Five tax incentives your business should be using: too many CFOs and other financial executives are either unaware of the tax incentives they can tap to save substantial amounts of money or are slowed by misconceptions of how the system works.

• Author: Zerbe, Dean
• Position: TAX

One would think that most chief financial officers, tax executives and business owners take full advantage of all the bells and whistles provided in the United States tax code--all 7,000 federal, state and local tax credits and incentives. But it's apparent that's not the case, and businesses are consistently failing to take full advantage of significant benefits.

The Government Accountability Office (GAO) found in a recent study that in the case of one incentive, the Research and Development Tax Credit, the overwhelming benefit is going to the biggest of companies. It wasn't because medium-sized companies didn't qualify for the R&D credit; it was because they weren't applying for it. The following outlines qualifications and how to qualify for five tax incentives.

1 The Research and Development Tax Credit

Self-censorship by business executives is the biggest obstacle right now to companies taking full advantage of the Research and Development Tax Credit. All too often, business executives think the R&D credit is for the Silicon Valley tech companies, big pharmaceuticals or maybe designers of the Space Shuttle. Nothing could be further from the truth.

The range of industries that qualify for the R&D credit is as wide as the membership of the Chamber of Commerce--apparel, software, tool and die, architecture and engineering and many others. Bottom line, if a company "makes something," there's a good chance it is engaged in activities that qualify for the R&D Credit.

Industry executives also need to be mindful of the types of activities that qualify. A "eureka!" moment--in which you have changed the world to get the credit--is not a prerequisite. The old "discovery test" was tossed out in 2001. The question is whether the goal is developing something that is "new to you." Modifications and improvements count too, so it's not just the original BlackBerry, but all the new versions as well.

For example, consider company efforts to be greener, more cost efficient or less wasteful. All of these are candidates for the credit. Think of the credit the way Congress thinks of it: As a wage-based inducement to help keep manufacturing jobs in the U.S. An unfortunate reality is that mistaken and outdated notions about what activities qualify for the credit--especially in light of recent case law--often cause companies that already take the credit to underutilize it.

For example, most small and middle-sized job shops--businesses that make products to order--aren't taking advantage of this particular R&D credit. They, like many others, are under the impression that it exists only for high-tech companies doing basic research. When speaking to job shops about the R&D tax credit, often the first objection one hears is "we don't design the products ... our customers usually design the products."

Job shops and contract manufacturers typically do very little product development. Their activities tend to focus on process development, which also qualifies for the R&D credit. They spend their time developing ways to make the customer-designed part in commercial quantities.

Toward that end, they usually make engineering changes to parts to make them moldable through the latest CAD/CAM software applications. They then have to design...