The year 2010 saw the launch of the iPad, Facebook market share overtake Google, Twitter go commercial and Toy Story 3 finish the year as the top domestic grossing film.  While there are many events and highlights of 2010, there is one that many may have overlooked.

On September 27, 2010, the President signed into law the Small Business Jobs Act. Even today, business owners are learning more about the act and the benefits it provides.

The act included many areas of tax savings.  One such area is the highly publicized R&D tax credit.  The R&D tax credit is one of several general business credits.  The act allowed small businesses better flexibility to utilize general business credits to offset taxes.

Software and manufacturing companies, who often qualify for the R&D tax credit, now have a much greater ability to reap cash rewards from the R&D credit. The bill allows small businesses to offset not only regular tax, which was the standard rule, but also Alternative Minimum Tax.  Companies that had previously not been able to take advantage of the credit because of this limitation are now able to see the full benefit of the credit and are paying less tax.

The second advantage provided by the act was the expansion of the ability to “carry back” the 2010 credits into prior years.  Small businesses can now carry back their 2010 R&D credits to offset the prior five years of taxes paid versus the one-year carry back that is currently and historically been in place.

There are a couple of caveats.  First, it is only available for the credits generated in the 2010 tax year–but this is still good news!  Companies with a December 31 year-end still have at least until March 15, 2014 to claim 2010 tax credits.  These credits will first offset taxes paid in 2010, any remaining 2010 credit can be carried back and used of offset both regular and AMT taxes in 2005-2009. The second caveat is that it is only available for small businesses; companies whose average gross receipts for 2007–2009 are under $50 million.  Keeping the March 15, 2014 date in mind, companies have just less than a year to go back and reclaim cash.

So, if you haven’t revisited your 2010 tax return, now is the time.  I highly recommend taking a look at your tax liability for 2010.  If you did pay tax, there are strategies available that can create tax refunds for qualifying companies.  Even S-Corporations or other flow through entities may benefit.

Michael Warady, CFP, is the National Director of Software R&D Consulting.  He has been working with companies throughout the U.S. to educate business owners and C-level individuals on the benefits and value the Research & Development Tax Credit can bring to their businesses.  He has helped bring over $150 million back to the business community through the R&D Tax Credit strategy.  Please contact Michael at (847) 914-9270 or michael.warady@sourcehovtax.com to learn more about how SourceHOV|Tax can help create additional cash flow for your business.

After a multi-year court battle over R&D tax credits claimed by Union Carbide Corporation, the Supreme Court recently denied Union Carbide’s request for certiorari.  This denial makes the Second Circuit’s affirmation of the Tax Court decision final.  The Tax Court determined that Union Carbide was not entitled to research credits for the entire amount spent for supplies.

In this case, Union Carbide conducted three research projects to improve manufacturing processes. The research was conducted on products that were already in the process of being manufactured and were ultimately sold. Union Carbide claimed research credits for the additional cost of supplies associated with the research in addition to the cost of supplies used in production.

On audit, the IRS challenged the applicability of the credit for production supplies that would have been used regardless of any research performed.

The Tax Court concluded that Union Carbide was entitled to research credits only for the additional supplies used to perform the research. Costs for supplies used for actual production were found not to be research under the tax code. According to the Tax Court, these costs were “raw materials used to make finished goods that would have been purchased regardless of whether UCC was engaged in qualified research,” and that at best, these costs are indirect research costs and therefore excluded from the definition of qualified research expenses.

On appeal, the Second Circuit agreed that the costs at issue were, at best, indirect research costs that were excluded from the definition of qualified research expenses.

The case went to the Supreme Court who on March 18, 2013, declined to review it, making the Second Circuit decision final.

This decision continues to show the importance of identifying and tracking supply costs when performing research associated with new or improved manufacturing processes,  Many of these supply costs are tracked in general “cost of goods sold” or “inventory” accounts and are not readily identifiable, making research credit claims associated with these costs more difficult to support and defend.