Tax Preparation

Tax Preparation — AceEngineer Inc

Entity Quick Reference

Trigger Conditions

Activate when the user mentions:

• Tax preparation or tax documents
• Corporate tax forms (1120)
• R&D budget or R&D credit
• Texas franchise tax
• Officer compensation or payroll tax
• Tax-year financial analysis

Data Sources

Primary Inputs

• Sabitha/<YEAR>/EXPENSES Jan <YEAR>-Dec <YEAR> rev1.xlsx — annual expense workbook (Income Statement sheet has all monthly revenue + expense line items)
• invoices/ — client invoices by project
• admin/loans/borrow/ — shareholder loan agreements
• preferred_vendor/DiSYS/ — S-Corp analysis forms, historical references

Tax Reference

• taxes/<YEAR>/document-checklist.yaml — master document tracking
• Tax/ — historical filed returns and tax forms

Generated Analysis (created during session)

• taxes/<YEAR>/2025-corporate-tax-analysis.yaml — 3-scenario tax computation
• taxes/<YEAR>/2025-ai-rd-budget-strategy.yaml — AI R&D budget + QRE classification
• taxes/<YEAR>/2025-retained-earnings-ai-growth-model.yaml — 5-year funding model

Workflow

Phase 1: Revenue Reconciliation

1. Read Income Statement sheet from expense workbook
2. Sum revenue by client (D=Jan through O=Dec, P=Yearly Total)
3. Cross-reference against invoice files in invoices/
4. Flag any discrepancies between expense sheet and checklist

Phase 2: Expense Extraction

1. Parse Income Statement — row-by-row with column P yearly totals
2. Key line items: R&D expenses, employee salary, utilities, office supplies, phone, housekeeping
3. Note zero-value categories (server_cost, software, travel, mileage, etc.)
4. Check for home office utilities that need allocation (simplified $1,500 vs actual %)

Phase 3: Tax Scenario Computation

Compute three scenarios — ALWAYS run all three:

1. Standard — all expenses as §162 ordinary deductions
2. §174 Full — all R&D amortized over 5yr domestic (half-year Y1 = /5/2)
3. Hybrid — split R&D: client-related = §162, product/AI = §174

Phase 4: R&D Strategy Analysis

Key classifications under IRC §174 and §41:

• §174 SRE (capitalized, 5yr domestic): AI tools, digitalmodel, automation frameworks
• §162 (ordinary deduction): engineering tools used for client projects
• §41 QRE (R&D credit): wages for R&D services + 65% of contractor wages
• CRITICAL: Owner labor does NOT count as QRE unless paid W-2 wages
• Post-2022: §174 amortization is MANDATORY, not optional

Phase 5: Funding/Capital Planning

Reverse-engineering from target:

1. Required tax → required taxable income (= target_tax / 0.21)
2. Required deductions = revenue - required taxable income
3. Gap = required deductions - documented deductions
4. Map gap to realistic categories (contractors, equipment, professional services)
5. Calculate §174 impact on Year 1 deduction (only 1/10th of R&D is deductible Y1)

Phase 6: Filing Documents

Create these deliverables:

• taxes/<YEAR>/2025-corporate-tax-analysis.yaml — full scenario table
• taxes/<YEAR>/2025-ai-rd-budget-strategy.yaml — R&D roadmap, QRE classification, budget scenarios
• taxes/<YEAR>/2025-retained-earnings-ai-growth-model.yaml — 5-year funding model, capital sources
• GitHub issues for tracking: filing, payment, loan conversion, R&D program

R&D Credit Quick Reference (Form 6765)

Qualifying Research Expenses (QREs)

• Owner W-2 wages for R&D time (percentage of salary × % R&D time)
• Contractor wages: 65% of payments count (IRC §41(b)(3) cap)
• Supplies used in research
• Cloud/compute for research: ORDINARY deduction, NOT QRE
• Software subscriptions: ORDINARY deduction, NOT QRE
• Hardware: §179 deduction, NOT QRE

Alternative Simplified Credit (ASC) Method

• 14% of current QREs exceeding 50% of average prior 3-year QREs
• If no prior history: 6% of current QREs (simplified base amount = 0)
• Example: $80K QRE wages + $40K contractor (×65%) = $106K QRE
  • No history → credit = 6% × $106K = $6,360
  • With 3yr history → ASC = 14% × (QREs - 50% avg) = higher

Key Tax Strategy Notes

§531 Accumulated Earnings Tax Defense

• C-Corps face 20% penalty on retention beyond reasonable business needs
• Strong defense: loan repayment obligations + R&D investment plans
• Document the business purpose for retaining earnings

Officer Compensation

• $0 officer comp on C-Corp with revenue = IRS audit trigger
• Must start W-2 salary to unlock R&D credit and retirement benefits
• Cannot retroactively pay W-2 for a prior year

Loan-to-Equity Conversion

• Convert related-party debt to equity to eliminate imputed interest
• Not a taxable event (conversion, not forgiveness)
• Provides permanent capital for business use
• Formal agreement + board resolution required

Common Pitfalls

• Never classify all R&D as §162 when §174 applies (mandatory capitalization)
• Never treat loan principal as deductible expense
• Cannot retroactively create deductions for prior years
• §174 amortization reduces Year 1 deduction (only 1/10th deductible)
• Subcontractor payments to India = no 1099-NEC, but still fully deductible COGS

Filing Deadlines