Tag Archives: R&d Tax Credit

In 2005, responding to customer requests for a flavorful gluten-free beer, this specialty brewery began experimenting with new formulations that would satisfy beer connoisseurs. Typically, gluten-free beers are generic white lagers that lack the exotic flavor and aroma of popular microbrewery beers. The challenge the company faced was creating a balance of gluten-free ingredients that worked together without creating a bitter brew. After continued experimentation, the company successfully developed a gluten-free beer that lived up to customer expectations.

SourceHOV|Tax began conducting R&D tax credit studies for the company in 2005 when the company’s revenues were $10 million. For nearly a decade, the company has benefitted from R&D credits averaging $65,000 annually. This $65,000 offset in taxes has allowed it to continue investing in the development of additional brews, and in 2013 it reached $70 million in sales. The company’s ability to grow at this pace is, in large part, driven by sales of its new products.

Deb Crumley, Director of R&D Tax Credit Consulting

Deb Crumley, Director of R&D Tax Credit Consulting

SourceCorp recently worked with a $6 million New York manufacturer to identify, document, calculate and claim the New York State Research & Development Tax Credit formally called the QETC. The company was able to go back and claim the credit for four years and claimed total credits of $328,474.

Subsequently, the owner was notified that state examiners intended to review the claim. SourceCorp met with the examiners and explained the client’s activities and expenses and their validity with regard to claiming the R&D credit. SourceCorp succeeded in sustaining 100% of the  credit for the company.

The QETC is a refundable credit, so this New York manufacturer was able infuse $328,474 into their business by evaluating what was already spent as part of the company’s initiative to stay competitive through research and development spending.

Regarding this article from Bloomberg: Obama May Seek Permanent R&D Tax Credit

Deb Crumley, Director of R&D Tax Credit Consulting

Deb Crumley, Director of R&D Tax Credit Consulting

Given its bipartisan support and the history of R&D tax credit’s extension, arguing that the budget deficit will be increased by making it permanent is misleading.  This article’s author uses the term “longest-running budget gimmicks in town” which couldn’t be more appropriate.  It will have the same budgetary impact if made permanent as it would if Congress keeps approving the temporary extensions.

More importantly would be the effect on businesses if they were certain of the credit’s future.  By understanding and being able to rely on this incentive, behavior related to R&D spending will be positively impacted.  For many companies, compiling the information to compute the R&D tax credit each year is cumbersome and an area that needs process improvement.  However, this is never a priority since the future of the credit is always in question.  With permanency, companies will be incentivized to increase R&D spending and make the internal process changes necessary to create more accuracy within their computations.

While there will be a budget impact to increasing the credit percentage for the Alternative Simplified Credit, it is necessary to keep the U.S. from lagging even further behind in international comparisons of R&D incentives.  Hopefully President Obama is successful,  and the credit is made permanent and more internationally competitive.

This recent court case favored the company claiming the R&D tax credit.

http://www.cbiz.com/page.asp?pid=8761

Laura Kushner, Director of Marketing

Laura Kushner, Director of Marketing

The United States was one of the first countries to enact a federal tax credit for R&D in 1981, and throughout that decade we had the most generous R&D incentive in the world. However, other countries soon realized the benefit of the R&D credit and adopted not only similar but often more lucrative credits.

By 1996, the U.S. ranked only 7th in R&D tax generosity out of the countries that had an R&D credit, and by 2004 we had slipped to 17th place. The key reason — every other country with an R&D tax credit has increased the generosity of those credits. Not only has the U.S. not increased the credit, but to date Congress has not yet extended the credit for 2010. The result – by 2009 the U.S. ranked dead last — leaving the number one position to France.

However, if Congress were to enhance the R&D tax credit and make it permanent as other countries have done instead of simply extending it each year, the result would be an immediate and positive impact on U.S. innovation and job creation.

For example, a study by the Information Technology and Innovation Foundation think tank suggests that raising the Alternative Simplified (ASC) R&D tax credit rate from 14 to 20 percent would create 162,000 jobs in the short-term and an unspecified number of additional jobs in the longer-term. ITIF also estimates that raising the ASC would increase the annual GDP by $90 billion, the number of patents issued by 3,850 and federal tax revenues by $17 billion.

Raising the ASC to 20 percent would bump the U.S. R&D tax generosity rank to number 10. However, we would need to increase the ASC to 31 percent to move to 5th place and to a whopping 47 percent in order to reclaim the number one spot with the most generous R&D credit of the 21 countries that currently offer one.

Fortunately for American businesses, all but about 12 states offer a state R&D credit. Some of these state credits are more lucrative than the federal credit, and some are even fully refundable.

For example, New York has a refundable credit, specifically for companies with revenues under $10 million, that averages between 9-18%. Starting in tax year 2010, the Minnesota state credit will be expanded and made refundable. Louisiana has one of the most lucrative credits of all the states. Depending on the size of the company, the credit can be from 8 to 40 percent, and it is also refundable.

Companies located in states that offer a state R&D credit can realize significant dollars in tax credits, especially when combined with the federal credit. These dollars can be reinvested to fund additional R&D which, in turn, will boost both innovation and job creation in the U.S.

Good news. Congress may now be turning their attention to the expiring tax provisions, including the R&D tax credit. While the R&D credit has support from both sides of the aisle, it has been deferred as more hot items, such as state education funding, make their way through Congress.

The entire Republican contingent on the Senate Finance Committee has called on Sen. Max Baucus (D-MT), chairman of the panel, to schedule an early September mark-up of legislation dealing with expiring tax provisions. (August 6 letter to Sen. Baucus regarding markup request) The letter noted that during a July 22 committee meeting Baucus agreed “to process a tax bill in committee” that would cover the expiration of individual tax rates, expired provisions such as the R&D tax credit, a compromise regarding the estate tax, and energy taxes. “In exchange, we agreed to limit our amendments to those particular topics and to refrain from offering amendments that would introduce extraneous matters like corporate tax reform,” the letter said. “It would be a mistake for the Senate to consider such an important piece of tax legislation without its having first been marked up” by the committee, the GOP members wrote. A link to the letter can be found at http://finance.senate.gov/newsroom/ranking/release/?id=a646558c-2302-440b-ad73-9480f7eb2d58.

In addition to being able to claim the federal research and development tax credit, companies conducting R&D activities in the state of Maryland may be eligible for a state credit as well. Maryland offers a nonrefundable R&D credit for certain qualified activities and expenses consistent with the federal credit.

Businesses must submit an application for the credit to the Maryland Department of Business and Economic Development by September 15 of the year following the tax year in which the expenses were incurred. The state will certify the amount of credit available to the business by December 15, and companies are then notified as to how much of the credit claimed will be paid.

Total credits for all businesses may not exceed $6 million per year. Historically the amount of credits applied for exceeds the $6 million maximum, and companies are ultimately granted only a percentage of the total credits for which they apply.

There are two credits available; the basic credit and the growth credit. The basic credit is 3 percent on all qualified research expenses up to a base amount.  Spending beyond the base amount entitles a business to the growth credit which is 10 percent. The credit is taken against corporate or personal income tax, and any unused credit may be carried forward for seven years.

As of July 1, 2010, the Maryland state R&D tax credit was extended from 2011 to 2020.

Stephanie Woods, Director of Business Development for R&D

Stephanie Woods, Director of Business Development for R&D

Beginning with the 2009 tax year, the Louisiana Research & Development tax credit is refundable and is one of the most lucrative of any states. Companies that have Louisiana-based qualified research expenses are eligible for the R&D tax credit.

Qualified research expenses include:

  • Wages for employees who:
    • Engage in research
    • Directly supervise research
    • Directly support research
  • Supplies used to conduct research and development
  • Contract research expenses – 65 percent of any expense paid or incurred to persons other than an employee of the company

Companies that employ up to 50 Louisiana residents may be eligible for a 40 percent state R&D tax credit on their qualified research expenses.

Companies that employ 50-99 employees can claim a 20 percent state credit for increasing their research activities. For companies with 100 or more employees an 8 percent credit applies.

Louisiana also offers alternative methods to calculating the credit for increased research activities. Companies that perform work under the SBIR program may also qualify for the credit.

Credits claimed prior to 2009 that cannot be utilized may be carried forward, transferred or sold.

Prior to claiming an R&D tax credit, a company must apply for and obtain a credit certification from the Department of Economic Development. Understanding the application process and evaluating the most appropriate calculation is critical to maximizing the R&D tax credit benefit. An R&D study will expedite and help support the application process. With the September 15 deadline rapidly approaching, now is the time to evaluate whether your company meets the requirements to claim the newly refundable Louisiana state credit for 2009.

For a look at some examples of the Louisiana state R&D tax credit click here.

In addition to being able to claim the federal research and development tax credit, companies conducting R&D activities in the state of Utah may be eligible for a state credit as well. Utah offers a nonrefundable R&D credit, ranging from 2.5-9 percent, for certain qualified activities and expenses. Qualifying activities follow the same definition as the federal credit and include:

• Creating new or improved products, processes, formulas, software, techniques
• Implementing cost reduction initiatives
• Automating or improving manufacturing processes
• Developing prototypes, first articles, models
• Designing tools, jigs, fixtures and molds
• New materials testing
• Testing new concepts

The Utah R&D credit does not expire, but does have a three-year statute of limitations for amending prior returns thereby allowing companies to take advantage of overpaid tax liability in the three prior years and also claiming a current year credit.

The credit may be computed using two alternative methods each with their own advantages, so some tax planning is necessary as you evaluate the credit opportunity. One method is more lucrative in that the credit percentages are higher but excess credits under this method cannot be carried forward. Under the second method, the credit calculated may be less, but any excess credits from one year may carry forward for up to 14 tax years.

In addition, a state credit is available for machinery and equipment that is dedicated to R&D. The credit is 6 percent of the cost of the machinery and equipment and is nonrefundable. If the credit is more than the tax liability, it may be carried forward for the next 14 taxable years as well.

Last month, Minnesota Governor Tim Pawlenty signed into law a jobs bill that includes enhancements to the state’s Research and Development tax credit.

The bill expanded Minnesota’s R&D tax credit, making it more attractive for small to large-sized companies that conduct R&D activities in the state.

Major changes to the MN R&D Credit:

1. Effective for taxable years beginning after December 31, 2009, partners in a partnership and shareholders in an S corporation may now take the R&D credit. Previously, only C corporations could take the credit.
2. The tax credit increased and now equals 10 percent of the first $2 million of excess qualified research expenses for the taxable year over the base amount. For excess expenses over $2 million, the credit equals 2.5 percent.
3. The credit for taxable years beginning after December 31, 2009, is now refundable.

ACTION ITEMS

All pass-through entities should seek to take advantage of the Minnesota R&D in 2010.

In addition, all companies that have had losses for several years, and have never taken the state credit, should take advantage of the credit in 2010 to obtain a refund.

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