Research & Development Tax Credits

September 10, 2009 | Subscribe to our RSS Feed

Research and Development is not just large companies employing scientists working in lab coats with ultra high tech equipment. Many small business also conduct research and developments on a smaller scale – in laboratories, on factory floors, and on computer screens – and receive substantial tax benefits because of it.

The federal government has recently extended (and increased) the tax credits available for Research and Development as part of the Emergency Economic Stabilization Act of 2008. The potential tax savings are significant: in 2006, $7.3 billion in Research & Development tax credits were claimed. 44 percent of Research & Development claims in 2005 came from the manufacturing sector, followed by professional, scientific and technical services (30 percent), the information industry (10 percent) and wholesale trade (6 percent).

The rules are complicated, but any manufacturer, professional, or technical service provider that seeks to improve its product – or seeks a better way to make its product – may be eligible for tax credits.

According to the IRS, a “product” can be an invention, formula, patent, pilot model, process, or technique. The R&D credit applies to “all expenditures incident to the development or improvement of a product,” such as employee salaries, patent application, and attorney fees. R&D involves the “elimination of uncertainty” about things like whether a new product will meet customers’ needs, whether a product can be made in a less costly way, etc. It makes use of the physical sciences like engineering, biology, or computer science, and involves experimentation.

Determining your eligibility is very complex (and can involve technical experts like engineers), but can definitely be worth it. The general principle is that a company can claim up 13% percent net tax effect, of its Research & Development expenses beyond a base level, which is an average of these expenses in previous years. Companies may also be able to amend prior years’ tax returns to claim the Research & Development credit, which further increases the amount of benefits received.

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1. Improving Your Products or Processes? MD says Thank You. Glass Jacobson