Cash for clients: recent changes have opened R&D tax credit to more businesses.

• Author: Miller, Smith
• Position: Taxguidance

in these tough economic times, businesses need all the help they can get to be profitable. An often-overlooked source of revenue is the research and development tax credit, which encourages U.S. businesses to invest in improvements that increase their competitive position in the market. Along with providing an immediate source of cash. R&D tax credits can reduce current and future years' federal and state tax liabilities.

Changes made to the credit in the past decade have removed the discovery test and documentation technical requirements, which has made the credit available to small- and medium-sized businesses.

In addition to the federal credit, many states--including California offer R&D tax credit incentives, which generally conform to federal guidelines. The credit can provide a reduction to past, current and future federal and state lax liabilities.

It differs from a deduction in that it is an actual dollar-for-dollar offset against taxes owed or paid.

The credit is a source of permanent tax savings and can be claimed for all open tax years. If the credits cannot be used in a particular year, they are carried back one year and then carried forward up to 20 years for federal credits, and indefinitely for California credits. Qualifying companies can retroactively claim R&D tax credits.

The credit is applicable when a new business component is developed or an existing business component is improved. Generally, a business component can be a product or a process and can include such things as:

* Introducing new or improved products, processes or technologies. Manufacturing products.

* Developing prototypes or models (including computer generated models)

* Designing tools, jigs, molds and dies.

* Developing or applying for patents. Advantages of (he R&D tax credit include:

* It allows businesses access to an immediate source of significant cash for funding growth by monetizing R&D expenses.

* It can lead to permanent tax savings and is a vehicle to achieve additional tax savings in the future.

* It allows a reduction to the overall effective tax rate and an increase in cash flow and earnings.

Visit www.ststaxcredits.com/industries.html for a list of industries that qualify for the credit.

The credit is derived from qualifying expenses in three major categories:

* Salaries and wages calculated and estimated as a percentage of employees' qualifying time and can include those performing the qualified activity those supervising the activity and...