do.
  • There is no law that says you have to wait a certain number of days before sending a patient to collections.
  • There is no law that says that if a patient is paying $5/month that you can’t send them to collections.

Contact Me Directly

Please subscribe to this blog , or contact me with any questions.

Call me directly at 770-224-8504 or 888-780-1333
Schedule a phone call with me by clicking here
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Email me at David.wiener@cashflowstrategies.us

10.5 Ways To Improve Your Collections

6 Nov

It’s a problem faced by virtually every business – how to deal with customers who pay their bills late, or not at all. While customers expect prompt and professional service, they don’t always meet the same standard when it comes to paying their bills.

Not like this…

Accounts not paid within terms can severely impact the cash flow of a business. A clearly defined and carefully communicated, yet diplomatic payment policy may help avoid difficult collection situations.

1. Have a Defined Credit Collection Policy:

One of the major causes of an overdue receivable is that the business

has not defined to its customers and staff when accounts are to be paid. If customers are not educated that accounts are to be paid on time – then chances are they’ll pay late or sometimes not at all. Make sure that your customer’s terms of payment are clearly stated in writing to each customer at the time of sale or services rendered.

2. Invoice Promptly and Bill Regularly:

If you don’t have a systematic invoicing and billing system – get one.

Many times the customer hasn’t paid simply because he hasn’t been billed or reminded to pay in a timely manner. This situation regularly occurs in smaller or newer businesses where there isn’t enough staff to invoice and bill on a timely basis.

3. Use “Address Correction Requested”:

One of the most difficult collection problems is tracking down a customer who has “skipped”. All businesses should be aware of a special service offered by the U.S. Post Office. Any statement or correspondence sent out from a practice should have the words “Address Service Requested” printed or stamped on the envelope. When a statement is sent to a customer who has moved without informing you of his/her new address and the words “Address Service Requested” appeared on the envelope, the Post Office will research this information. If the Post Office can locate a change of address on that customer, they will send you form #3547 with the customer’s correct address.

4. Contact Overdue Accounts More Frequently:

No law says you can contact a customer only once a month. The old adage, “A squeaky door gets oiled” has a great deal of merit when it comes to collecting past due accounts. It’s an excellent idea to contact late payers every 10 – 14 days. Doing so will enable you to diplomatically remind the customer of your terms of payment.

5. Develop a Systematic Plan to Follow up Past Due Accounts:

Determine ahead of time what action you will take and at what time frame you will take it. For example, at 15 days past due make a phone call. Your staff can start with a “courtesy” call to make sure that the statement was received. At 30 days past due send another statement with the message, “This is 30 days past due, please remit.” Having this plan and adhering to it makes both you and your customers aware of the fact you expect to be paid.

6. Use Your Aging Sheet – Not Your “Feelings”:

Many businesses (or well-meaning people on their staff) have let an account age beyond the point of ever being collected because he or she “felt” the customer would eventually pay. While there certainly are a few isolated cases of unusual customer situations, the truth is that if you are not being paid, someone else is. So stick to your systematic plan of follow up. You will soon know who intends to really pay and who does not. You can then take appropriate measures once you know where you stand.

7. Make Sure Your Staff is Trained:

Even “experienced” staff members can sometimes become jaded when dealing with customers. This usually occurs when customers have made and broken promises for payment. Make sure the staff is firm yet courteous when dealing with customers. Your collection staff could benefit from customer service training because, in effect, they must “sell” your customers on the idea that you expect to be paid. Make sure that your collection staff is trained to not only bring the account current, but to also maintain good will with your customers.

8. Admit and Correct any Mistakes on Your Part:

Sometimes customers do not pay because they feel you have made a mistake. If you have, quickly admit it and correct it. Your customer realizes that mistakes can happen in business. Unfortunately, many customers believe that “the doctor doesn’t need the money”. Denying an obvious error only fans the fire of resentment your customer may already feel.

9. Follow the Collection Laws in Your State:

In many states, businesses are governed by the same collection laws as are collection agencies. For example: Calling a customer at odd hours or disclosing to a third party that a person owes your business money are a few of the numerous collection practices that can cause serious repercussions. When in doubt, call your state’s department of finance for any clarification on the law.

10. Use a Third Party Sooner:

If you’ve systematically pursued your past due accounts for 60 to 90 days from the due date, (and they still haven’t paid) you’re being delivered a message by your customer. More than likely, you’ve requested payment four to six times in the form of phone calls, statements, and letters. Statistics show that after 90 days, the effect of in-house collection efforts wear off 80%. That means that the time and financial resources budgeted for collection efforts should be focused within the first 90 days where the bulk of your accounts can and should be collected. From that point on, a third party can motivate a customer to pay in ways you cannot, simply because the demand for payment is coming from someone other than you. Avoid paying a percentage to a contingency collection agency, using small claims court or hiring an attorney by utilizing a flat fee collection service such as TSI. It will save your business time and money.

10.5. Remember that Nobody Collects Every Account:

Even by setting up and adhering to a specific collection plan, there are a few accounts that will never be collected. By identifying these accounts early you will save yourself and your business a great deal of time and money. At the same time, your business will benefit from improved cash flow from the vast majority of accounts that do pay.

Developing and implementing a sound collections policy is a vital part of running a successful business. Follow these steps, and watch your business thrive while retaining a good professional relationship with your customers.

Don’t forget to subscribe to this blog for more Tips and Tricks to make your business or practice more profitable.

Contact Me Directly

Please subscribe to this blog , or contact me with any questions.

Call me directly at 770-224-8504 or 888-780-1333
Schedule a phone call with me by clicking here
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Email me at David.wiener@cashflowstrategies.us

The 30 Day Bill Cycle is Dead

21 Sep

The way that medical and dental practices have approached people that owe money in the past no longer works nearly as effectively as it once did. 

The “one size fits all” approach is dead, and the 30 day bill cycle is dead both in follow-up and collections of slow-pay and delinquents accounts. 

The reasons for a patient not paying the bill when due can be varied.  Some don’t pay on time because of financial reasons. Others have the funds but are too disorganized to remember where the bill is.  Some will try to hold off paying, hoping that you will forget or give up.  Still others have no intention to pay you

It can be very expensive to have your staff continue to send statements, make phone calls, and “chase the money”

So what should a business do?

We have determined that there are actually four distinct types of patient payers.  Each is motivated in a different way to pay the bill, and it is a mistake to treat them all the same.  They are:

THE DUTIFUL PAYER

The dutiful payer feels a keen responsibility to pay their debts in a timely manner.  They are motivated to pay the bill by the initial statement you send following patient responsibility.  Fortunately, they are (or should be) the largest category in your practice.

THE DISTRACTED PAYER

The distracted payer has the very best intentions to pay your bill, but they seem to be so busy and distracted that they misplace your statement or just forget to pay it.  Timely reminders are sufficient to motivate them to get that bill paid.

THE DISRESPECTFUL PAYER

The disrespectful payer tries to see what they can get away with, and hope that you will give up trying to collect the bill if they dodge you long enough.  They do not respond to your statements, letters, or phone calls.  Rather it will take a contact by a third party collection agency for them to be convinced that the practice is serious about collecting the debt.  That alone will motivate them to pay, and they will generally pay the bill after they receive the first contact by that third party.

PROFESSIONAL DEBTOR

The professional debtor never intended to pay the bill when they received service.  They are likely in collections with other creditors already.  These, and these alone, need to be in the hands of professional collectors, familiar with medical debt, before too much time has elapsed and too much money has already been spent chasing them.

HOW TO GET PAID FASTER

I’d like to have the opportunity to show you how to motivate each type of payer to pay their bill, and to do it inexpensively and easily.  Call me or email me today and I’ll be happy to show you.

Don’t forget to subscribe to this blog for more Tips and Tricks to make your business or practice more profitable.

Contact Me Directly

Please subscribe to this blog , or contact me with any questions.

Call me directly at 770-224-8504 or 888-780-1333
Schedule a phone call with me by clicking here
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Email me at David.wiener@cashflowstrategies.us

HIPAA Violations That Can Destroy a Medical or Dental Practice

14 Sep

The Health Insurance Portability and Accountability Act, also known as HIPAA, was enacted in 1996. Since then we’ve seen some major HIPAA violations that can cost up to $1.5 million per year. This can seem intimidating for your practice, especially if you don’t know how to avoid a violation.

Let’s look at the 11 most common HIPAA Violations. Your organization needs a better understanding of what you should and shouldn’t do so that you don’t face a breach.

Lack of Employee Training

Lack of employee training. Nearly 1/4 of healthcare workers don’t receive the proper HIPAA training that they need. But employee education and training can help your organization avoid all of the common violations on this list.

Mishandling of Medical Records

Medical record mishandling using paper records increases the chance that protected health information or PHI will be left exposed for unauthorized people to see. Leaving computers unlocked also poses a risk. Locking your computers when not in use ensures protection of electronic records.

Using insecure technology.

As we use more digital health information, medical records are more susceptible to breaches.

Using insecure technology to share PHI is a huge risk that should never be done because it’ll expose your organization to a breach.

Hacking and Malware

PHI records are worth 100 times as much as credit card numbers on the dark web.

So hackers are intentionally seeking this information. It’s so important to have anti-virus, anti-malware firewall software installed on your devices to help protect against hackers.

Lack of Authorization and Proper Signatures

Some employees will carelessly release PHI because they don't know what's required in order to release it in the first place. Uses and disclosures of PHI requires written consent by authorized individuals when it's not being used for treatment, healthcare operations, or payment.

Incorrect Information

It’s simple, double-check or even triple-check that you are releasing the correct patient’s information.

Improper Storage and Disposal of PHI

While people probably don’t go through the garbage searching for PHI, it’s definitely a best practice and recommended that you dispose of it properly through shredding, destroying, and hard drive wiping.

Lost or Stolen Devices

Human error is uncontrollable and you can’t really prevent a stolen device from happening in the first place. Your organization must have the proper safeguards in place so that the PHI is not exposed from these stolen devices.

Misuse of Social Media

Using more social media increases the chances that a patient’s photo will be shared on the internet. Employees must be cautious about what they post on social media, ensuring that it doesn’t include anything regarding patients.

Casual Conversation

Stories about patients may be fun and interesting but discussing PHI is always off-limits. This includes gossiping about patients to friends, family, or even co-workers.

You never know who might be listening or what they might tell someone about.

Celebrity File Lookups

Not only can talking about patients be interesting, so can snooping into their files. This is very common with celebrities in particular and even with no intention of sharing the information it’s still a breach if you look at files without authorization.

HIPAA violations can be disastrous to a practice. Compliance is not a suggestion, it is mandatory and non-compliance can be very costly. Don’t risk it! Cash Flow Strategies, Inc. is pleased to work with PCIHIPAA and OfficeSafe to provide your practice with a full solution to compliance, training, and protection.

CLICK HERE to receive a free HIPAA Risk Analysis for your practice

Contact Me Directly

Please subscribe to this blog , or contact me with any questions.

Call me directly at 770-224-8504 or 888-780-1333
Schedule a phone call with me by clicking here
Visit my website by clicking here
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Email me at David.wiener@cashflowstrategies.us

Appreciating Depreciation for Real Estate Brokers

7 Sep

You can be a tax hero to your clients and prospects. Here’s how.

Become a “Tax Hero”

You can become a Tax Hero to your current and potential real estate clients. We’re talking about a hero status so big that your clients think you should start wearing a cape.

And, you don’t need to become a tax professional to be a Tax Hero. Just make your clients aware of one simple tax code that most are missing—100% Bonus Depreciation.

In the first year of ownership, this one change potentially saves a commercial building owner $40,000 – $100,000 per $1 Million of building owned or purchased. It’s like buying a building and getting up to a 10% off gift card.

To become a Tax Hero, just say this to your client or prospect:

  • “100% Bonus Depreciation.
  • • When you buy a building, about 20% of the building qualifies for 100% Depreciation.
  • • It’s worth about $60K per Million in the first year you own the building.
  • • I have a specialist that you can talk to. I’ll send you their number.”

That’s it. Congratulations on achieving Tax Hero Status! YOU EARNED IT!

How Does it All Work?

Now, overachievers want to know how and why this new tax code works. I’ll try and keep it simple.

  • In the new tax code, Congress wanted to encourage business owners to buy more stuff to stimulate the economy.
  • So on purchased items that have to be capitalized and depreciated over a period of 20 years or less, Congress said you can have all of your depreciation deductions in the first year.
  • It is like everything went on sale.

Every tax professional knows how to take these deductions on items like equipment, computers, furniture and fixtures but not all know how to get 20% of the building to qualify for this same bonus depreciation in the first year. This is where you might want to recommend a cost segregation specialist.

What is cost segregation?

Instead of selecting the old straight-line depreciation method that views the building as one whole piece and depreciates the building over 39 years, the owner can select a depreciation method that groups or “segregates” the values of the parts and pieces of the building into categories that depreciate on a 5-, 7-, 15- and 39-year basis. About 20% of the building fits into the 5-, 7-, and 15-year categories. And remember Congress said that anything purchased that has a depreciable life of 20 years or less can be 100% Depreciated in the first year. That averages $40,000-100,000 of cash flow in the first year for every $1M of building.

Cost Segregation Services, Inc. —CSSI can perform an engineering-based study of the building by identifying and valuing all the parts and pieces that qualify, photo document the building, and to supply the numbers that allows the tax professional to file for these deductions, AND we can provide a free, no-obligation estimate on any building in 48 hours.

For buildings that you might have for sale, or buildings that a prospect might be considering, you can contact me and I will get you that estimate on the building to present to your potential client.

I think that long shiny cape would look good on you. Contact me today to learn more about how I can help make you a HERO.

Contact Me Directly

Call me directly at 770-224-8504 or 888-780-1333
Schedule a phone call with me by clicking here
Visit my website by clicking here
Visit my YouTube channel by clicking here
Email me at David.wiener@cashflowstrategies.us

Free Webinar – Dental Collections and Cash Flow During COVID-19

30 Aug
https://cashflowstrategies.webinarninja.com/live-webinars/491655/register

Please join me for an important webinar on how to keep your practice’s cash flowing while we all emerge from this pandemic.

Friday, September 4
2:00 PM Eastern

Here is What You’ll Learn

  • Why taking action now may save your practice

The Bureau of Economic Analysis has reported the the US personal savings rate has surged by more than 33% in the last few months and the stock market is at almost unprecedented highs. Whether it is through reduced consumption or stimulus, people have money right now. Some of it rightfully belongs to you, and it is the right time to go get it.

  • How to avoid paying high collection percentages

We will discuss the “dirty little secret” of the collections industry that most certainly has you paying too much to get your money collected.

  • How to collect more money, while spending less

Your cash flow is the lifeblood of your practice. Without adequate cash flow, especially in today’s environment, your practice cannot survive. You will learn how to manage your receivables AND save staff time as well.

  • Learn the 4 Patient Payer Types

Learn why certain patients do not pay on time, and how to motivate them to pay their bill, without ruining vital patient relationships. We will discuss 4 distinct types of patients payers and how they can be motivated to pay on time and educated to never pay late again.

CLICK HERE TO REGISTER

Free CARES Act Webinar for Commercial Real Estate Owners

9 Apr

Tuesday, April 14, 2020 1:00 PM CST

If you own or lease commercial or residential income property, this will likely be the most critical information you have heard since the Covid-19 outbreak.

During this uncertain time, most business owners are faced with difficult decisions regarding cash flow. We can help you increase cash flow NOW, through new and existing tax legislation, because you own commercial property.

Please don’t miss this critical tax information.

Join us for a live 30-minute webinar on Tuesday, April 14th at 1:00pm CST. We will be discussing how, as a business owner, you are able to make cash available immediately by utilizing existing tax laws and the new CARES Act. We will be explaining two specific items, NOLs and Qualified Improvement Property, within the act that have been designed to allow you to get money back from the US Treasury when you need it most. These topics are not related to the SBA loan process; this is an additional viable source of cash flow.

Please click the link below to register for this live webinar with Q&A so that you can have all your questions answered in one place. Seating is limited, so please register soon. 

Whether you are a tax professional joining the session on your client’s behalf, a building owner, or lessee looking for a solution to a very real problem, we are here to answer any questions you have.

CLICK NOW TO REGISTER

CSSI has been called on during economic downturns in the past, saving businesses in the path of financial destruction. 

“Thank you so much CSSI! Without the influx of cash I received from my reduced tax payment, I would have had to close my new location. You literally saved my business. I will forever be grateful.“

                                                                                                      – Barbara S.

About CSSI: For years, CSSI has been providing quality and affordable engineering-based cost segregation studies. Our national coverage and expertise allow us to work with customers and properties across the United States.

With over 20,000 studies performed, we are the premier company proving cost segregation studies and Tangible Property Regulation studies for U.S. Properties.

This webinar will be presented by Warren Dazzio, Executive Vice President, and Robert Taylor, VP of Operations at CSSI.

The CARES Act and Cost Segregation – New Opportunities

30 Mar

The CARES Act, a $2.2 Trillion bill was passed in response to the Corona virus Pandemic. There are parts of this bill that will have a direct impact on Cost Segregation. Please contact me for more information or to assist you in helping your clients take advantage of this new information.

Net Operating Losses:

Allows for a five year carryback of net operating losses arising in 2018, 2019, and 2020. It also allows net operating losses to offset 100% of income (as opposed to being limited to no carryback and only to 80% income offset from carryforward losses under the Tax Cuts and Jobs Act of 2017 that was in place before the CARES Act).

Impact – Example – A Cost Segregation study is applied in 2019 which causes such a large depreciation deduction that the client reports a net operating loss in 2019. He can carry this loss back for 5 years and apply it to gains made in those years. This would result in a tax refund providing cash flow in a time of need.

Important Note – The 5 year carryback rules require you to go back 5 years and roll forward from there if the loss is in excess of the carryback years income.
Example – John Smith has income for the past 5 years, and a loss in 2019 as follows:
2014 – $75,000
2015 – $150,000
2016 – $400,000
2017 – $350,000
2018 – $195,000
2019 – $(425,000)
In this case John would roll the $425,000 loss back to the 5th year 2014 and offset all of that income, then roll the remaining $350,000 to 2015 and offset all of that income, and finally roll the balance of $200,000 to 2016.

Qualified Improvement Property:

Qualified Improvement Property has been corrected to be identified as 15 year property meaning it would be eligible for 100% bonus depreciation. This change is effective for property acquired and placed in service after 9/27/2017.

Impact – Since the definition of Qualified Improvement Property was introduced, CSSI has been identifying this property as Qualified Improvement Property within our reports. This property is now eligible for 100% bonus depreciation, so previous clients with this type of property included in their reports can now retroactively apply bonus depreciation to these improvements. 

More Time:

With the extension of time to file for 2019 taxes, there are opportunities to still have Engineering-Based Cost Segregation done for any commercial or rental residential properties over $200,000.  

Contact Me Directly

Call me at 770-224-8504 or 888-780-1333
Email me by clicking here
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The Dentistry Uncensored Podcast with Dr. Howard Farran

5 Mar

I recently had the opportunity to join Dr. Howard Farran for a recording of the “Dentistry Uncensored” podcast at his studio in Phoenix, AZ. We spoke of all things concerning cash flow in the dental and oral surgery practice.

Howard Farran, DDS, MBA, the founder and owner of Dentaltown.com and Dentaltown magazine, has practiced dentistry at Today’s Dental in the Phoenix metro area for more than 30 years. In 2017, Incisal Edge magazine ranked him among the 32 most influential people in dentistry.

You can watch the podcast video by clicking here

Or listen to the audio podcast by clicking here

If you are have difficulties or questions about your practice’s cash flow, or would be interested in learning how your cash flow can be improved, contact me for a no-cost, no-obligation Cash Flow Checkup.

Contact Me Directly

Call me at 770-224-8504 or 888-780-1333
Email me by clicking here
Visit my website by clicking here
Visit my Youtube channel by clicking here

Maximize Your R&D Tax Credits

17 Feb

In research and development tax credits, some cost related to wages, supplies and contract research are eligible.  Many times, however, taxpayers tend to overlook some of the processes and work that can be included to maximize the tax savings.

Contrary to popular belief, R&D credits are not limited to things that have not previously been done.  Many think these credits are limited to new inventions like the cell phone, or the lightbulb, but that is not the case.  The Internal Revenue Service does not require that technology be revolutionary or new innovation to be eligible for these tax credits.  The only requirement is that products and processes be improved.

Unfortunately, those who could benefit from claiming R&D tax credits either fail to claim them, or leave money on the table, because they aren’t aware of all the activities that qualify.  R&D credits are a dollar-for-dollar reduction in income tax liability that is either underutilized or not utilized at all every year.

Here are some often overlooked qualifiers for R&D credits:

CLOUD COMPUTING NETWORK COSTS

Cloud computing server, platform and SaaS software application innovation costs may be qualified research expenses that are eligible for R&D credits.  Leasing cloud computing time is often cheaper and easier than purchasing locally hosted servers and outfitting data centers.  These expenses may be eligible when the cloud servers are located away from the taxpayer’s premises and operated by another.  The taxpayer must not be the only, or primary, user of the cloud server.

AUTOMATION THAT IMPROVES EFFICIENCY OF PROCESSES

Improving workflows and processes in manufacturing may also qualify by using process automation tools.  Automated shelving, labeling systems, and the use of robotic arms are some of the process automation tools that may be involved.  In the case of a robot, while the cost of the robot cannot be used for R&D credits, the time invested in designing the type of robot, how and where the robot will be used, and the testing involved may be qualified expenses.

ARTIFICIAL INTELLIGENCE AND MACHINE LEARNING

Any process of product that uses machine learning or artificial intelligence to determine how to better accomplish a process, or increase its efficiency, qualifies for R&D credits.  Machine learning can assist in the decision of where to place a robotic arm for the most efficient and effective use.

REPLACING AN OBSOLETE PART OR PRODUCT WITH NEWER TECHNOLOGY

A common scenario in which these expenses may qualify for the R&D credit, a piece needs to be replaced as part of a manufacturing process, but the supplier no longer makes the part.  If a direct replacement cannot be found, the taxpayer may change their product or process to accommodate a new part on the market, requiring design changes.  These changes may be related to size, functionality, geometry or other elements.

When the obsolete part is so old, new technology may also provide a better answer than a retrofit.  Research and testing must be done to accommodate the new technology.  If the taxpayer can provide proof of concept, demonstrate how the new technology improved the product or process, and document the failure points, they may be able to recoup the amount expended for design and testing.  The wages related to a marketing associate who provided the design input to the improvement or features that should be created through the new technology, but they must be able to show documentation of the individual’s contribution to the process, and that they had the sufficient technical experience necessary to participate in the design.

MACHINE LEARNING AND AI

Any product or process using machine learning or artificial intelligence to learn how to do something better, more efficiently, or faster, qualifies for R&D credits.  For example, machine learning might help a company learn where to place a robotic arm for its best use.

These are a few activities that might be overlooked in considering expenses for the R&D credit in manufacturing products and processes.  This is not an exhaustive list but may help in thinking through how to maximize your research and development credit.  Activities do not have to necessarily fit the textbook definition of research to qualify.

If you have questions about R&D credits or their application, please give me a call at Cash Flow Strategies, Inc.  We have a team of experts who can certainly answer your questions regarding this topic, Cost Segregation, Section 179, The 2014 Tangible Property Regulations, and the Real Estate Professional designation.

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